Synchrony Financial (SYF) Earnings Call Transcript & Summary

Okay. Good morning, and thank you for joining us. I'm Barclays Consumer Finance Analyst, Mark DeVries, and I'm pleased to be joined by Synchrony's Financial CEO, Margaret Keane; and CFO, Brian Wenzel. We'll be doing a hybrid presentation, leading off with some introductory comments by management, followed by a fireside chat, but we'll break it up with some polling of the audience. And I'll also leave time for any questions that come in from the audience during this session. If you'd like to ask a question, you should have an option to enter it on the upper left-hand side of your screen, or you can try to e-mail directly to me, and we'll do our best to address your questions and the time we have today. Before we start off with the prepared remarks, I'd like to lead off with a question for the audience to participate, please click-through the polls on the left side of your screen. After you respond, you should be able to toggle back to the video of the discussion.

So first question for the audience, what factor do you view as most likely to determine whether Synchrony outperforms over the next year? Reacceleration in overall retail sales, reacceleration of loan growth, stable to only modestly worsening credit, upside to NIM or other. So as you respond to that, we will move on. Going to hand it off to Margaret for her comments, Margaret, take it away.

Sure. Thanks so much, Mark, and good to see you. So I thought before I provide a business update, I really just wanted to touch on one thing that is personal to many of us. And we just recognize the attacks of 911 as in a New Yorker and a family of very many police offices. It's always one of those events that really touches my heart, and I was reminded about just how he Rote many of our first responders, health care and military personnel were involved on that day and the days that followed. And those are some of the same people that are dealing with the pandemic and doing incredible service. So I just want to say thank you to all of them for the service, and thank you for our Synchrony associates who really have done an outstanding job really handling our cardholders, our partners and our merchants and providers. Finally, I hope as we come together as a country that we can really take what we've learned 19 years ago and be reignited today as we were then for such coming together as a country that we did back in 911 to really see if we can come together after this pandemic and some of the horrific social justice that has been going on in our society. So I think it's just important to kick off with that since 9/11 was last Friday and just something for us all to be thinking about. From a business perspective, I think the good news is that our purchase volume has stabilized. And it's been remaining relatively consistent quarter-to-date. It's important to remember that as we went into this pandemic, we were actually in a very strong economy, the consumer was very strong. And clearly, the consumer is benefiting from stimulus and the industry-wide forbearance. So we're seeing that in some of the numbers, as you noted, we put out today. And it's manifesting itself in 2 things. One is a much higher payment rate and a much better delinquency rate, which is really not indicative of the high inquire rate that we have. So clearly, those plans are helping. As we think about retail itself and consumer behavior, we certainly are seeing a change, right? A lot more online. Anyone whose digital is definitely winning in this space. I would tell you that as we've opened up, we've definitely seen some positive momentum. People are back out shopping in store. My guess is that will continue to hold unless something happens, right? I think one of the caveats, everything I'm saying is, is there a second wave, how does that portray itself? Is it in certain parts of the country, the whole country, and I think something we have to really pay attention to. I think holiday season will be very different. You already have noted that many of the big retailers are not going to be open Thanksgiving. That's a big shift. Our guess is what you're going to see, and we're already having conversations with partners, a much earlier start to retail. And it's going to be a lot more digital and a lot more store pickup. I don't know if any of you've been out anywhere, but they do have Christmas stuff out already, which is quite amazing. And their Thanksgiving cards, if you want to get them already, and we haven't even had Halloween. So there's a definite push on everyone getting out there to drive forward for the holiday season. And I think the other piece that we'll pay attention to is inventory. I do think there's an inventory challenge in some of our partners in terms of just a longer week time to get products, so whether it's furniture or appliances anyone has bought a home recently. I'm sure they [ see ] taking a little longer to get your product. But I think that's all coming back online. So that should be helpful. We're poised and have in place to take all the actions we've been taking. Actions in a couple of ways. We're managing through credit and reducing credit lines and really managing our portfolio. I think going into this, our portfolio was very much stronger than it was when we went into the financial crisis. So we feel good about where we are in the current portfolio. And really, I'd say there's 2 key things that we shifted pretty quickly. Back in March, we had a number of agile teams working on a number of projects, and we kind of sat back and pretty quickly pivoted those teams because we wanted to make sure we were adjusting to the realities of what was happening. So I would say a majority, almost all those teams are working on something related to digital, whether it's digital point of sale, digital customer service, even we're revamping our whole collection process to be much more digital. And I think the significance of that is that's going to play out as we go into 2021. And we're just trying to get more tools in the hands of our partners and the customers to really do everything digitally. And that's really where most of our effort is right now, and we just stopped doing certain other things that didn't make sense in this current environment to really drive forward. You're going to hear from us today that we are in a good position right now. I think, though, there's still a lot of uncertainty. And I think the biggest uncertainty is really 2 things. Is there a second wave? How quick does the vaccine come out? And I think there's been some positive momentum there, but we'll have to see. And then I'd say the third is really how does an unemployment play out. And we've seen a bit of an improvement on unemployment, but I think many of us believe there's going to be another wave of layoffs and what -- how do those layoffs transpire. So what I would say, we're being very cautious and thoughtful, but at the same time, really working very, very hard to support our partners as we work through the pandemic in the cycle.

Great. So thank you for those comments, Margaret. Before we move on, just results on the first question we asked, it looks like, not surprisingly, an overwhelming majority of you expect that the stable credit is going to be the biggest determinant of that performance. Just one more question for the audience before we move on. What do you view as the biggest risk to the shares here? Additional material reserve bills, continued strong retail partners, low or 0 loan growth, prolonged period of no buybacks or other. So moving on to my questions for management. This is obviously a tough time for retailers in general, so can you speak to how the conversations with current retail partners are going? What kind of things have you been able to do to work with struggling retailers to help them pull through? And what measures can you take to limit your own exposure?

Sure. So I touched on some of this. A lot of what we're trying to do is really around the digital integration with the partners. We continue to accelerate there. And I think where the partners have a strong a strong digital presence, those are the ones that are certainly moving and winning. I think we're working harder to get some of our smaller retailers up that curve and trying to roll out things that are really going to help them. I -- when our retailer is struggling, we -- I think the good news is we have very tight relationships with our partners, and we're at the most senior levels of those companies. So we're kind of dialoguing with them all the time. Our exposure is not with the retailer. Our exposure is with the consumer. And I would tell you, since we've been in business 90 years, we've gone through many cycles. We have protections in our contracts. We've always made sure that we have a way to facilitate that consumer coming out of that particular bankruptcy or whatever, and you've seen us do that with hhgregg and Toys"R"Us. So we know how to do this. And in most cases, when you go back and look at the history, even if the retailer liquidates, our portfolios usually liquidate positively. And the most important thing there is wherever you can give the consumer utility on a card -- so if we can move it over to another program or move it to a Mastercard or Visa, and the consumer has the utility of the card, we usually do really, really well. In addition to which we're now not paying RSAs to the partner, so we can use those dollars towards a value prop. And we did that with Toys"R"Us, which has been a very successful program for us, actually. So we have a whole team that is watching all of this. We're paying close attention to what's going on in our retail base. And making sure that we're helping those customers where we can, but also protecting our portfolio as well as we go through something like that.

Okay. And what kind of things are your partners looking for -- from you? Is it that help in transitioning to digital that you talked about as a big area of focus? Or are there other things they're looking for?

Well, I think there's probably a couple of things, and it really varies by -- some retailers are re-looking at value props, so we're doing a lot of work on new value props because value props is the driver of the consumer to spend and open up new cards. So that's a big one that we're working on. The second is a lot of what you said is really around the digital integration and how can we make things even more sophisticated with our partners. And I'm sure you know we just rolled out Verizon, we'll have Venmo coming up, a lot of work going on there in terms of that digital connection to the customer and really driving that forward. So I think -- we're also investing in the back end too, through AI. Actually saw a nice tweet yesterday where one of our customers actually commented that they were calling because they paid -- they had a late fee. They said it was their fault. And they actually never had to speak to anyone. When they called, we actually asked, upfront, do you want this late fee waved? He said it took a couple of seconds, and he said he never had to talk to anyone. That's the kind of things we're doing to really, one, make it a seamless process -- Brian doesn't like when we wave late fees, by the way, but the good news is we're really satisfying the customer. And making it really seamless and easy for them to really engage with us. And we're doing that across for all our partners where we can really make it digital.

Okay. Great. And how has competition been around new opportunities. And is the environment impacting the pace at which these opportunities kind of present themselves?

There's -- I would say there's not a lot of big deals out there that haven't been. There are opportunities out there. There's some that have been recently announced. We haven't won some of those. I think the thing that we have learned over time is we're going to be very diligent on the strength of the partner as well as our ability to get a return that we feel is right for us. So we're not going to win every deal, but we feel good about the deals we are winning. And I'd say pretty much everyone's being reasonable off there, maybe some a little more aggressive than we would be, but we're going to maintain our discipline. I mean the most important thing you can do in a period like this is be very disciplined.

Okay. Great. What kind of things are you doing right now to accelerate your retail partners' transitions to the more digital commerce?

I think it's probably the biggest -- as we have an agile team, who's really kind of looked at the whole point-of-sale upfront. So I think you're reading about things like QR codes, really making sure we can facilitate every wallet, making sure it's a seamless integration with the partner. I mean one of the things that the partner really wants is they don't want people jumping in and out of their app. So we have to be in their app and make that a very simplified, seamless process. We've moved to a very quick process in terms of the amount of data that you actually have to put in. But on the back end of that is a lot, a lot of really great work by our credit team to really make sure we're verifying that customers who they are. I think one of the things you really have to pay attention to in a digital world is fraud, which -- there's still a lot of fraud out there. And so as important as our underwriting, it's as important to really maintain our capability around fraud. And we've really, I think, accelerated in that area and continue to accelerate our capabilities there. And I think we have -- working with some external partners just a better way for us to continue to control fraud because that is one area that I think anyone who's in financial services knows this is just a big area. But we all have to pay attention.

Got it. I think you mentioned you had refocused several teams on the digital stuff in March. Were you having to accelerate investments to kind of keep up with the shipping needs there?

No. Because we actually, as part of our whole -- and we'll talk about, I'm sure, expenses more. We actually took a really, really quick look. I actually asked Brian Doubles to really take ownership of re-prioritizing how we're thinking about things. And we have -- we had 8 teams that were focused on different elements of how we wanted to run the business. And a big one was around prioritization of our agile teams. And so what we've done is we just stopped doing certain things and then reallocated those resources to the teams we really wanted to accelerate. So there was not an incremental spend resulting from that actually. We actually just said we're going to stop here. And not an easy thing to do, by the way because a lot of these projects are -- every project is being done for a reason, and you're now pulling resources from one to go to the other. But I have to say our teams' really stepped up, and we've taken people that we're working on maybe some front-end projects and put them on, for instance, the digital collection project we have, and they've been finding that to be really interesting. It's a different part of the business. So not investing more really about reallocation.

Okay. Got it. Turning to another question now for the audience. The current reserve levels are adequate, over reserved or under reserved [ register ] response to that. Moving back to questions to management. In terms of behavior of -- from your card holders, what are you seeing there since the start of the pandemic and how have things changed as states reopened more recently?

Yes. I think the biggest change that -- it's not a change. I think it's an acceleration of what was already happening, which is digital payments. People really don't want to touch things. And so wherever we can make a contactless transaction, I think the better the consumer feels. So I think that's a lot of what we're working with our partners. Now that's us, but the part also has to have the capability on their point-of-sale to do contactless. So that's a lot of our discussion and work with our partners to really get there. But I think going forward, the whole acceleration of digital wallets and contactless, I think, are really probably the biggest change that are occurring as we continue to go through this pandemic. And I think that's changed. It's like the handshake. How many people are going to shake hands, probably not a lot anymore, right? I think this is another example where people just want to touch point-of-sale systems. So I think you'll continue to see that movement. And that requires a lot of work on our side, the partner's side. We need a contactless card. So we got to work with the Mastercard or Visa in those transactions. So I think all of that comes into play.

Okay. Interesting. How have purchase volumes trended across Retail Card, Payment Solutions and CareCredit? We're clearly in the early stages of the pandemic. People chose to forgo more discretionary health care procedures, which explains a sharper drop in purchase volumes in CareCredit. Have you seen that recover kind of at an accelerating pace? Or does that remain depressed?

Yes. I'd say Payment Solution and CareCredit is down about 6%. Retail Card is down right now in the quarter. And this is -- these are quarter-to-date numbers, is down 1%. Overall, Synchrony is down 2%. So you could see, we definitely have picked back up. I think health care is definitely picking back up, it's slower. I will tell you, we never skipped a beat in Pets. Pets, like, accelerated. I think in Payment Solutions, we have seen probably a little more up and down there, a little bit up and down over the last couple of weeks. Primarily driven by the fact that it's taking longer. So when you purchase a furniture, and it's taking a -- we can't charge you to that until you're getting that product. So I think the sales process is a little more elongated. But look, I think they're strengthening really a couple of different areas. You're definitely seeing strength in home. So anything related to the home is doing extraordinarily well. Home sales are up people buying houses. The second is we're still seeing, what I'll call, state vacation types of things, products like powersports stuff, we saw a lot of that. That's probably slowed down a little bit only because we're entering the fall, but still very -- it's probably harder to get the product than our sales. And then I'd say on CareCredit, the one area that was a little slow to come back, but is back is coming back much stronger than I think any of us anticipated to be very frank, is dental. So dental is coming back, and I think we thought that was going to be a little more elongated. We've been working with our partners, just so you know, aside from helping them on digital and things like that, we've had a number of best practice working sessions with our dental partners on the things to think about when you're reopening. So we've had some of our team who have been working on our own, how do you reopen? Work with our partners on how to reopen and I can honestly say I went to my dentist on a Saturday, who does take CareCredit, and it was a really seamless process and a very careful process. So I do think we're seeing that come back.

Okay. Great. Turning back briefly to the audience response. Brian, you'll be relieved to hear that most people think you're either adequately or over reserved with a small number saying under. For the next question, peak credit card charge-offs this cycle will be 6% to 7%, 7% to 8%, 8% to 9% or 9% plus. So moving back to questions on management. How are you managing credit lines, given all the uncertainty in this environment? Are you able to kind of reduce credit lines without damaging relationships with your retail partners?

Yes.

Yes. So I think I'd say a couple of things. I think -- and I'm going to compare this to the crisis because I think we're a different company than we were when we went into the crisis, right? If you recall, we were actually still at GE back then. And we've made a tremendous amount of investments and first of all, we changed the book. So our book is, I think, in better credit shape than it was when we went into the crisis. The second is we've invested heavily in tools to really become much more surgical and our ability to really look at customers across all 3 platforms, which before we weren't on this, we kind of did a little bit of a hammer kind of process. So we feel very comfortable that we've been actually taking actions for quite a while. And this isn't like [ also ] you hit the pandemic, okay, what are we doing? We've been doing actions all along. Now have we accelerated some things? Yes. We work with our partners very closely on credit because in many cases, they participate in the RSA. So they want to understand. So we're always thoughtful with them on how we want to approach it. The good news for us is we have private label, and we have dual cards. So we always have the opportunity to give it a private label versus dual card. That's a great way to manage credit line, and it's also a way for us to facilitate the purchase. So we're not having big customer issues around credit lines or their engagement in the process. And as I said, we always are very transparent with them, sit across the table, work it through, and we're feeling like we're in a good spot right now as evidenced by our delinquencies, I think.

Yes. The one thing I'd add in here, Mark, is our strategy is very different than a lot of our peer's. We're a low in growth strategy. So the acquisition piece of this is not as big because we are giving lower lines. Margaret hit on the point that potentially where we had an ability to offer some of the dual card we can slide them down or private label with the lower line. So those from a line perspective and a customer perspective are not really tension points. Our new accounts we indicated back in the second quarter were down, I think, 36%. This quarter we're down quarter-to-date, down around 20%. So we're still down. And that's really volume oriented. You're still not getting some of the physical foot traffic through that. And from a line perspective, we've been pretty thoughtful around stopping some of the more proactive things. So proactive credit line increases that we do in programs, which drive a lot of sales. We scale those back. Now Margaret talked about some of the tools we use, a lot of data coming from our partners in order to make strategic decisions. So some of the things we have done about inactive account closures and some line decreases on open accounts. That's really where we impact credit the most. And we've done that for past couple of years. We've been a little bit more aggressive, I think, in the past couple of months. But there's not something broad that we're doing. But again, from a partner perspective, because the way in which we originate, we're in a much better position than most.

That's helpful. Can you provide an update on how your forbearance numbers have trended since last quarter?

Sure. So if you think about forbearance, cumulatively since the start of the pandemic, let me start there for a second, Mark. We put about 1.9 million accounts or $3.6 billion of our portfolio into forbearance from a pull-through, through really the first week of September. What's left in forbearance now? So people have been on the program for a couple of months, have come off. It's only about 140,000 accounts approximately and about $270 million of balances. So a lot of our accounts that had asked for payment deferrals have received those deferrals and now are expected to make a payment or have made a payment. So -- and when you look at those accounts, it's not surprising, right? The accounts that went in there, a little bit more were subprime. 90% of the accounts were current, though. But as they roll off program, they are performing a little bit worse than the kind of cohort peers, which isn't necessarily unexpected, right? These were lower credit quality. There are people who were impacted by COVID or at least indicated that they were impacted by COVID. So they are rolling into delinquency at a slight higher rate. So when you look at this morning, we reported our delinquency numbers, and our 30-plus was at 2.6%, down 180 basis points, which is pretty impressive, I think. And our charge-offs were down to 4.3%. So these are already manifesting themself. So the forbearance program isn't really masking it, and we could talk about credit later. But the forbearance program, for us, has done what we intended it to do. Obviously, the key question is how is the individual affected by multiple forbearances? Which we really don't have as much visibility into. But the program has worked, but only about $270 million left in forbearance as of the beginning parts of September.

Okay. I got a question from the audience here on this topic. How are you handling the kind of process of re-deferrals on borrowers who may need a second chance at -- and some kind of payment holiday?