Synchrony Financial (NYSE:SYF) Q1 2024 Earnings Call Transcript

Synchrony Financial (NYSE:SYF) Q1 2024 Earnings Call Transcript April 24, 2024

Synchrony Financial beats earnings expectations. Reported EPS is $3.14, expectations were $1.42. SYF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Synchrony Financial First Quarter 2024 Earnings Conference Call. Please refer to the company’s Investor Relations website for access to their earnings materials. Please be advised that today’s conference call is being recorded. Currently, all callers have been placed in a listen-only mode. The call will be opened up for your questions following the conclusion of the management’s prepared remarks. [Operator Instructions] I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. You may begin.

Kathryn Miller: Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today’s press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.

During the call, we will refer to non-GAAP financial measures in discussing the company’s performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today’s call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. On the call this morning are Brian Doubles, Synchrony’s President and Chief Executive Officer, and Brian Wenzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles.

Brian Doubles: Thanks, Kathryn. Good morning, everyone. Today, Synchrony reported strong first quarter results, including the successful completion of two previously announced transactions: the sale of our Pets Best insurance business, which generated an $802 million after-tax gain in the quarter and will extend our reach in the rapidly growing pet industry through a minority interest in International Pet Holdings we received as part of that sale; and the acquisition of Ally Lending’s $2.2 billion point-of-sale financing business, which will augment the existing offerings in our Home & Auto and Health & Wellness sales platforms. Together, these transactions expand Synchrony’s differentiated offerings in the market and strengthen our position as the partner of choice as we drive long-term value for our many stakeholders.

Excluding the impact of the Pets Best gain on sale, Synchrony delivered adjusted first quarter net earnings of $491 million, or $1.18 per diluted share, a return on average assets of 1.7% and a return on tangible common equity of 16.8%. This performance highlights the resiliency of Synchrony’s earnings power over time as we deliver results while positioning the business for strong risk adjusted growth ahead. Our differentiated model enables us to assess and react quickly through cycles and environments as our broad product suite, compelling value propositions and innovative technology continue to resonate with both our consumers and partners. We opened 4.8 million new accounts in the first quarter and grew average active accounts by 3%. Our products and value propositions drove $42 billion in first quarter purchase volume, 2% above the prior year and our highest ever first quarter performance.

Health & Wellness purchase volume increased 8%, led by pet, dental and cosmetic and reflecting broad-based growth in active accounts. In Diversified & Value, purchase volume increased 4%, driven by spend both at our partners and outside of our partners. Digital purchase volume increased 3%, reflecting continued consumer engagement through growth in average active accounts. In Home & Auto, purchase volume decreased 3% as the strong growth in home specialty and auto network and the impact of the Ally Lending acquisition was offset by a combination of lower customer traffic, fewer large ticket purchases and lower gas prices. And in Lifestyle, purchase volume decreased 4%, reflecting the impact of lower transaction values. Dual and co-branded cards accounted for 42% of total purchase volume for the quarter and increased 6% as our value propositions continue to drive increased engagement and growth.

Synchrony’s out-of-partner spend reflects a comprehensive range of categories, industries and products and offers a deeper view into consumer behavior throughout the quarter. Spending in January was impacted by challenging weather conditions as average transaction frequencies declined 4% versus the prior year. In February and March, however, we saw a rebound, particularly in non-discretionary categories. Overall, consumers focused on more non-discretionary spend in the quarter and shifted out of certain discretionary categories like home furnishings, travel and entertainment. Despite the change in mix, however, we continue to see broad-based growth in many discretionary and non-discretionary categories. Across the business, Synchrony continues to see indications that non-prime borrower spend has slowed and our portfolio’s purchase volume growth continues to be driven by higher credit-grade consumers.

Average transaction values among super prime borrowers continue to increase, and similarly, we see average transaction frequency growth from our prime and super prime segments. These relative adjustments in consumer spend behavior generally reflect a financially healthy consumer who is continuing to become more selective in their purchases and align their cash flows; a trend which has also continued to take shape in Synchrony’s credit performance. Portfolio payment rates continued to moderate and reached 15.8% for the first quarter, about 90 basis points lower than last year and about 60 basis points higher than the average payment rate level across our first quarters from 2015 to 2019. The relative pace of payment rate moderation has continued to slow from both a generational and credit grade perspective, which, when combined with the spending trends we’ve observed, reinforces our view that borrowers are generally reverting to spending and payment behaviors that are more consistent with pre-pandemic norms.

These trends are also supported by a number of our other consumer financial health indicators, including a strong labor market and external deposit data that has shown relative stability across industry savings account balances. Taken together, these dynamics are contributing to Synchrony’s recent delinquency performance, highlighted on Slide 11, where the year-over-year rate of change has slowed as our portfolio has reached pre-pandemic ranges. The normalization and recent stabilization of our delinquency performance has occurred at a more gradual pace than the majority of our industry peers, underscoring the powerful combination of our disciplined underwriting, advanced analytics and sophisticated credit management tools. We’re encouraged by these trends and continue to expect our portfolio’s net charge-offs to peak in the first half of this year.

We continually monitor indicators across our portfolio along with the broader industry’s credit performance, and continue to take credit actions to optimize our portfolio’s positioning for 2024 and beyond. Synchrony utilizes a broad range of proprietary and external data, including payment behavior characteristics, billions of transactions, and credit bureau alerts to deliver actionable insights that inform our underwriting, product and credit management strategies across the account, channel and portfolio levels. Our ability to leverage these insights and deliver optimized financing solutions and experiences for our customers and partners, even as needs evolve and market conditions shift, is what enables Synchrony to consistently deliver the outcomes that matter most for our many stakeholders and increasingly positions us as the partner of choice.

To that end, Synchrony added or renewed more than 25 partners in the first quarter, including BRP, and added two new technology partnerships with Adit Practice Management Software and ServiceTitan. We are excited about our new partnership with BRP, a global leader in powersports and marine products, which will enable their U.S. dealers to offer secured installment loan products for their well-known line of powersports products, including the Ski-Doo, Sea-Doo and Can-Am on and off-road vehicles. Synchrony will deliver our financing offers with flexible terms through their online or in dealership application process, highlighting our ability to address the diverse needs and preferences of our customers. And Synchrony’s strategic technology partnerships with Adit Practice Management Software and ServiceTitan each represent opportunities to drive seamless customer experiences while also expanding access to our diversified suite of financial solutions and services.

Synchrony’s partnership with Adit, an industry-leading dental practice management software provider, will expand care credit access to dental practices nationwide and includes integration with Adit Pay for patients, enabling a seamless and easy-to-use experience for both patients and practitioners. Connecting patients to payment solutions at their dentist’s office is an essential part of ensuring their care journey is as smooth as possible and dental practices benefit from more timely and effective revenue cycle management. Similarly, Synchrony will integrate with ServiceTitan, a leading software platform built to power trades businesses, enabling contractors to offer their home improvement financing through a direct-to-device application process.

By providing access to flexible financing at their fingertips, customers are empowered to make a choice that gets them closer to their goal while their contractors benefit from a frictionless sales experience. So whether we are building new relationships or supporting and enhancing existing ones, Synchrony deeply understands what our customers need and expect and what our partners, merchants and providers are seeking to achieve. Our ability to deliver for these stakeholders and consistently achieve strong outcomes through varying conditions demonstrates the strength of Synchrony’s business model and commitment of our incredible team. And speaking of our team, in today’s world, it has never been more important for us to attract and retain the best talent, which we do through our unwavering commitment to our employees and our culture.

So I’m proud to share that we’ve been named among the top best companies to work for in the U.S. by Fortune Magazine in Great Places to Work. Synchrony moved up 15 positions to Number Five in the 2024 rankings, reflecting our unique and special culture and our relentless focus on putting people first, as we continuously strive to achieve best-in-class experiences for our many stakeholders. With that, I’ll turn the call over to Brian to discuss our financial performance in greater detail.

Brian Wenzel: Thanks, Brian, and good morning everyone. Synchrony’s first quarter results reflected the combination of our differentiated business model and a resilient consumer in an evolving macroeconomic environment. We generated $1.3 billion in net earnings, or $3.14 per diluted share on a reported basis. Excluding the $802 million after-tax gain from the sale of our Pets Best business, we generated $491 million in net earnings, or $1.18 per diluted share. Ending loan receivables grew 12% to $102 billion. This growth reflected the impacts of the continued purchase volume growth, an approximate 90 basis point decrease in payment rate, and the completion of our Ally Lending acquisition. Net revenue increased $1.6 billion, or 50% driven by the Pets Best gain on sale of approximately $1.1 billion, which was reported through other income.

Excluding the Pets Best gain on sale, net revenue increased $530 million, or 17%. Net interest income increased 9% to $4.4 billion, driven by 15% higher interest and fees. This growth in interest and fees reflected the combined impacts of higher loan receivables, a lower payment rate and higher benchmark rates, and was partially offset by higher interest expense from benchmark rates. RSAs of $764 million in the quarter were 3.04% of average loan receivables, a reduction of a $153 million versus the prior year, driven by higher net charge-offs, partially offset by higher net interest income. Provision for credit losses increased to $1.9 billion, reflecting higher net charge-offs and a $299 million reserve build, which included a $190 million build related to the acquisition of Ally Lending.

Other expenses grew 8% to $1.2 billion, primarily driven by higher employee costs in support of growth and our continued investment in technology. Our efficiency ratio for the quarter, excluding the impact of the gain on sale was 32.3%, an improvement of approximately 270 basis points versus last year. Next, I’ll cover our key credit trends on Slide 10. At quarter end, our 30 plus delinquency rate was 4.74% compared to 3.81% in the prior year and 18 basis points above our average for the first quarters of 2017 to 2019. Our 90 plus delinquency rate was 2.42% versus 1.87% last year and 14 basis points above our average for the first quarters of 2017 to 2019. And our net charge-off rate was 6.31% in the first quarter compared to 4.49% in the prior year, an average of 5.84% in the first quarters of 2017 to 2019.

Our allowance for credit losses as a percent of loan receivables was 10.72%, up 46 basis points from the 10.26% in the fourth quarter, primarily reflecting the impact of seasonal trends. The reserve build in the quarter largely reflected the addition of the Ally Lending portfolio. As Brian discussed, Synchrony’s credit performance has been consistent with our expectations. Given that Synchrony shares the consumer with our broader industry peers, we continue to monitor our portfolio and the broader industry’s credit performance. As we’ve done periodically since mid-2023, we’ve been taking incremental credit actions, starting in March, across specific segments of our portfolio that should reinforce our portfolio’s performance for 2024 and beyond.

As Slide 4 demonstrates, Synchrony has built a track record of achieving consistent, attractive risk adjusted returns through changing market conditions. This performance has been enabled by the combination of our disciplined underwriting, which targets a 5.5% to 6% loss rate on average, and our RSA, which aligns program and portfolio performance. We will continue to leverage our deep consumer lending experience, our diversified product suite, sales platforms and verticals, and our sophisticated data analytics and technology to further deliver on that priority. Turning to Slide 12, Synchrony’s funding, capital and liquidity continue to provide a strong foundation for our business. Our consumer bank offerings continue to resonate with our consumers as we grew deposits $2.4 billion in the first quarter.

Deposits represented 84% of our total funding at quarter end and are complemented by our securitized debt and unsecured funding strategies, which each represent 8% of our total funding. During the quarter, we issued $750 million of secured funding and completed a preferred stock issuance of $500 million, which served to more fully optimize our capital structure. Total liquid assets and undrawn credit facilities were $24.9 billion, up $3.2 billion from last year, and at quarter end represented 20.5% of total assets up 38 basis points from last year. Moving on to our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony will continue to make its annual transition adjustment to our regulatory capital metrics of approximately 50 basis points each January through 2025.

The impact of CECL has already been recognized in our income statement and balance sheet. Under the CECL transition rules, we ended the first quarter with CET1 ratio of 12.6%, 40 basis points lower than last year’s 13.0%. The net capital impact of our Pets Best sale and Ally Lending acquisition added approximately 40 basis points to our CET1 ratio. Our Tier 1 capital ratio was 13.8%, unchanged compared to last year. Our total capital ratio decreased 10 basis points to 15.8%, and our Tier 1 capital plus reserve ratio on a fully phased-in basis increased to 23.8% compared to 23% last year. During the first quarter, we returned $402 million to shareholders consisting of $300 million of share repurchases and $102 million of common stock dividends.

As of March 31, 2024, we had $300 million remaining in our share repurchase authorization. As part of our capital planning approved by the Board of Directors, our share repurchase authorization was increased by $1 billion, bringing our total authorization to $1.3 billion for the period ending June 30, 2025. Furthermore, the Board intends to maintain our current quarterly dividend of $0.25 per share. Synchrony remains well positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. Turning to Slide 13 for a review of our 2024 business trends. As a reminder, Synchrony previously filed an 8-K on March 5, 2024, with a revised financial outlook, including EPS guidance for the full year 2024.

Specifically related to the framework around the pending late fee rule change and our product, policy and pricing changes, there continues to be uncertainty regarding the timing and outcome of the late fee-related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of the late fee rule changes, and any potential changes in consumer behavior in response to the product, policy and pricing changes we implement as a result of the new rule. Outcomes and actual performance related to any of these uncertainties could impact the EPS outlook. Looking at the remainder of the year, Synchrony will continue to execute across our key strategic priorities and prepare our business as we navigate an evolving operating environment.

We have commenced the implementation of our product, policy and pricing changes, the majority of which will be completed over the next two to three months, and we anticipate having greater clarity on the impacts of these changes likely in the second half of the year. In the meantime, we continue to expect our business to demonstrate typical season patterns in many of our key metrics. We expect net charge-offs to peak in the first half of the year and that the reserve coverage at year end should be lower than the year end 2023 rate. Finally, we expect that the RSA will continue to align program performance and continue to function as designed. In closing, Synchrony is focused on leveraging our core strengths to optimize our business position and build on our long history of delivering steady growth and strong risk-adjusted returns.

Our depth of consumer lending experience informs our go-to-market and product strategies. Our investment in sophisticated credit management tools empower our agility and our RSA supports our financial resilience. Together, our differentiated model continues to consistently deliver value to each of our stakeholders through changing environments. I will now turn the call back over to Brian for his closing thoughts.

Brian Doubles: Thanks, Brian. Synchrony’s first quarter results were driven by our differentiated business model and our commitment to delivering sustainable, strong results for our customers, partners and stakeholders. We are leveraging our proprietary industry and consumer insights, our diversified products and platforms, and our advanced data analytics to consistently provide access to responsible financing solutions for our customers, sales and loyalty for our partners and sustainable growth at strong risk-adjusted returns for our stakeholders. We’re confident that Synchrony is operating from a position of strength as we navigate the year ahead. We’re excited about the opportunities we see to drive still greater long-term value as we continue to partner with hundreds of thousands of small and mid-sized businesses and health providers to provide access to credit to our more than 70 million customers for their everyday needs and wants.

With that, I’ll turn the call back to Kathryn to open the Q&A.

Kathryn Miller: That concludes our prepared remarks. We will now begin the Q&A session. [Operator Instructions] If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Ryan Nash with Goldman Sachs. Please go ahead.

Ryan Nash: Hey. Good morning, guys.

Brian Wenzel: Hey, Ryan.

Brian Doubles: Good morning, Ryan.

Ryan Nash: So it seems like charge-offs are coming in a little bit higher than expected, but we’ve now seen our delinquencies potentially inflect and starting to follow seasonal patterns. So can you maybe talk about what this means for the full year loss rate and where do you see losses and the allowance settling out over the intermediate time frame if your forward view proves accurate?

Brian Wenzel: Yeah. Thanks for the question, Ryan. So again, I think we have been somewhat clear that we believe charge-offs, when you look at the delinquency trend as we entered into 2024, that charge-offs will peak in the first half of the year and decline. I think you see that, well, certainly in the bend in the first quarter. I think when you see the results in April, when we put out our 8-K, you will see delinquencies down on both a 30 plus and 90 plus basis relative to what we just reported here today. So I think when you start looking at that, you look at the seasoning of the credit actions that we took, really in the second and third quarter of last year. We feel good that the charge-off rate will decline in the back half of the year.

And most certainly, we haven’t changed our underwriting targets to be in the 5.5% to 6% range, generally speaking. So we feel good about that which leads us to the belief that if you see that lower net charge-off rate in the back half of the year and you project that forward into 2025, that the reserve coverage rate should be below the 10.26% rate that we had really at the end of last year, and really, the increase in the first quarter here was reflective more of the seasonal patterns than anything else.

Ryan Nash: Got it. And then maybe as a follow-up. So the RSA has beaten several quarters in a row. 1Q was well below that 3.50% to 3.75% I think you had outlined in the prior guidance. So maybe just talk a little bit about how you’re thinking about the RSA for ’24. This is, of course, ex-late fees. And do you think the new normal for this is below that 4% to 4.25 %, 4.5% you’d outlined in the past? Thank you.

Brian Wenzel: Yeah, Ryan. As I look at the RSA trend, the first quarter was — that clearly, when you look at it year-over-year on the higher net charge-offs, which was a substantial amount of the decrease in the RSA, partially offset — about a third of it offset by really, NII growth and the NII was a little bit suppressed because you had the last full impact on your interest-bearing liabilities. If I take a step back for a second and think about the core business, Ryan, I believe we’re at a point where we have peaked on assuming no rate increases and peaked on our interest-bearing liability costs. As I talked about the net charge-off rate peaking in the first half, you should see an upward bias then in the RSA as we step through the remaining quarters of the year.

The other variable will be volume. So even if you looked on a linked quarter basis, volume being down and being down a little bit year-over-year for some of the RSA clients, will play a factor, but it should trend upwards as we step through, given the peaking nature of the interest-bearing liability costs and charge-offs.

Ryan Nash: Thanks for the color, Brian.

Brian Wenzel: Thanks, Ryan.

Operator: Thank you. We’ll take our next question from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani: Thank you. Good morning. I guess my first question is on purchase volume. Obviously, that continues to remain weak. Could we just talk about sort of how we get it back to a baseline that accelerates? I know inflation is sort of weighing in on the consumer, but maybe just talk about what’s driving that and how and when we get it back to a baseline that’s higher?

Brian Doubles: Yeah, Sanjay. Hey, maybe I’ll start on this and then pass it to Brian. I mean, look, I think generally we’re pretty pleased with the growth that we’re seeing in the business. I think the consumer is still in good shape. Obviously, the job market is very strong, that’s helping. But you are seeing a lot of that spend being driven by the higher end consumer, the higher-income consumer and that’s actually not a bad thing. I think they’re benefiting, obviously, job market, house prices are up, stock prices are up. On the lower end, that’s where you’re seeing some of the slowdown. And from a credit perspective, that’s not the worst thing. I think we see people being prudent. I think they’re managing to a budget, they’re managing to their cash flows. They’re not overextending. So I think there’s a positive read-through from a credit perspective on that. I don’t know, Brian, if you want to…

Brian Wenzel: Yeah. The first thing, Sanjay, and I want to remind people, we’re comping off of what I’d say is a really strong quarter last year. So when you look at a 2% off, that is very strong, it’s a record for our company for the first quarter. Brian highlighted some of the differences. I think you’re plus 8% on a higher FICO, down a little bit year-over-year on lower FICOs. We are seeing most certainly the consumer step back in certain bigger ticket areas, right? Either going down in transaction values, which I think you see reflected in the Home & Auto purchase volume being down and really in Lifestyle. But we do see strengths in those pockets. Our home specialty business is up in the double-digits or our outdoors business is up.