Q1 2024 Earnings Summary
- Synchrony Financial has a strong capital position and is generating excess capital, enabling it to pursue opportunistic acquisitions like the recent Ally Lending deal.
- Q1 purchase volumes reached a record high, growing 2% despite challenging comparisons. The company is gaining market share within partner programs and remains confident in consumer spending driven by higher-income consumers.
- The company's robust deposit franchise has led to increased liquidity, with deposits growing $3.4 billion from the end of last year. The strength and attractiveness of their digital platform contribute to continued deposit growth without significant marketing efforts.
- Purchase volume growth remains weak, especially among lower-income consumers and big-ticket items, signaling a slowdown in consumer spending.
- Management did not reiterate their EPS guidance of $5.70 to $6, suggesting potential uncertainty in their financial outlook.
- The company plans to increase APRs and implement new fees to offset impacts, which could negatively affect customer satisfaction and competitiveness.
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Late Fee Rule Changes
Q: How will the CFPB's late fee changes impact earnings and timing?
A: Management is executing their plan to offset the late fee impact through product, policy, and pricing changes, aiming for ROA neutrality by end of 2025. If implemented in May, operational challenges would arise, but they are preparing for this scenario. The late fee impact is included in capital planning, and they believe they can manage it without affecting capital targets. -
EPS Guidance
Q: Does the original $5.75 to $6.00 EPS guidance still hold?
A: Management reaffirms the EPS guidance provided on March 5th, stating they are ahead of expectations, with positive trends in net interest margin and charge-offs. They did not reiterate the guidance explicitly, as it was issued only 45 days ago. -
Credit Outlook and Charge-offs
Q: When will charge-offs peak, and what's the credit outlook?
A: Charge-offs are expected to peak in the first half of 2024 and decline in the second half, with delinquencies improving. Delinquencies are down in both 30-plus and 90-plus days. Management anticipates lower net charge-off rates in the back half of the year. -
Net Interest Margin and Deposit Pricing
Q: What drove the net interest margin decline, and when will deposit costs level out?
A: The net interest margin decline was due to higher interest-bearing liability costs and excess liquidity. Management expects costs to have peaked and net interest margin to improve throughout the year as deposit pricing follows the market down. -
Return on Assets Targets
Q: Can you maintain long-term ROA targets despite late fee impacts?
A: Management aims to be ROA neutral by end of 2025 after the late fee change. They remain confident in achieving long-term ROA targets, leveraging strengths like the RSA and excess capital, while monitoring regulatory changes. -
Capital Position and Acquisitions
Q: Are there opportunities for acquisitions like Ally given strong capital?
A: With excess capital and strong generation of 2.5% CET1 over the last 12 months, management is open to opportunistic, accretive acquisitions like Ally, focusing on strategic fit in familiar industries. -
Competition and Industry Responses
Q: How are competitors responding to late fee changes?
A: Management expects competitors to implement similar offsets; absorbing late fees without offsets leads to suboptimal returns and isn't viable long-term. -
Purchase Volume Trends
Q: Why is purchase volume growth weak, and when will it improve?
A: Purchase volume grew 2%, comping off a strong prior year. Consumers are being prudent, with lower transaction values but higher frequency, particularly in lower-ticket categories. Management expects improvement as spending stabilizes. -
Cash Balances
Q: Why are cash balances elevated this quarter?
A: Elevated cash balances are due to strong deposit growth of $3.4 billion and $600 million proceeds from the sale of Pets Best franchise. Excess liquidity is expected to normalize, improving net interest margin. -
Small- and Medium-Sized Businesses Focus
Q: Is Synchrony shifting focus to small- and medium-sized businesses?
A: Management highlights growth in serving hundreds of thousands of small- and medium-sized businesses, especially in health and wellness, complementing large partners. Investments yielded receivables growth of 20% in this area.