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    Synchrony Financial (SYF)

    Business Description

    Synchrony Financial is a premier consumer financial services company that offers a comprehensive suite of digitally-enabled products across various industries, including digital, health and wellness, retail, telecommunications, home, auto, outdoor, and pet sectors . The company primarily provides credit products through financing programs established with national and regional retailers, local merchants, manufacturers, buying groups, industry associations, and healthcare service providers . Synchrony's product offerings include private label, dual, co-brand, and general-purpose credit cards, as well as short- and long-term installment loans and consumer banking products .

    1. Home & Auto - Offers credit products tailored for home improvement and automotive purchases, working with partners in these sectors to provide financing solutions.
    2. Digital - Provides credit solutions for digital platforms, enhancing online shopping experiences through partnerships with major e-commerce and digital service providers.
    3. Diversified & Value - Delivers a range of credit products to partners in various retail sectors, focusing on value-driven consumer segments.
    4. Health & Wellness - Supplies financing options for healthcare services, collaborating with healthcare providers to offer patients flexible payment plans.
    5. Lifestyle - Caters to lifestyle-oriented sectors, including outdoor and pet industries, by offering credit products that support consumer purchases in these areas.

    Q3 2024 Summary

    Initial Price$47.42July 1, 2024
    Final Price$49.01October 1, 2024
    Price Change$1.59
    % Change+3.35%

    What went well

    • Health and Wellness segment reports 10% loan growth year-over-year, with strong customer satisfaction and Net Promoter Scores, positioning Synchrony well in a $400 billion market.
    • Late-stage collections have started to improve in recent months, indicating potential enhancements in credit performance.
    • Net Interest Margin (NIM) is expected to trend higher in the future, providing tailwinds to profitability as interest components increase and benefits in interest expense materialize.

    Q&A Summary

    1. Credit Performance and Reserve Rates
      Q: How is credit performance affecting reserve rates and outlook?
      A: Management indicated that credit performance is generally tracking expectations, with delinquencies stabilizing and no significant signs of stress among lower-end consumers. They expect the reserve rate at year-end to be generally in line with last year's 10.3% , and losses are expected to move back towards 5.5% to 6% as underwriting adjustments take effect. The decrease in reserve rate is driven by the denominator effect as loan balances stabilize.

    2. Net Interest Margin Expectations
      Q: What are the expectations for net interest margin given rate changes?
      A: Management expects net interest margin to have an upward bias over the next several quarters , driven by benefits from payment rates declining and lower interest expense as CDs reset at lower rates. In a declining rate environment, they anticipate tailwinds due to lower funding costs, with retail deposits, particularly CDs, mostly repricing in the first half of next year. They also foresee interest income benefiting from PPPC actions and lower payment rates.

    3. Impact of CFPB Late Fee Rules
      Q: How will CFPB late fee rules impact the company?
      A: Management is operating as if the late fee rule will go into effect, preparing to offset the impact of an $8 late fee. Pricing actions have been implemented to mitigate the expected impact, and customer attrition is lower than expected. If the rule does not go into effect, they have not planned for rolling back changes but would discuss with partners if necessary.

    4. Spending Trends and Loan Growth Outlook
      Q: What is the outlook for spending trends and loan growth?
      A: There has been a slowdown in spending volume due to consumers trading down and acting rationally amid inflation pressures. Purchase volumes have stabilized at low single-digit declines, and management expects stability heading into the holiday season. Loan growth is expected to remain low single-digit as credit actions continue to impact new accounts but could reverse if macroeconomic conditions improve.

    5. Collections Performance and Credit Actions
      Q: How are late-stage collections performing, and is it harder to collect now?
      A: Late-stage collections have shown improvement over the last few months, although still performing worse than pre-pandemic periods. It is harder to collect today due to tougher customer contact, but investments in digital collections and other channels are helping. Underwriting actions are designed to bring losses back to 5.5% to 6%, and delinquency trends are tracking expectations.

    6. Health and Wellness Segment Performance
      Q: How is the health and wellness segment performing?
      A: The health and wellness segment continues to be a strong contributor, with loan growth up 10% year-over-year. While there is some pullback in discretionary procedures, areas like pets are up 4% year-over-year. The CareCredit card usage rate has increased to 65%, up 500 basis points from last year, indicating strong customer engagement.

    7. Competition and Pricing Actions
      Q: Are competitors' actions influencing your pricing strategies?
      A: Management monitors competitors but feels comfortable with their own actions. They are not an outlier relative to peers and have not seen a need to recalibrate pricing to remain competitive. The focus remains on maintaining value propositions that resonate with customers and partners.

    8. PPPC Tracking vs. Guidance
      Q: How is PPPC performance tracking versus initial guidance?
      A: PPPC actions are generally performing in line with expectations. Customer attrition is lower than anticipated, impacting the timing but not the point of neutrality for mitigating the impact of policy changes. The core performance is slightly better than expectations.

    9. Macroeconomic Outlook
      Q: What macro factors are you watching to adjust your strategies?
      A: Management is observing the consumer's response to inflation and the labor market. They look for stabilization in credit trends and reduced uncertainty to drive more normal growth and potentially reverse some tightening actions. Affordability issues and the impact of excess credit in the system are also considered.

    Revenue by Segment - in Millions of USDQ2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Home & Auto--------
    - Interest and Fees06-7--6-5
    - Other Income-15-416--1,061--7
    Digital--------
    Diversified & Value--------
    Health & Wellness--------
    Lifestyle--------
    Corp, Other--------
    Retail Card--------
    - Retailer Share Arrangements--------
    Payment Solutions--------
    CareCredit--------
    Total Interest Income4,6164,8125,3545,92820,7105,5685,582-
    Total Other Income-6192--1,157117-
    Total Revenue--------
    KPIs - Metric (Unit)Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Over-30 Day Loan Delinquencies (%)3.81%3.84%4.40%4.74%-4.74%4.47%4.78%
    Net Charge-Off Rate (%)4.49%4.75%4.60%5.58%-6.31%6.42%6.06%
    Allowance Coverage Ratio (%)10.34%10.40%10.26%10.72%-10.74%10.79%-
    Average Active Accounts (Thousand)69,49469,51770,30871,526-71,66770,97470,424
    Purchase Volume (Million USD)41,55747,27647,00649,339-42,38746,84644,985
    Period-End Loan Receivables (Million USD)91,12994,80097,900102,988-101,733102,284102,193
    Average Loans (Million USD)92,48996,23099,683100,957-101,478102,009-
    Interest and Fees on Loans (Million USD)4,6164,8125,1515,323-5,2935,3015,522

    Executive Team

    NamePositionStart DateShort Bio
    Alberto CasellasExecutive Vice President and CEO—Health & WellnessJune 2021Alberto Casellas is the Executive Vice President and CEO of the Health & Wellness platform at Synchrony Financial. He previously served as CEO of Synchrony's CareCredit platform and held various leadership roles at GE .
    Curtis HowseExecutive Vice President and CEO—Home & AutoJune 2021Curtis Howse is the Executive Vice President and CEO of the Home & Auto platform at Synchrony Financial. He has held various roles at Synchrony and GE, including leading Direct to Consumer efforts and the Diversified Client Group .
    Carol JuelExecutive Vice President, Chief Technology and Operating OfficerJune 2021Carol Juel is the Executive Vice President, Chief Technology and Operating Officer at Synchrony Financial. She has a background in technology leadership roles at GE and Accenture .
    David P. MelitoSenior Vice President, Chief Accounting Officer and ControllerFebruary 2014David P. Melito has been the Senior Vice President, Chief Accounting Officer, and Controller at Synchrony Financial since February 2014. He previously held various accounting roles at GE .
    Jonathan S. MothnerExecutive Vice President, Chief Risk and Legal OfficerNovember 2023Jonathan S. Mothner is the Executive Vice President, Chief Risk and Legal Officer at Synchrony Financial. He previously served as the Executive Vice President, General Counsel, and Secretary .
    Maran NalluswamiExecutive Vice President and CEO—Diversified & Value and LifestyleJanuary 2023Maran Nalluswami is the Executive Vice President and CEO of the Diversified & Value and Lifestyle platforms at Synchrony Financial. He has held various roles at GE Capital and Synchrony .
    Bart SchallerExecutive Vice President and CEO—DigitalJune 2021Bart Schaller has been the Executive Vice President and CEO of the Digital platform at Synchrony Financial since June 2021. He previously served as the Chief Marketing Officer of Synchrony .
    Brian J. Wenzel, Sr.Executive Vice President, Chief Financial OfficerMay 2019Brian J. Wenzel, Sr. has been the Chief Financial Officer of Synchrony Financial since May 2019. He has held various financial roles at Synchrony and GE .
    Brian D. DoublesPresident and Chief Executive OfficerApril 2021Brian D. Doubles has been the President and Chief Executive Officer of Synchrony Financial since April 2021. He has served as a director and has been a member of the board of directors of Synchrony Bank since 2009 .
    Daniel ColaoBoard of Directors MemberOctober 1, 2024Daniel Colao was appointed to the Board of Directors of Synchrony Financial, effective October 1, 2024. He has over 30 years of industry experience and previously served as CFO and Executive Advisor of GE Capital .

    Questions to Ask Management

    1. Regarding the CFPB's pending late fee rule change, can you provide a detailed update on the litigation status and how the potential implementation of an $8 late fee safe harbor could impact your financial performance and strategy?

    2. With the observed moderation in consumer discretionary spending, particularly in categories like furniture, electronics, and cosmetics, how are you adjusting your growth strategy in the Health and Wellness segment to address the slowdown in bigger ticket discretionary purchases?

    3. You've mentioned the implementation of proactive pricing and policy changes in response to the anticipated late fee rule changes. How confident are you in achieving earnings neutrality through these measures, and can you elaborate on any early indications of customer behavior shifts, such as lower paper statement fee income and customer attrition?

    4. Given the ongoing challenges in late-stage collections and the evolution of collection rules, how are you adapting your collection strategies to improve recovery rates, and what impact do you anticipate this will have on your credit performance moving forward?

    5. The guidance for reserve coverage at the end of the year suggests a larger seasonal step-down compared to previous years. Can you explain the factors driving this expectation, and how changes in macroeconomic conditions or consumer payment behavior are influencing your provisioning?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateApril 2024
    End Date/DurationJune 30, 2025
    Total additional amount$1.0 billion
    Remaining authorization amount$700 million as of September 30, 2024
    DetailsIncremental share repurchase program

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Reserve Rate: Expected to be generally in line with the year-end 2023 rate (~10.26% or 10.3%) .
      2. Net Interest Income (NII): Expected to remain sequentially flat .
      3. Net Charge-Off Rate: Expected to be lower in the second half of 2024 than in the first half .
      4. Earnings Per Share (EPS): Expected between $8.45 and $8.55 .
      5. Credit Performance: Delinquencies expected to follow seasonality .
      6. Loan Receivables Growth: Expected to show low single-digit growth .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Earnings Per Share (EPS): Expected between $7.60 and $7.80 .
      2. Net Charge-Off Rate: Expected to be lower in the second half of 2024 .
      3. Reserve Coverage Ratio: Expected to be in line with year-end 2023 .
      4. Other Expenses: Expected to trend in line with the first half average .
      5. Purchase Volume: Expected flat to low single-digit decline .
      6. Loan Receivable Growth: Expected to be more moderate .
      7. Net Interest Income and Other Income: Expected to grow progressively .
      8. Credit Loss Rate: Targeted between 5.5% and 6% .
      9. Return on Assets: Targeted at least 2.5% .
      10. Capital Ratios: Final adjustment of approximately 50 basis points in January 2025 .
      11. Efficiency Ratio: Was 31.7% for the second quarter .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. EPS Guidance: Range of $5.70 to $6.00 .
      2. Net Charge-Offs: Expected to peak in the first half .
      3. Reserve Coverage: Expected to be lower than year-end 2023 .
      4. Interest-Bearing Liabilities Costs: Believed to have peaked .
      5. Delinquencies: Expected sequential decline .
      6. RSA (Retailer Share Arrangements): Expected to trend upwards .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Macroeconomic Assumptions: GDP growth of 1.7%, unemployment rate of 4.0%, Fed funds rate of 4.75% .
      2. Loan Receivables Growth: Expected 6% to 8% .
      3. Net Interest Income: Expected between $17.5 billion to $18.5 billion .
      4. Net Charge-Offs: Expected 5.75% to 6% .
      5. Return on Average Loan Receivables (ROCs): Expected 3.5% to 3.75% .
      6. Operating Efficiency Ratio: Expected 32.5% to 33.5% .
      7. Capital Ratios: CET1 ratio reduced by approximately 50 basis points .
      8. Impact of Transactions: Sale of Pets Best business to result in a $750 million gain .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • American Express - Major financial institution competitor for partners .
    • Bread Financial - Major financial institution competitor for partners .
    • Capital One - Major financial institution competitor for partners .
    • JPMorgan Chase - Major financial institution competitor for partners .
    • Citibank - Major financial institution competitor for partners .
    • TD Bank - Major financial institution competitor for partners .
    • Wells Fargo - Major financial institution competitor for partners .
    • Affirm - Non-bank provider of pay-over-time solutions .
    • Afterpay - Non-bank provider of pay-over-time solutions .
    • Klarna - Non-bank provider of pay-over-time solutions .
    • Apple - Larger technology-focused company offering financial products .
    • Google - Larger technology-focused company offering financial products .
    • Walmart - Larger retailer offering financial products .
    • Target - Larger retailer offering financial products .
    • Ally Financial - Competitor in the retail deposits business .
    • Barclays - Competitor in the retail deposits business .
    • Capital One 360 - Competitor in the retail deposits business .
    • CIT - Competitor in the retail deposits business .
    • Citi - Competitor in the retail deposits business .
    • Citizens Bank - Competitor in the retail deposits business .
    • Discover - Competitor in the retail deposits business .
    • E-Trade - Competitor in the retail deposits business .
    • Marcus by Goldman Sachs - Competitor in the retail deposits business .