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Synchrony BK Inevitable?

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Anonymous
Not applicable

Synchrony BK Inevitable?

Okay, so I'm reading a business article about Synchrony Bank, and most of note, their credit card portfolio... I hope I'm allowed to post and discuss this...? Because it CERTAINLY speaks volumes and explains a LOT as to why they are closing MASS amounts of cards... They are basically upside down... With $87b of open Limits and only a small percentage backed by actually equity... Plus a 50%++ loss in their own stock prices... 😱

 

https://www.google.com/amp/s/seekingalpha.com/amp/article/4338526-synchrony-financial-out-of-sync

 

Any thoughts? Comments? Updates?

 

I am concerned...

 

So if they were to go belly-up... What would happen to our Lowe's, Chevron, Verizon, and other cards? Would they be unusable? Would they immediately close? Would another bank step-up and take over our cards? Please help me to understand what may/should happen...

Message 1 of 10
9 REPLIES 9
sccredit
Valued Contributor

Re: Synchrony BK Inevitable?

If (and it's a BIG if) they were to go under they would file BK and restructure the company and/or sell off some or all of the lending portfolio. Too much value in the relationships and business lines for everything to shut down completely. Most likely scenario to me is that they will raise equity if needed.

Message 2 of 10
FinStar
Moderator Emeritus

Re: Synchrony BK Inevitable?


@Anonymous wrote:

Okay, so I'm reading a business article about Synchrony Bank, and most of note, their credit card portfolio... I hope I'm allowed to post and discuss this...? Because it CERTAINLY speaks volumes and explains a LOT as to why they are closing MASS amounts of cards... They are basically upside down... With $87b of open Limits and only a small percentage backed by actually equity... Plus a 50%++ loss in their own stock prices... 😱

 

https://www.google.com/amp/s/seekingalpha.com/amp/article/4338526-synchrony-financial-out-of-sync

 

Any thoughts? Comments? Updates?

 

I am concerned...

 

So if they were to go belly-up... What would happen to our Lowe's, Chevron, Verizon, and other cards? Would they be unusable? Would they immediately close? Would another bank step-up and take over our cards? Please help me to understand what may/should happen...


It appears this is an older paywalled article @Anonymous (April 2020) -- also please notice the 2019 references comparing data to 2020.  Outlook is different these days for SYNCB.  However, for those in readership - link/ partial article below from the source:

 

https://seekingalpha.com/article/4338526-synchrony-financial-out-of-sync

Synchrony Financial: Out Of Sync
Apr. 20, 2020

Summary

  • Synchrony's credit card and signature loan portfolio is quite susceptible to high losses and charge-offs in a recession.
  • Loan to equity ratios were relatively high going into the coronavirus economic shutdown.
  • A sustained and deep recession could easily bankrupt the company.

Synchrony Financial (SYF) is a consumer financial services company in the United States, focused on specialized financing programs and consumer banking products. The company also offers private label credit cards, co-branded credit cards, small to medium-sized business credit products, and promotional financing for consumer purchases, including private label credit cards and installment loans. In addition, it provides deposit products, including CDs, retirement accounts, money market funds, and savings accounts to retail and commercial customers. The company sells credit products through contracts with national and regional retailers, small merchants, manufacturers, buying groups, industry associations, and healthcare providers.

 

It is probably best known as the wholesale provider of retail charge and credit cards from the likes of Lowe’s (LOW), Sam’s Club, Verizon (VZ), Venmo and PayPal (PYPL), Amazon (AMZN), Old Navy and The GAP (GPS), Chevron(CVX), TJX (TJX) and many more. The company lost one of its largest and most profitable accounts associated with Walmart (WMT) last year. However, substantial investor fear over Synchrony’s credit card portfolio of assets just recently appeared.

Signature Loan Risk

The coronavirus economic shock could prove a major headache to the company’s business model. Similar to past recessions, Wall Street is questioning if credit card companies can survive a monster uptick in default rates that may soon appear in the “uncollateralized” consumer loan market. Holding $87 billion in loan assets against just $12 billion in tangible book value at the end of 2019 (subtracting about $3 billion in goodwill and intangible assets from $15 billion in net accounting equity), a default rate of 15% would effectively put Synchrony into bankruptcy itself. Below is a graph of its loan portfolio breakdown with changes last year.

Image Source: Company 4th Quarter Presentation

Believe it or not, the odds of a massive rise in delinquent loans, uncollateralized mind you, looks all but assured as the national unemployment rate jumps from 4% to 20%+ between February and May. My primary concern is Synchrony is one of the most exposed to defaults and loan write-offs, as it offers cards to many of the least creditworthy candidates in the consumer retail industry. Below is a graph of loan quality and charge-off trends before coronavirus.

Image Source: Company 2019 10-K

 

I fully expect 2020 numbers will reach record levels of loan loss and payback decay for the company. Synchrony’s 6.4% loan loss and 5.6% charge-off rates were already almost DOUBLE the U.S. rate for credit card defaults of 3.7% at the end of 2019. As you can see on the graph below using Federal Reservedata, credit card industry (and consumer loans generally) charge-off rates have hovered at a very low level for years. Using the 2009 peak of 10.5% for the industry, we can easily extrapolate the potential of 12-18% recession-induced rate of charge-offs over time for the business. Not a small player, Synchrony holds a 7% share of ALL credit card debt nationally. If today’s major economic downturn persists, the coronavirus shock may morph its balance sheet “assets” into “liabilities” quickly.

Image Source: Created Using St. Louis Fed Data

Much like peers and competitors Discover Financial (DFS), American Express (AXP), and Capital One (COF), investors are rightly concerned a rash of missed payments and personal bankruptcies to come in 2020-21 will eat away at consumer loan asset values, the mainstay of their business models. Below you can see Synchrony has been the weakest 3-year performer of the group, far worse than the entire U.S. banking and finance industry represented by the Financial Select Sector SPDR ETF (XLF).

 

The 14-day Average Directional Index (ADX) spiked to a truly oversold level near 60, circled in blue. Since that point, the stock has tried to reverse higher in price, but with little success. Now the ADX is back to a more typical 30 number. Another issue with the March-April bounce is the appearance of overhead resistance in lower peaks, first at $20 a share, then at $19. The Negative Volume Index (NVI), a record of buying/selling activity on falling volume days, shows a significant level of selling since February, marked with a red circle. Lastly, the daily On Balance Volume (OBV) downtrend, highlighted with a green line shows a total lack of buy conviction the past eight weeks. Taken together, the NVI and OBV trends are not very encouraging, with both lines near yearly lows.

 
What level of devastation can happen in a recession?

Since Synchrony was not publicly traded during the last recession, I am drawing the 2007-09 chart for Capital One to review how much downside could still remain in the stock quote. Basically, the Great Recession nearly destroyed Capital One, as the stock price slid from $65 to $6 over 18 months, with the price underperforming the S&P 500 by 75% at the bottom!

Is Synchrony headed in the same direction? While each recession is different, the coronavirus effect on employment has been the most profound since the 1930s Great Depression, with unemployment rates above 20% expected in coming weeks. As I mentioned, the total impact of the unemployment problem has been offset short term by stimulus spending in Uncle Sam’s account. Nevertheless, in terms of consumer confidence and income levels during the second half of 2020, the jury is still out for deliberation. If the economy remains weak throughout 2020, I suspect Synchrony will continue to zig-zag lower in price as reality bites and loan losses jump.

I am short Synchrony and Capital One currently. Both have a history of lower credit quality loans, generating lower net profit margins going into the 2020 recession vs. American Express and Discover. In contrast, American Express has much stronger loan quality and Discover produces higher margins to offset the risk of default.

Message 3 of 10
Bradac56
Regular Contributor

Re: Synchrony BK Inevitable?

I seriously doubt Sync is going anywhere any time soon. 

 

Keep in mind all of that is coming from a seekingalpha.com shock jock - there entire site model is to get you to buy a subscription based on limited opinion peaces.  I like the site (I keep a roth ira blue chip divi Fidi account) but I don't quote any of there blogger's as gospel.

 

Even if Sync did go belly up and could not float a bailout the big players would just shift the accounts to a different lender similar to what Barclay's does in the USA every 10 years or so.


Message 4 of 10
FinStar
Moderator Emeritus

Re: Synchrony BK Inevitable?


@Bradac56 wrote:

I seriously doubt Sync is going anywhere any time soon. 

 

Keep in mind all of that is coming from a seekingalpha.com shock jock - their entire site model is to get you to buy a subscription based on limited opinion pieces.  I like the site (I keep a roth ira blue chip divi Fidi account) but I don't quote any of there blogger's as gospel.

 

Even if Sync did go belly up and could not float a bailout the big players would just shift the accounts to a different lender similar to what Barclay's does in the USA every 10 years or so.


Exactly.

 

And, despite some of the analysis, yes.  Plus, now almost a year later from the published article, the author's 'forecast' of "A sustained and deep recession could easily bankrupt the company." and "If my projection proves correct, Synchrony is headed for big financial trouble." hasn't materialized to the levels he predicted back almost a year ago 🤷‍♂️

Message 5 of 10
coldfusion
Community Leader
Mega Contributor

Re: Synchrony BK Inevitable?

If he's been aspiring to be a quant I hope he decides to choose a different career path. 

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Message 6 of 10
AndySoCal
Valued Contributor

Re: Synchrony BK Inevitable?

Here is link that will give you understand Synchronny Bank's health

 

https://www.depositaccounts.com/banks/synchrony-bank.html#health 

 

Click on the health report. 

 

Just checked the quarter that ending 12/31/2020 reported a profit of 738 million.

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Message 7 of 10
gdale6
Moderator Emeritus

Re: Synchrony BK Inevitable?

Synch is a spin off from GE, previously this was all known as GECC. I have been hearing about their impending demise since the crash in 08 yet here they still are. Since they are making a profit at this time I dont worry too much about all of it and they are able to raise capital by issuing stock or taking in more deposits.

Message 8 of 10
Anonymous
Not applicable

Re: Synchrony BK Inevitable?

@gdale6 That's interesting. I didn't realize SYNCB is a spin-off from GE. So are they still owned by GE? Does SYNCB's profits benefit GE still? I ask, because I know the proverbial hell that GE is going through and it would definitely be needed for GE. LOL

Message 9 of 10
gdale6
Moderator Emeritus

Re: Synchrony BK Inevitable?


@Anonymous wrote:

@gdale6 That's interesting. I didn't realize SYNCB is a spin-off from GE. So are they still owned by GE? Does SYNCB's profits benefit GE still? I ask, because I know the proverbial hell that GE is going through and it would definitely be needed for GE. LOL


No GE doesnt own Sync and GE does not get a cut of the profits unless they own stock in it which I am not aware of. For many years GE relied on their financing arm to turn profits but it nearly sank them in the 2008 turndown so they decided to spin it off in I believe 2015.

Message 10 of 10
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