Why Synchrony Sank on Tuesday

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Credit cards
Source: Thinkstock
Consumer financial services giant Synchrony Financial (NYSE: SYF) said Tuesday morning that it has recently completed a loss forecast and now expects a rise of 20 to 30 basis points in the company’s net charge-off rates over the next 12 months. Investors headed for the exits on the report and shares traded down about 9%.

In the first quarter of fiscal 2016, Synchrony reported a net charge-off rate of 4.76%, up from 4.23% in the fourth quarter of 2015. The dollar total reached $780 million, more than 10% higher than the fourth-quarter dollar loss of $6976 million, the previous high.

The company said that beginning in the current quarter, it expects to raise its loan loss reserves, “with our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) likely to increase 20-30 basis points from the first quarter of 2016.”

In the first quarter, Synchrony’s allowance for loan losses totaled $3.62 billion (5.5% of end of quarter loan receivables). A 20-basis point increase would lift the company’s loan loss allowance to its highest-ever percentage.

In a research report from Jefferies that was published a week before Synchrony released first-quarter results in April, the analysts raised their price target on the stock to $42, citing continued growth in private label credit cards.

Apparently the downside is that customers for those cards may not be the best credit risks.

Synchrony stock traded down more than 10% in the late morning Tuesday, at $276.34 in a 52-week range of $23.764 to $36.40. The consensus price target on the stock is $3.55.