Subprime Credit Costs Capital One And Synchrony Downgrades From Morgan Stanley

Why is it that credit card losses continue to rise at a time when employment data shows a healthy labor force? Analysts at Morgan Stanley attempted to answer that question in a research report on Friday, noting it's a "tale of two consumers."

The economy is indeed solid and unemployment is very low, while at the same time credit card delinquencies are rising, a team of analysts noted. As a whole, the average consumer is very much in "good shape," but subprime consumers are facing lots of pressures.

Taking a deep dive into the subprime consumer shows that they are coming to terms with higher rent and health care costs, which are in fact rising faster than their wage growth, the analysts found. At the same time, the banks are also tightening their stands and pulling back on subprime card growth.

As such, the analysts felt it prudent to downgrade the two credit card companies with the biggest exposure to the subprime segment: Capital One Financial Corp. COF and Synchrony Financial SYF.

Specifically, 36 percent of Capital One's total card loans are held by subprime customers while Synchrony's exposure stands at 28 percent. Accordingly, the analysts downgrade Capital One's stock rating from Overweight to Equal Weight with a price target lowered from $97 to $83. Synchrony's stock rating was also downgraded from Overweight to Equal Weight wit a price target lowered from $35 to $32.

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