It was recently disclosed that both Warren Buffett and Seth Klarman bought shares of Synchrony Financial (SYF) in the second quarter of 2017.
Let’s take a look at why.
Synchrony Overview
Synchrony Financial was spun off from GE Capital as a public company in 2014.
It’s the largest issuer of store credit cards in the country. When Amazon, Lowe’s, Walmart, and many other retailers issue branded store credit cards, those are Synchrony’s cards. They also offer CareCredit- a way to pay for medical expenses with debt.
In order to fund those loans, they have a lean online bank that offers high interest rates relative to its peers, thanks to low physical expenses. This allows their clients to save money and earn returns that at least keep up with inflation.
Credit Cards: Cheap but Volatile
A couple weeks ago, in an article on Modest Money called The Safest Banks to Invest In, I discussed the U.S. Federal Reserve’s assessment of the largest financial institutions in the country, and showed this graphic:
Source:Â Dodd-Frank Act Stress Test, June 2017
It shows the estimated loan loss rates for the top financial institutions in the country if we were to encounter a recession as severe as the one from 2008. At the top of the list of loan loss rates are the banks that focus on credit cards.
American Express (AXP) and Discover Financial Services (DFS) have conservative underwriting standards, meaning they focus on lending to people with high credit scores. However, despite their high standards, they are basically pure-play credit card issuers, and credit card debt takes the biggest hit in recessions.
Capital One (COF) also has a large credit card presence, but is more diversified. It still has high loan loss rates because its not as conservative of a lender as American Express or Discover.
Here’s a chart showing the net charge-off rates of the major card issuers from the first quarter of 2017:
