Q4 2023 Earnings Summary
- Synchrony achieved a record purchase volume of $185 billion in 2023, reflecting strong customer engagement and diversified sales platforms, and expects to maintain or grow this level in 2024.
- The company anticipates outsized growth in its Health and Wellness and Digital platforms, leveraging leading positions and partnerships with companies like Venmo, Verizon, PayPal, and Amazon.
- Strategic initiatives such as the acquisition of Ally Lending's point-of-sale financing business and in-sourcing recovery operations are expected to enhance growth and efficiency, potentially providing a tailwind beyond 2024.
- Facing challenging comparisons in purchase volume growth for 2024, as purchase volume was a record high of $185 billion in 2023, making it difficult to achieve similar growth levels in the upcoming year.
- Weakness in the Home and Auto verticals due to lower foot traffic and decreased transaction values, with consumers purchasing lower-priced items. This trend is expected to continue into the start of 2024, potentially impacting overall growth.
- Expected increase in net charge-offs to 5.75% to 6% in 2024, reaching the higher end of the targeted underwriting range due to credit normalization and a cautious underwriting posture, which may affect profitability.
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Credit Quality and Charge-Offs
Q: How will delinquencies and charge-offs trend in 2024?
A: Brian Wenzel noted that delinquency rates are stabilizing, with 30-plus and 90-plus delinquency rates only 12 basis points and 4 basis points, respectively, over 2017–2019 averages. He expects the net charge-off rate to be in the range of 5.75% to 6% for 2024, peaking in the first half and lowering in the second half, staying within underwriting targets. -
Net Interest Income Guidance
Q: What could affect the Net Interest Income outlook?
A: The NII guidance assumes three rate cuts beginning in September 2024, with a beta of 30%. If there are more or earlier rate cuts, NII could increase due to lower interest on liabilities; conversely, fewer cuts could lower NII. -
Late Fee Rule Impact
Q: How is the company preparing for the potential late fee rule?
A: Brian Doubles stated they have been preparing for almost a year, spending $7 million , and are working with partners on pricing actions and offsets to fully mitigate the impact when the final rule is issued. Conversations with partners have been constructive, focusing on maintaining customer access to credit. -
Allowance for Credit Losses
Q: When will the allowance for credit losses peak and decline?
A: The coverage ratio is expected to rise seasonally in the first quarter due to lower receivables and the addition of Ally Lending's portfolio, but it should trend down over the year, exiting 2024 lower than the starting point of 10.26%. -
Capital Deployment and Acquisitions
Q: How will capital from recent transactions be used?
A: The sale of Pets Best will generate about 80 basis points of capital, net of investment. The company will spend about 50 basis points on acquiring Ally Lending. Capital priorities remain organic growth, maintaining the dividend, share repurchases, and selective inorganic opportunities. -
Consumer Spending Trends
Q: Are there changes in consumer behavior affecting spending?
A: Brian Wenzel observed a rotation out of travel into other categories. Transaction values are down while frequency is up, indicating consumers are being efficient with spending. Early 2024 sales have been softer than expectations, possibly due to weather affecting foot traffic. -
Underwriting Posture
Q: How is the underwriting stance compared to prior periods?
A: The company is more prudent than a year ago and remains cautious. They are not using credit as a lever for growth and are closely monitoring consumer trends. Credit actions taken in the second and third quarters are beginning to show effects. -
Portfolio Renewals and Pipeline
Q: Are there any large programs up for renewal soon?
A: The majority of programs are contracted through 2026 and beyond. The company occasionally renews programs early if mutually beneficial. Late fee rule uncertainty has made pricing new business more challenging, but partner discussions are constructive. -
Preferred Equity Issuance
Q: Any plans for preferred equity issuance in 2024?
A: The company has 75 basis points of capacity in Tier 1 capital and may issue up to $700 million to $750 million to optimize the capital structure. Timing depends on market conditions and demand. -
Recovery Rates and Impact on Charge-Offs
Q: How will recoveries affect net charge-offs?
A: By in-sourcing recovery operations, recovery rates have improved. Recoveries are expected to rise in 2024 due to higher net charge-offs and potential easing of rates, which could improve pricing for written-off paper. -
Net Interest Margin Outlook
Q: Is there a path to a 16% Net Interest Margin?
A: Brian Wenzel indicated that NIM could benefit if rate cuts occur earlier or are more significant than expected, but did not provide a specific timeframe for reaching a 16% NIM. -
Expense Management
Q: How will expenses trend in 2024?
A: The company is targeting an efficiency ratio, achieving operating leverage by growing expenses at a slower rate. Investments in early retirement programs and facilities will drive benefits in 2024. -
Sales Volume Expectations
Q: What are expectations for purchase volumes in 2024?
A: They expect sales volumes to be generally consistent with last year, facing difficult comps after a record-high purchase volume of $185 billion in 2023. Growth will depend on GDP growth and payment rate trends. -
Impact of Recent Transactions
Q: How do recent transactions fit into the company's strategy?
A: The acquisition of Ally Lending complements and accelerates current strategy in home improvement and health and wellness, adding 2,500 new merchants and 500,000 new customers. The sale of Pets Best was opportunistic, generating over 10x the original investment and allowing continued investment in the pet space.