Amid rising concerns about U.S. consumers’ ability to manage their credit card debt, Synchrony Financial has been tightening its lending standards, particularly among customers with subprime credit scores.
The effects of those changes on the company’s bottom line — both for good and ill — were evident in fourth-quarter results reported Friday.
Stamford, Conn.-based Synchrony said that the pace of increase in its late payment rate moderated during the quarter, with loans at least 30 days past due making up 4.67% of all loan receivables. While that metric rose from 4.32% from the same period a year earlier, it represented the slowest rate of increase in more than a year.
The bad news for Synchrony is that the tighter loan standards are crimping growth in customers’ use of its credit cards. Loan receivables increased by 7% to $81.9 billion during the fourth quarter, the slowest rate of growth in nearly three years.
Purchase volume on Synchrony cards totaled $36.5 billion during the quarter, up just 3% from the same period a year earlier. That was the lowest growth rate since Synchrony — once part of General Electric — held its initial public offering in 2014.
The $95.8 billion-asset firm reported quarterly net earnings of $385 million, results that were hindered by a $160 million expense related to the recently enacted federal tax legislation. Shares in Synchrony were up 2.4% in midday trading.
Synchrony specializes in store-branded credit cards, a segment of the card market that has comparatively high loss rates, and investors have sometimes sold off the company’s shares in response to worse-than-expected credit performance.
Synchrony started tightening its underwriting standards in the second half of 2016, Chief Financial Officer Brian Doubles said Friday during the firm’s earnings call.
Doubles acknowledged the negative impact of the stricter underwriting on spending by subprime customers. He said that purchase volume by customers with credit scores below 660 shrunk by 13% in the fourth quarter.
“That’s still a great segment for us,” Doubles said. “It’s just when you compare it with a year ago, it’s down slightly.”
Merchants view store-branded credit cards as a way to drive higher sales volumes, but Synchrony CEO Margaret Keane said that the firm’s decision to tighten its underwriting standards has not drawn pushback from its retail partners. Those partners include Walmart, Amazon and JCPenney.
“Our partners are very cognizant of the fact that they don’t want to put credit in the hands of people that can’t handle it,” Keane said during the earnings call.
Synchrony said Friday that it expects to grow its existing book of loan receivables by 5% to 7% in 2018, but that growth should be 13% to 15% when factoring in the company’s recently announced deal with PayPal Holdings.
Under that partnership, Synchrony will acquire $6.8 billion in loan receivables from San Jose, Calif.-based PayPal, and will also become the exclusive issuer of PayPal Credit for the next 10 years. Many U.S. consumers use PayPal Credit to finance e-commerce purchases.
The PayPal agreement figures to add to the credit risk in Synchrony’s portfolio, offsetting at least some of the effects of the company’s tighter lending standards. At the end of 2016, borrowers with credit scores below 680 owed 49% of PayPal Credit’s loan receivables, compared with 27% at Synchrony.
Doubles said Friday that he does not expect any significant changes to how PayPal Credit loans get underwritten. Synchrony expects the deal to close in the third quarter of 2018.