Don’t Get Too Comfortable About Consumer Debt



One big debate on Wall Street today is whether consumers have taken on too much debt or if economic growth and a strong job market have effectively bailed them out.

By the third quarter of 2017, total household debt had exceeded its pre-financial crisis peak by $280 billion, according to a report by the Federal Reserve Bank of New York, which also warned of rising delinquencies on credit cards and auto loans. For much of last year these concerns weighed on the shares of listed credit-card and auto lenders.

But a torrent of good economic news late last year, including falling unemployment and rising wages, seems to have drowned out investors’ worries. Shares of four major consumer lenders—

Discover Financial

Synchrony Financial

SYF 3.14%

Capital One


Alliance Data Systems

—have rallied by 20% on average since the end of September, compared with an 11% rise in the S&P 500.

On Friday, Synchrony Financial—a lender specializing in store-brand credit cards—reported stronger-than-expected earnings. On a conference call, executives made several reassuring comments, noting that their 2017 loans are so far performing better than the more troubled 2016 vintage. They said that the pace of “credit normalization,” a euphemism for rising defaults, will moderate in 2018. Shares rose around 1% in morning trading.

So is it time to sound the all-clear? Not quite. A closer look at Synchrony’s results reveals a less-flattering picture. Net charge-offs actually rose in the fourth quarter, to 5.8% of total loans from 5% the previous quarter. The portion of loans that are more than 30 days past due fell slightly, to 4.7% from 4.8% the prior quarter, but they are still up substantially from 4.3% in the fourth quarter of 2016.

The company forecasts that net charge-offs will stabilize in 2018, ranging from 5.5% to 5.8%. Perhaps so, but investors have good reason to take this forecast with a grain of salt. Like competitor Capital One, Synchrony has had trouble accurately forecasting this number. At the start of last year it was predicting net charge-offs of 4.75% to 5%. Instead it ended up with a full-year level of 5.4%.

The sector’s strength ignores the lingering uncertainty. Consumer credit was flashing orange for much of last year. Upbeat economic news has lowered the alert level to yellow, but not all the way to green.

Write to Aaron Back at


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