In normal times, that’d be good sign of financial responsibility. But in the pandemic era, it may just be the calm before the storm.
“People got forbearance on credit cards, mortgages and auto loans. Everything got pushed out,” Keane said. “As forbearance and stimulus wears off, we’re definitely in a rockier place.”
In other words, the financial pain got delayed, not canceled.
“It’ll almost certainly get darker from here,” Brian Wenzel, Synchrony’s chief financial officer, told CNN Business.
Bracing for bad loans
Synchrony, whose share price is down 37% this year, is reining in consumers’ ability to rack up credit card debt by lowering credit limits.
The credit card company revealed Tuesday it raised its provision for bad loans by $475 million, or 40%, during the second quarter. The surging credit costs drove a staggering 94% drop in Synchrony’s bottom line.
And yet Synchrony’s credit metrics hardly look like the United States is mired in a deep recession. (It is).
Just 3.1% of the company’s loans are 30-plus days past due. That’s down from 4.4% a year ago.
Likewise, Synchrony isn’t suffering a spike in losses on credit card defaults, at least not yet. Net charge-offs as a percentage of total average loans stood at 5.4%, down from 6% a year ago.
Americans are paying down credit card debt
But these numbers are a bit of a mirage.
Synchrony’s forbearance program is masking the financial pain. Customers enrolled in the relief program don’t have a minimum to pay, meaning they are viewed as “current” whether they choose to make a payment or not. And nearly one-third of those customers have not paid off their credit card debt at all.
Synchrony has enrolled 1.7 million customers with $3.2 billion of balances in the forbearance program since it launched earlier this year. Encouragingly, the company said nearly 70% of those customers have since left forbearance.
“Customers didn’t go out and spend. They actually paid down debt and deleveraged,” said Wenzel, the Synchrony CFO.
Job cuts loom
History shows credit card losses can be severe during recessions. That’s because this expensive form of debt is unsecured, meaning there is no collateral to protect lenders when consumers can’t pay.
“We believe that this environment will prove challenging for Synchrony and expect weak earnings for 2020,” Kyle Sanders, analyst at Edward Jones, wrote in a note to clients Tuesday.
Sanders predicted Synchrony may need to set aside additional funds for bad loans in the near future because of the “elevated uncertainty about the magnitude and duration of the disruption from COVID-19.”
Like other companies, Synchrony is seriously considering job cuts as it stares into that uncertain future.
“We’re looking at every nickel we spend. We might have to do layoffs. I’m trying to do everything possible to minimize the number of layoffs we have to do,” Keane said, adding that any potential cuts won’t be “massive.”
The biggest wild card, of course, is what happens with the pandemic. A second wave in the fall could further wound the economy.
“We should all be concerned that the virus is increasing,” Keane said, referring to the recent spike of infections in Sun Belt states.
Already, Synchrony is seeing signs that the resurgence of the pandemic is hitting the real economy.
After plunging by as much as 31% year-over-year in early April, purchases on Synchrony cards turned positive in late June. However, Synchrony said that spending during the first two weeks of July was down 2% from last year.
“We’ve seen a little bit of pressure since the virus popped up,” Keane said.
Surviving the retail apocalypse
“You will probably see more bankruptcies,” Keane said. “The guys that are successful are just becoming stronger and more sophisticated.”
Yet the Synchrony CEO expressed cautious optimism about the industry, especially stores that innovate and enhance the shopping experience.
“I don’t buy that brick-and-mortar completely goes away,” she said. “People like to shop.”