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Recovery Continues; 3Q Earnings; Synchrony/Venmo launch Card; PayPal Embraces Crypto

By Tito Donis

October 26, 2020


This week, we look at signs of a steady - if still slow and fragile - recovery, with new jobless claims falling to the lowest level since March; improving consumer credit scores shine a light on a system that needs an upgrade; PayPal’s embrace of Bitcoin; and, on the earnings front, continued improvement to lenders’ loss reserves even as SYF announced a new partnership with Venmo.

Let’s get to it.

Jobless Claims Drop, Purchasing Managers Index Up

Two encouraging data points on the U.S. economy were released this week.

On the employment front, the latest unemployment claims of 787,000, and a revision down for the week of 10/3, to 767,000, brought numbers down to the lowest rate since March. The number of people claiming state unemployment benefits also fell, to 8.4MM.

Source: WSJ, PeerIQ

Turning from the employees to the employers, new survey data from IHS Markit points to an ongoing recovery among U.S. businesses. The Purchasing Managers Index, which measures whether business activity is growing or shrinking, rose to 55.5 in October - the highest level in 20 months - while overall confidence levels rose to the highest point since May 2018.

Credit Scores Shot Up, Even as the Economy Melted Down

As unemployment rolls slowly tick down, the WSJ looks back this week at the impact waves of stimulus have had on the American consumer. Even as the economy collapsed in the spring and summer, as we’ve highlighted here before, stimulus payments helped individual consumers stay current or even pay down debt - even as many took advantage of COVID support programs.

Together, the stimulus packages helped average consumers actually improve their credit scores, which rose to 711 in July - the highest since FICO began tracking this in 2005.

But that just highlights the backward-looking nature of the traditional credit score, which doesn’t really capture real-time consumer behavior...and needs a modern upgrade.

VantageScore and alternative data providers (e.g., rent, utility, etc.) others are developing solutions to address some of these deficiencies.

Week Two of Earnings: Improving Economy Benefits SYF, COF, DFS and AXP

3Q earnings season continued this week, with SYF joining COF, DFS, and AXP in reporting results.

Highlights from SYF: Launches Venmo Credit Card with QR Code Innovation

It seems like many of the POS lenders are doing well - public and private (Affirm, Klarna, Wisetack, etc.). It’s a great sign for the sector and suggests the shift to digital is bouying the category through Covid.

Synchrony continued execution this quarter, signing with another partner (Venmo), following their deal with Verizon last quarter. Synchrony appears focused on the furniture and healthcare POS verticals.

Source: Synchrony Financial, PeerIQ

Source: Synchrony Financial, PeerIQ

A few highlights to call out among the other credit card lenders reporting this week:

Capital One [COF] reduced provisions significantly from the prior quarter, setting aside $450MM for the Credit Card segment (down from $2.9Bn in 2Q) and releasing $43MM (versus a $876MM provision) from the Consumer segment. Charge-offs for both business lines fell to 3.6% (vs 4.5% in 2Q) for the Credit Card business and 0.3% (vs 1.2% in 2Q) for the consumer segment.

COVID-19 assistance enrollment for Auto loans continued to decline - though with so many enrollees being re-enrollments, it’s a core area to watch.

Source: CapitalOne, PeerIQ

Discover [DFS] reported new provisions of $710MM in the quarter, mostly offset by charge-offs; total ACL increased only $42MM, holding at $8.2Bn overall, versus a nearly $1.3Bn increase in the prior quarter.

NCO rates for Credit Card and Personal Loans improved versus the prior quarter, to 3.45% and 2.69% respectively. Reserve rates did increase slightly, to 9.3% for Credit Card and 11.9% for personal loans, from the prior quarter.

Source: Discover Financial Services, PeerIQ

American Express [AXP] set aside $665MM for credit losses, a significant drop from the $1.6Bn provision in the second quarter. Although write-offs fell slightly ($927MM to $781MM), most of the drop was driven by a reserve release (-$116MM) versus last quarter’s build (+$628MM). Overall, loan reserve ratios ticked up slightly to 8.3%, while reserves as a share of credit receivables fell to 1.0%.

American Express, PeerIQ

Finally, student loan provider Sallie Mae [SLM] sold its Personal Loan portfolio in the quarter. The move reduces provisions by $43MM, takes $609MM in balances (at 2Q) off the books, and most importantly helps focus the firm on its core student loan business.

PayPal follows Square into Crypto

Finally, this week payments giant PayPal announced that it would partner with Paxos, a regulated cryptocurrency services provider, to offer its account holders access to select crypto inside the PayPal digital wallet.

While the tool allows customers to buy, hold and sell crypto within the PayPal ecosystem, it’s not completely fungible just yet - there’s no ability to transfer those holdings directly from PayPal to another wallet.

The service will be available to U.S. clients in the coming weeks, with expectations of expanding the service to Venmo and international clients in the first half of 2021.

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