Credit card issuers were among the worst performing U.S. stocks Tuesday after Synchrony Financial said it expects higher write-offs within the next year as consumers struggle to repay loans.

Synchrony tumbled 13% to $26.45, the biggest drop since its 2014 initial public offering, and American Express Co. fell 4.1%, the most in the Dow Jones Industrial Average. Capital One Financial Corp. slid the most in almost a year, and Discover Financial Services also declined.

Synchrony, led by Chief Executive Officer Margaret Keane, expects write-off rates to climb 20 to 30 basis points over the next 12 months, and will increase reserves for soured loans beginning this quarter, the firm said in a regulatory filing before U.S. markets opened. Write-offs as a percentage of total average loans were 4.7% in the first quarter, up from 4.53% a year earlier, the company said in April. 

"There doesn’t appear to be anything that pertains to how we’re underwriting -- it appears to be a general softening in the consumers’ ability to pay," Chief Financial Officer Brian Doubles said Tuesday at an investor conference sponsored by Morgan Stanley in New York. "We’re coming off historic lows; we wouldn’t view this as a step change in consumer behavior necessarily."

Card issuers are warning that credit trends have deteriorated after years of historically low defaults. Capital One CEO Richard Fairbank said at a conference this month that soured loans are rising, while JPMorgan Chase & Co.’s Jamie Dimon said that credit is “going to get worse.” 

U.S. consumers are borrowing and spending more. Revolving credit, which is composed mainly of credit card debt, rose to $951.5 billion at the end of April, a 5.5% increase from a year earlier, according to the Federal Reserve. Retail sales climbed 0.5% last month, more than forecast, following a 1.3% jump in April that was the biggest gain in a year, according to Commerce Department figures  released Tuesday.
“It sure seems like the market thinks it’s more of a tidal and secular shift,” Daniel Werner, a Morningstar Inc. analyst in Chicago, said in a telephone interview. “We’re not at a point where people should really be panicking," he said, adding that “it’s more of a move to a normalization of losses.”

AmEx continues to see “predictable and steady” delinquency and write-off rates, Douglas Buckminster, president of global consumer services, said Tuesday at a different investor conference. 

“Everybody who follows this industry knows we’re at historic lows in terms of credit costs, and there’s largely only one direction for them to go,” Buckminster said. “Twenty to 30 basis points over the next year or two did not seem like an alarm bell to me.”

Synchrony’s Doubles fielded questions at the Morgan Stanley conference, with one attendee saying the announcement caught the room off guard because the company said earlier this month that its retail clients were performing well. Analysts including David Ho of Deutsche Bank AG also said they weren’t expecting the revised forecast.

“This announcement today is clearly a huge negative surprise given management was out with investors last couple weeks reiterating stable credit trends and reserves growing in-line with loan growth,” Ho said in a note.

The increase in Synchrony’s write-offs could be countered by better-than-forecast loan growth, said Jefferies Group analysts led by John Hecht. Hecht, who has a $42 price target on the stock, said he views any potential weakness as a buying opportunity.

Synchrony, which went public in July 2014 after splitting off from General Electric Co., issues private-label credit cards for dozens of retailers, including Wal-Mart Stores Inc., Dick’s Sporting Goods Inc. and Men’s Wearhouse Inc.

About 28% of Synchrony’s credit card loans in the first quarter were to consumers with FICO scores below 660, who typically have higher delinquency and credit losses than those with higher scores, the firm said in its quarterly regulatory filing. That compares with 34% for Capital One and about 18% for Discover.

Synchrony’s announcement bodes poorly for McLean, Va.-based Capital One because of how many of its borrowers have lower credit scores, Evercore ISI analysts led by John Pancari said in a note. The warning “should add to concerns about credit quality for subprime borrowers and credit cards,” he wrote.

Discover reported in a filing earlier Tuesday that net write-offs fell to 2.4% in May from the previous month. Loans at least 30 days overdue, a signal of future losses, held steady at 1.6%, among the lowest in the industry. The biggest U.S. card issuers typically disclose credit metrics on the 15th of each month.


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