We’re back to our regularly scheduled programming this week.
This week, we:
(1) dive into the sputtering economic recovery as COVID-19 infection rates push states to close down (again) and Congress debates another round of stimulus;
(2) examine Q2 earnings at Synchrony and Amex with a focus on cure and DQ rates; and,
(3) touch on a few more examples of FinTechs big and small launching the products needed for the new digital-first normal.
Let’s get to it.
COVID-19 Resurgence Hits Employment Data…
COVID-19 cases continue to rise, and this fed into the big macro topic of the week: an uptick in new unemployment claims to 1.4MM in the week ended July 18th.
We believe the increase – the first in nearly four months – comes as the PPP’s “payroll bridge” nears an end for many small businesses. And the timing is far from ideal, as states are cutting back on reopening plans, including new limits on bars and restaurants.
Over the last two months, we have seen plenty of V-shaped recovery evidence across employment gains, mobility trends, retail spend, and other data. The early part of the recovery has proceeded swiftly and sharply. However, these “low hanging fruit” wins are likely behind us.
It’s hard to see how travel, hospitality, and leisure recover full employment in the near term, regardless of stimulus programs passed. Together, these industries may be enough to keep unemployment levels at least at 8% through end of year. (Indeed, Amex this week noticed that T&E spending is recovering more slowly than non-T&E – see below for more…)
Here at PeerIQ, we’re monitoring the interaction between COVID-19 counts, stimulus payments, and economic recovery closely. We think three charts do a great job showing the net impact:
Rate of New COVID Cases (Source: NYT)
Weekly Level of Economic Support Across US Stimulus Packages (Source: FT)
Aggregate US Economic Activity (Source: NY Fed)
Source: NY Fed, PeerIQ
It’s clear that with COVID-19 cases rising and forcing a second round of shutdowns across the country and the earlier round of stimulus packages petering out, the engine behind the nascent economic recovery is stalling.
…Forcing Congress and the Fed to Fast-Track the Next Round of Stimulus Packages
As concerns over the sputtering U.S. economic recovery have grown, Congressional debates over potential stimulus extensions have heated up.
At the time of writing, the Senate’s stimulus plan was still delayed by ongoing debates over the specific measures, such as payroll tax cuts, to include in the package.
Earnings Resiliency in the COVID-19 Era
As readers know, for the last few months we’ve been emphasizing that the pandemic will in fact accelerate the shift towards a “digital first” financial world.
Our view is that firms that succeed in the post-COVID-19 era are the ones whose business models are directly linked to digital trends.
2Q Earnings: Synchrony Financial (SYF) & American Express (AXP)
Two companies reporting earnings this week that are nearly on opposite ends of the lending spectrum: Synchrony and Amex.
Synchrony Financial is one of the largest private label credit card issuers in the U.S. This gives Synchrony a mass-market, lower credit risk borrower tilt. Amex is nearly the exact opposite – mass market, affluent, and payments oriented.
Here’s a summary of Synchrony’s forbearance program and its results, including cure rates %:
- SYF granted forbearance to a cumulative total of approximately 1.7MM accounts ($3.2Bn in account balances) at the time of forbearance
- Nearly 70% of these accounts left forbearance through June 30th
- Approximately 500,000 accounts or $1.1Bn in balances remain in forbearance
- Of the 70%, ~8% of those accounts paid their balance in full
- 61% were making payments
- Through mid-July, these numbers remain relatively stable
- Of the accounts that are enrolled in forbearance, 92% were either current or less than 30 days past due, so a relatively small number of accounts for 30+ days past due
Here are some additional stats on the profile of enrolled borrowers and DQ trends. Notice DQ’s 30+ DPD levels have recovered swiftly. Also, about 56% of hardship enrolled are FICO < 660 – a useful stat for modelling your own portfolio risk.
Reach out to PeerIQ to learn more about how to construct pre-pay and loss curves calibrated with this data.
Source: Synchrony Financial, PeerIQ
SYF had to take significant loan loss reserves during the crisis – reaching 7.91% of receivables in the most recent quarter.
Source: Synchrony Financial, PeerIQ
American Express, on the other hand, focuses primarily on mass affluent / prime borrowers. Amex rolled out a Customer Pandemic Relief Program.
How is the Amex CPR program performing?
- 75% of borrowers have cured/exited the program
- The remaining 25% are enrolled in long-term relief programs or carry a delinquent status
- Amex is no longer enrolling borrowers in its short-term relief program
- Balances in hardship programs were $11.5Bn in mid-April. At the end of Q2, these balances stood at $5Bn, $2.2Bn higher than BAU levels (pre-COVID-19)
- 80% of borrowers enrolled in the program successfully complete their payment plans
AXP provision is more sizeable and conservative. Management notes in the earnings call: “We feel good about our credit reserves…depending on what your future view of the economy is. If you think there’s going to be more shocks, government aid running out, then we will need all of those reserves.”
Here is additional data on forbearance program balances over time:
Source: American Express, PeerIQ
Amex’s overall reserve levels have been higher than SYF, at 8.1% of total loans. However, write-off rates have been noticeably lower, at 2.8% of loans and 2.5% of receivables.
Source: American Express, PeerIQ
What Does This Tell Us?
The cure rates % on forbearance programs for Synchrony (lower-mass market) and Amex (prime) are not terribly different – 75% to 80%. Consumers across the credit spectrum remain resilient.
We’ll keep on top of this – particularly as stimulus benefits start to fade now and at the end of the year to see how these two borrower populations perform.
FDIC Looks to Ease the Way for Fin/Tech Partnership
On the regulatory front, the FDIC announced this week that it would be seeking comment on a new standards and certification program designed to streamline the partnership process between financial institutions and technology companies.
Targeted in particular at community banks and other firms without the in-house staff and resources to develop their own technology, the effort aims to set common “best practices” for tech firms that seek to provide credit underwriting and other tools to banks.
The RFI is a welcome signal that FDIC Chairman Jelena McWilliams is focused on embracing innovation and technology. Historically, the FDIC has lagged other regulatory agencies in the use of technology and this is a welcome change.
eBay’s Back in Payments (and Other Product News)
eBay will build an internal payments solution, looking to capture an incremental $2Bn in payments revenue, reported Business Insider this week. The former customer of PayPal struck a five-year service agreement with the payments company when spinning it out in 2015.
Now that the agreement has expired, VP of global payments, Alyssa Curight, is eyeing the opportunity to provide not only payments solutions, but other products like loans, for merchants on eBay’s platform.
And in yet another example of how different spheres of FinTech are merging, in an interview with Business Insider, Visa CFO, Vasant Prabhu, laid out the firm’s vision to be a “network of networks” in payments.
The firm is looking to expand beyond its traditional credit and debit card businesses into all aspects of payments, including peer-to-peer. (We also believe Visa is quietly on a mission to displace ACH payments with debit transactions to capture a ton of interchange.)
Finally, congratulations to Alchemy, led by Timothy Li, who this week announced the launch of the “world’s first hybrid branch and mobile point of sale lending solution.
The tool gives customers control of how they’d prefer to interact with merchants during COVID-19 – both online and offline.
In the News:
- S. Initial Unemployment Claims Rose to 1.4 Million Last Week (WSJ, 7/23/2020) Data suggests that the labor market’s recovery could be cooling due to an increase of COVID-19 cases.
- Goldman’s Hatzius Sees Extra U.S. Jobless Benefit Cut in Half (Bloomberg, 7/24/2020) Goldman Sachs Chief Economist, Jan Hatzius, believes that U.S. lawmakers will cut supplemental unemployment benefits in half, which will result in a slower recovery.
- Investors Brace for Consumer Debt Defaults if US Relief Stalls (Financial Times, 7/24/2020) Delinquencies have remained low so far, but the U.S. relief stalls have investors on edge.
- Fed Deliberates How and When to Roll Out More Economic Support (WSJ, 7/22/2020) Fed officials are set to discuss the next economic stimulus package.
- FDIC Floats Certification Program for Fintechs Working with Banks (American Banker, 7/21/2020) The Fed is seeking comment about a potential set of standards and a certification program that are intended to make it easier and cost-efficient for financial institutions to partner with technology firms.
- Alchemy Launches World’s First Hybrid Branch and Mobile Lending Operating System (Cision PRWeb, 7/20/2020) Alchemy Technologies announced the launch of their next generation of lending operating system, which combines brick and mortar operation and online lending experience under one seamless solution.
- Jack Ma’s Ant Group Plans Dual IPOs in Shanghai, Hong Kong, Bypassing New York (WSJ, 7/20/2020) Hangzhou-based, Ant Group Co., plans its initial public offerings in Hong Kong and Shanghai.
- Scientists Accidentally Bred the Fish Version of a Liger (NY Times, 7/15/2020) Scientist accidentally created the “Sturddlefish,” which is a hybrid of Russian Sturgeon and American Paddlefish.