Why Synchrony Financial Spooked the Credit-Card Industry

Synchrony Financial warned of higher-than-expected defaults this year, alarming investors in credit-card issuers

By Aaron Back
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When one credit-card issuer sees rising defaults, it generally won’t be alone.

That explains the reaction after Synchrony Financial SYF -13.11 % warned investors on Tuesday morning about its business. The company now sees a charge-off rate of around 4.5% to 4.8% over the next 12 months. That compares with earlier guidance of 4.3% to 4.5% for this year.

Even though charge-offs were already on the rise in the first quarter, investors and analysts seemed shocked by the new forecast, sending Synchrony shares down by 14% in midday trading. Other card issuers declined in sympathy, with Discover Financial Services DFS -4.05 % down around 3% and Capital One Financial COF -6.62 % falling around 5%.

Synchrony issues branded credit cards with retailers such as Wal-Mart Stores. WMT 0.60 % These tend to go to slightly riskier borrowers than many bank-issued cards. At the end of March, 28% of Synchrony’s credit-card loans were to borrowers with FICO scores of 660 or less. That compares with 18% for Discover and just 14% for J.P. Morgan Chase JPM -1.88 % ’s cards. But it isn’t as aggressive as Capital One, which had 35% of loans below that threshold.

Comments by Synchrony managers at a Morgan Stanley MS -2.61 % conference on Tuesday suggest the problem could go beyond them alone. Consumers seem to have generally suffered a decline in their ability to pay debts, they said, possibly because they have taken on more auto and student loans.

Earlier this month, J.P. Morgan chief James Dimon warned that the auto-loan market is “a little stretched.” Bank have also been ramping up credit card lending in a bid to boost returns.

Default rates on credit cards have been running at historically low levels for years so a reversal was bound to come eventually. Investors are right to brace for more bad news. There is never just one cockroach.

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