The COVID-19 environment has not been particularly favorable for bank stocks, with low interest rates and fears of default prompting a strong sell-off. Other types of financial stocks, especially those related to e-commerce, are doing much better.
Synchrony Financial (NYSE: SYF) is a combination of the two, a consumer bank mixed with a fintech platform which gives it a differentiated model. So even though the share price has suffered, the company is in a fairly safe place. Is it a good time to buy stocks?
When customers don’t buy and can’t pay their bills
Synchrony offers a host of behind-the-scenes financial solutions for retailers and others who need to outsource these applications and programs. One of its best-known services is underwriting private label credit cards for businesses such as Amazon, The hole, and Pay Pal.
In Synchrony’s first quarter, which ended March 31, earnings per share fell 71% year-over-year, from $ 1.57 in 2019 to $ 0.45 in 2020. Like other banks, the company has set aside massive provisions for losses – in this case, $ 1.68 billion, about double the provision from last year.
At the start of the quarter, the company recorded double-digit volume growth, higher than the previous two quarters. This held up until mid-March, when stay-at-home orders took effect and volume fell 26%. Global sales fell 27% at the same time, and these trends continued in April. Restaurants, entertainment, travel and gasoline, all of which slowed in the post-restriction period, account for 27% of global retail card sales. These segments declined during the post-restriction period, but essentials, such as groceries, discounts and drugstore, increased during this period.
To make itself more competitive in this market, Synchrony offers several digitally enhanced services, such as SyPI, a customizable plugin for a business application that allows customers to perform all kinds of financial functions from their mobile phones; Alexa voice payments; and Setpay, which is a mini-loan that a customer can request to make a one-time purchase.
As spending activity has slowed, banking has become more important as consumers try to keep their money safe. Synchrony’s banking division ended the quarter with $ 65 billion in deposits, up 1% year-on-year. The bank has 75.5 million active customer accounts and $ 19.2 billion in liquid assets.
Better than before
CFO Brian Wenzel spent a lot of time on the company conference call to discuss the company’s preparedness for this crisis in relation to the Great Recession. At that time, Synchrony was still a division of General Electric, from which it was split in 2014.
Since then, Synchrony has created a more disciplined and rigorous process for underwriting and reviewing credit, which has resulted in a significant improvement in the system. It now uses sophisticated data algorithms that include an assessment of 4,000 credit attributes. Today, 73% of the company’s portfolio has a FICO credit score above 660, up from 61% in 2008. Only 9% have a rating of 600 or less, up from 19% in 2008. This is more evident in new accounts, 80% of which are above 660 and only 1% below 600.
The portfolio is well diversified by industry, and the company has extended many of its other products so that it is not just tied to credit cards. So, while a crisis of this magnitude will undoubtedly affect the ability of customers to pay off their credit card debt, Synchrony has spent the past 10 years fine-tuning its systems to be better protected for a time like now. .
An innovative bank
Synchrony’s stock price has fallen about half this year (as of Wednesday’s close), far more than the big banks, and is below its initial public offering price of $ 23 nearly. six years. It may seem like a risky business right now, and investors may be worried. Consider that Synchrony’s imputation rate, which is what it expects to lose if it defaults, was 6% in the first quarter, double the industry average of 3%. This means that he may face a higher level of default than other credit card underwriters, especially if the economy remains closed for a long time.
But while private label credit cards are more risky than the big, established card companies, they also have lower balances, which balances out for Synchrony. It also has a growing consumer banking division and, in general, a lot more business in its pipeline.
In addition, the company has many other strengths and retains its dividend throughout the pandemic. As disappointing as the first quarter results may seem, they were relatively clean given the financial atmosphere, and the company is better equipped for this pandemic than it was for the financial crisis.
The stock price will likely continue to be volatile in the short term, reflecting the state of the economy, so it’s not a must buy today, but the price should improve when the economy does. , so you don’t want to wait while the price is still removed.
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