Moody's Warns That Private-Label Credit Card Issuers Will Be Crushed By Retail Implosion
We’ve spent a lot of time of late talking about the retail implosion currently underway in the United States courtesy of a massive oversupply of retail square footage and a simultaneous shift in demand toward more online purchases. In fact, we recently highlighted a report from Credit Suisse which suggested that nearly 9,000 retail locations could permanently close their doors in 2017, the most since at least 2000.
According to the Swiss bank’s calculations, on a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimates that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.
And here were those closings broken down by retailer:
Of course, the store closures are only part of the story as the broader economic impact of the coming retail apocalypse will be felt through a whole host of industries. As Moody’s points out today, one such space that will be hit particularly hard is the “private-label” credit card issuers with just 5 companies accounting for nearly 80% of all credit balances outstanding.
A small number of banks dominate US private-label card issuance, with the top five accounting for 79% of balances as of early last year. The largest issuers are: Synchrony Financial Inc. (unrated); Citigroup Inc. (Baa1, stable); Alliance Data Systems Corporation (unrated) via its Comenity Bank (unrated) subsidiary, which was formerly known as World Financial Network National Bank; Capital One Financial Corporation (Baa1, stable); Wells Fargo & Company (A2, stable) and TD Group US Holdings LLC (A2, stable).
“As retailers close stores in an effort to improve profitability over the coming years, the trend will put upward pressure on private label charge-offs, owing to the fact that some cardholders will lose access to geographically convenient stores, even as a portion of those cardholders shift at least a portion of their spending to online channels,” Jody Shenn, a Moody’s Vice President says.
Meanwhile, the hardest hit names will likely be Synchrony and Alliance Data as they rely almost entirely on private-label credit cards.
Additionally, sales challenges could create incentives for retailers to push for looser underwriting standards by their card issuing partners, which would weaken the credit quality of these accounts, especially new accounts.
“Among the largest private-label card issuers, only Synchrony and Alliance Data rely heavily on the business,” Warren Kornfeld, a Moody’s Senior Vice President, says. “Private-label and cobranded cards account for almost the entire loan books of both, each with heavy retail card concentrations.”
Citi and Capital One rely on private-label and co-branded card loans for a high single-digit percentage of their earnings, also with heavy retail concentrations. Wells Fargo and TD Bank have very modest retail private-label and co-branded credit card exposures relative to their overall loan portfolios.
While showing up on the right-hand side of this chart was probably sold to investors as a ‘yugely’ positive thing over the past couple of years, we suspect the messaging in future presentations will have to be “tweaked” (chart per Alliance Data investor presentation).
Meanwhile, it seems that both Alliance Data…
…and Synchrony are already starting to show some signs of stress.
But we’re sure it’s no big deal.