Synchrony Financial (SYF) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our session with Synchrony Financial. This is Brian Foran from Autonomous Research. And delighted to be joined by the CEO, Brian Doubles; as well as the CFO, Brian Wenzel. Brian Doubles is new to the role in 2021. But obviously, has been with the company for a long time, including over a decade in leadership positions, most recently, President of the company. So Brian, I know it's been a while now, but congratulations again on the new role this year.

And maybe before we dive in, you made some leadership announcements this year -- sorry, this week. I wonder if you could start there, what would you like to communicate to investors? What was the change? And what was the rationale underneath it?

Yes. Thanks, Brian. Appreciate that and glad to be here with you today. So yesterday, we announced a number of organizational changes. The first one probably most significantly is that we're moving to 5 platforms from the 3 that we have today. And these new platforms will really be focused by industry and type of partner. And we really think that by aligning our commercial teams by industry and type of partner, we'll really be able to deliver products and capabilities more quickly, and we'll be able to do that at scale. As you think about the new platform design, organizing by industry is really going to help us cater to clients that have similar needs. As you might imagine, we're a very different business than we were 8 years ago when we spun out from GE. I think the timing is just perfect for this type of change. We've evolved so much. If you think about our partner set today, it's so different than what it was back when we did the IPO in 2014. We've got PayPal, we've got Venmo, Amazon, Walgreens, Verizon. And the fact is that if you look at our purely digital partners, they need different solutions from us as we integrate with them differently. If you think about our partners that go-to-market through multiple channels, how we're serving their customers tends to be different, too. And so we think by putting similar partners together, it's really going to help us even better anticipate what they need from us in terms of products and capabilities. So that's really the first big change. The second big change is we announced a Chief Growth Officer for the company. And they'll really be responsible for product, for marketing, data analytics and digital design, all in one function now. And one of the things that we saw, particularly over the last 18 months is there's just a ton of synergy across those different groups. There's a ton of collaboration that happens between product and digital design, and it's all really -- it all really hinges on data analytics. And so by bringing those things together, again, the goal here is speed and bringing products and capabilities to market more quickly. It's all about how do we anticipate what our partners want and what the customers want. So that's really the second big change. The last big change is bringing together our technology and operations teams. And again, I think this is an area where we just see a ton of synergies between those 2 groups. It's going to make us more efficient really in providing that best-in-class, seamless customer experience. And so I'm really excited about these changes. I think we've been working on this for a while. The other benefit, which is not necessarily a reason why we did it, but I do think that the new platform disclosures should provide some additional helpful information for all of you and our investors. We give you a breakdown by industry on trends, et cetera. And that was hard for you, I think, to pull out under the old Retail Card, Payment Solutions, CareCredit design. So again, I'm excited. We've got some great new leaders in place. A really strong group of people, tons of experience, and I think this sets us up really well for the future.

Clearly, growth is a key component in your thought process there. And probably the biggest headwind recently has been around payment rates. You had a great chart in your investor deck with the first quarter. And kind of the punchline was each month in the past 3 or 4 has been 400 or 500 basis points above the long-term average, which is a big move. As I talk to investors, both on Synchrony as well as all of the industry, one of the biggest debates is, is this a temporary thing? Is this just a function of stimulus checks? Or is there evidence emerging that this is kind of the new normal of a more cautious consumer, at least for a little while? What are you seeing? What's your thought process around that? And where do you shake out on that debate?

Yes. Maybe I'll start and then ask Brian to comment because I think this has been one of the surprises, frankly, as we move to the pandemic that consumers' balance sheets were so strong from the stimulus and the fact that they weren't spending on travel and entertainment and other things that they had so much discretionary income. They were saving it and they were using it to pay down balances. And that's been fantastic for credit. As you've seen that. We're running at all-time lows on delinquencies and charge-offs, which is great, which we love, but it's been a challenge in terms of balance growth. I do think with that said, it is a short-term phenomenon. I don't think this is permanent in any way. I do think that we will continue to see spend outpace payments as we get kind of into the back half of the year. I think as confidence gets better, you saw pretty good jobs numbers today. I think you're going to see consumers start to spend again. They're going to build balances. It will -- there will be a reversion to the main. And Brian, why don't you add a little bit of color to that?

Yes. Thanks, Brian. The way I think about it, Brian, when we look at payments and we look at trends when dollars flowed into the system, we clearly saw both on the spending side as well as on the payment side, the influx of payments coming through. So we can see a correlation as it relates to when dollars came into the system from the stimulus. So we see that. We also see it to begin to wane after a period of time. It generally has been 45 to 60 days after the payments went. Now this last set of payments were elongated, right? It started in March, but it continued on through April. So we continue to see some upward pressure relative to that payment rate. It stayed at a very elevated level in April and into May. So -- but we do think it's going to win. Now when you asked about long-term trend, we do think that there's probably a long-term trend with auto pay. You're seeing more customers choose auto pay, but they're choosing potentially minimum balances. So I think there's a little bit of rotation you may see in folks' revenue components, but we don't think along and see any change. Now the other thing that you're probably ask and a lot of questions we get is around loan growth, right? How do you think about that? We clearly have seen stimulus impact our spending, right? We've seen spending ahead of our expectations in the first quarter, which we said back in April, that has continued into the second quarter. So we've seen very strong growth. And we've seen that across the board. So in all of our platforms, whether it was digital, health and wellness, home and auto, diversified value, across all the segments we're seeing them. And then the key question is when does those sales outpace payments, right? We talked about it back in April about the inversion. When does inversion happen? And for us, we'll see how the next 30 days goes. But as of now, we have inverted versus the first quarter on loan receivables. So we actually have seen growth. We'll see what happens here in June, whether that continues. And there's a likelihood that we may invert year-over-year on loan growth versus second quarter last year. So we are seeing very strong payments, but very strong volume across the board.

I think the one thing, Brian, to say to that is the -- this is more qualitative. But as we go out, and we talk to our partners across the board, they are feeling this pent-up demand, this demand to spend. And that's true across all industries. It's certainly true as we talk to our providers in CareCredit, a lot of elective health care procedures got pushed or delayed just because they couldn't get the same volume through the offices with the pandemic protocols and things like that. And so as we're talking to them, like they are barely able to keep up with the bookings, which I think is a real positive. And so this idea of pent-up demand as the economy continues to open, and we'll see that through the balance of the year, I think, is a really positive indicator for us.

And I'm sure as we get to investor Q&A, and I'd be remiss if I didn't remind people up in the top right, I believe on your screen, you should see a spot to put questions in, if you'd like, and I'll get to those in the back half of the session. So I'm sure people will want to follow-up on some of those comments. But maybe moving on just around the future of the store card business. I recognized, in some ways, it's a misnomer. In some ways, you kind of reorganize the business somewhat reflecting that. So it's a little bit of a data term. But maybe to start, I mean, you've shifted half your business to digital partners at this point. How do you think -- it certainly exceeded any expectations, I think investors would have had 3 or 4 years ago about what you could do? So what do you think enabled that? What do you think people may be underappreciated about your ability to pivot and where do you see that mix going over time?

Yes. Thanks, Brian. It's definitely a data term. I actually -- when you said it, I kind of cringed a little bit because it just -- it really doesn't reflect how our business goes to market today. There's no question that we're a digital business today. We saw that accelerate even further over the past year with the pandemic. And I think this is where we saw the investments that we've been making in digital products and capabilities really paid off. To your point, a lot of our partners were already 100% digital. But even our more traditional retailers that have a store footprint, how we're interacting with their customers, even in the store is digital. So we've been -- they're alongside them, helping them transform their business to be more digital. And so regardless, if you go in to market, completely digital or if you're doing that through multiple channels, in-store and online, our products and capabilities are there to support our partners and help them with that transformation. And I think so much of what we saw over the past 12 months, these are going to be permanent shifts in how consumers pay and use our products, whether it's contactless or a lot of our programs now, we're just going straight to a digital card. So when you think about card, that in and of itself is a misnomer because a lot of times, it can be just a digital account that gets saved online or in the app. And there doesn't have to be a physical card. You mentioned we're getting 60% of our applications through a digital channel today. We've seen huge growth in that year-over-year. Online sales penetration in our old Retail Card platform is 50%. The average nationally is closer to 15% or 16%. So as you think about our business, we're overindexing in that channel. So I feel great about how we're positioned here, in addition to how we're driving that in the core. This is also how we're winning new business. When we go in, and we're pitching for new business, we're doing that, and we're talking about our digital capabilities, how are we going to provide a seamless customer experience and how are we doing that digitally. And that's so much more important today than it was 5 years ago. If you look back 5 years ago in this business, you went in, you pitched on economics and you pitched on value prop. And then those were kind of the 2 things that you went in, you talked about. And now you're spending 70% of the time talking about what's the customer experience? What's the product set that we're going to offer to customers, how are we going to support and drive sales for the partner? So it's a very different dynamic. And if you don't have those capabilities, you can't compete and win today.

And maybe buy now, pay later is kind of the product de jure in this business. I think a lot of people, I know I am, are struggling to figure out. Is this a little bit of a Fed? Is this a structural change? Is it a niche part of the industry? Or is it kind of taken over? What are your latest thoughts there? And also any commentary you'd like to give on what you're cooking up for later this year as a response in that business?

Yes. Look, I think we said, look, our strategy has to be to provide a full suite of products that fit both the needs of our partners and our customers. And part of the reason for that is just go back to how diverse our partner set is. We don't have the luxury of being able to just provide 1 or 2 products. We need to be able to provide every financing product under the sun. And the way I think about it is we want to be able to provide kind of a menu of products and capabilities to our partners. And so based on the products they're selling and their customers and how their customers want to purchase, they'll have access to those products and they'll plug-and-play, which ones make the most sense for them. And that's really our strategy. And that means that, that includes revolving products, that includes equal pay installment products. And we actually -- we've got $15 billion of equal pay balances today. And so this is actually a really big part of our business that I think is underappreciated. I think people think of it more as just a revolving card product, but we do $15 billion in Equal Pay products. SetPay, it can be long term, it can be short term. It kind of mimics a lot of the buy now, pay later features. We're adding additional features to that in the second half of the year for some of our partners who have asked for it. For us at the end of the day, this is -- we think about it as this is partner and customer-led. So if our partner come to us and say, "Hey, we really want a very traditional buy now, pay later product, here you go." We want a longer-term SetPay installment product, here you go. We want a more traditional revolving product because we want to get that second, third purchase, and we want to be able to do life cycle marketing to that customer, here you go. And so we really have to be able to find this full suite of products. And I think part of the benefit of reorganizing the way we did and part of the announcement we made is we want to be able to do that in a way that's very scalable across the enterprise, right? Because oftentimes, if you develop exactly what one partner wants and maybe a little bit different than other, what we're trying to do is really provide scalable solutions that our partners can kind of select which ones make the most sense for them. And I think that will help us get faster and also more efficient in terms of the solutions we're providing.

Maybe pivoting a little bit to the near term, I mean, the conference is labeled Strategic Decisions, so I don't want to sink our own boat and ask 10 questions about the NIM. But the net interest margin has been a big swing factor of late. I think you talked about on the last set of guidance, expansion in second half '21, maybe returning over time to the long-term average in around the mid-15%, high 15% range. But it's under 14% today or at least as of the last quarter. I wonder if both of you could touch on the confidence in that outlook and return to normal. And maybe what you kind of view as the key upside and downside risks you're watching?

Yes. Why don't I start with it and then Brian can add any color. So the way we break it down, Brian, is there's 3 really distinct pieces. The first piece is the excess liquidity. So all the payments that we've gotten in the inability to really deploy that cash. So we have a large excess liquidity position, which was over $5 billion at the end of the first quarter. So that was one chunk of pressure to the NIM. The second chunk was really the fact that you saw a very significant decrease in delinquent accounts, which impacts late fee yield. And most certainly, the higher pay downs, which also contributed. The third bucket, probably the less impactful bucket is just the benchmark rates. And I'll put that aside. So our confidence also stems from the fact that if you go back to that first bucket, we've been able to burn off a lot of liquidity and we believe, we can burn off the excess liquidity pretty quickly. We actually took a number of actions here in the second quarter on the debt funding side, where we allowed some debt to expire, we did things a little bit earlier. We've actually had to actually increase our high-yield savings because we saw some attrition that's in that book. So we went up 10 basis points to 50. So that is something that when you fully normalize out liquidity for a quarter will add a significant amount, I think we sized it to be somewhere around the 90 basis points or so, give or take. So you'll see that factor into the book as we move forward, burning off the excess liquidity. The second piece of that, which was really the late fee component and really financial, that's really when payments normalized. We will see pressure in the second quarter. From the first quarter because, as you know, Brian, in the first quarter, we showed you the dispersion of payment in such an elevated payment rate in March that continued in April into May. So there's going to be some pressure here. But again, we see the trend on payments beginning to taper so that will taper as well. So there is short-term pressure on the NIM from the first quarter, but that should normalize back out. Clearly, as we begin to build delinquencies, and we think delinquencies will come back, we can argue whether or not to come back to just where we were prepandemic or higher, that will build the yield back up on the book. And so long term, we don't see anything fundamentally different where we can't get back to that 15.5% to 16% net interest margin.

I actually missed you raised the savings rate. You might get a new customer later today. It's only 10 bps, but that's 20% more interest. 25%?

Correct. That's right.

And maybe along the same lines, the RSA, I want to say at the outset, the fact that it's so high, ultimately is reflecting a good thing for the business. It's a reflection, both you and your partners are doing very well in terms of profitability. But I think the level has been higher than people appreciated it could get. You've talked about it coming down over time. And maybe in the same spirit, what you're seeing in terms of near-term trends and kind of the confidence in that normalizing over time as well?

Yes. What you see, Brian, is actually stabilized, right? So I think the fourth quarter or first quarter, there was some stability there because the loss rate had stabilized, right, in the business, and the pressure really was on the net interest margin. I think, again, as you move forward here, as losses begin to rise, that will fill immediately through the RSA and begin to bring that back down. There will be some offset relative to the net interest margin coming back. But from a business perspective, we're down a greater percentage on net charge-offs than we are on revenue. So clearly, the RSA will begin to come back in line. Now one of the things that has been confusing to folks is how the reserves work through the RSA. And again, it's been very challenging when you don't have delinquency, but yes, you're posting billions of dollars of reserves to pass those through some of these arrangements, and there are some lags to the extent that the full effect wasn't through the RSA as they are wound, and we unwound some reserves in the first quarter, and there's a potential that we may unwind further as we move throughout the year that, that will flow right back through us. So you'll see the RSA come back into that more normalized level. To the extent that our net charge-offs go above a 5.5% kind of prepandemic level, you'll see it actually dipped below the historical average. So again -- but your point to start is it's actually working as this design. We're actually making more money, and we're paying our partners more, which is how it's designed to work.

Which is a good thing. I think, Brian, if you look at all of these different components, whether it's margin, RSA, net charge offs, which, again, are at historic lows, we do think that none of this indicates a permanent shift in those measures that this is transient in nature. It is largely driven by the stimulus and really high payment rates across the board. And this will -- it's hard to call exactly when it will kind of revert to the mean, but we definitely think it will over time.

And maybe coming back to the underlying business and CareCredit, in particular, it's one you gave more information on the earnings call and really highlighted -- Brian Doubles, you highlighted it as an example of pent-up demand. Maybe talk a little bit more about what's got you excited about that business? And what kind of growth trajectory you think is possible over the next coming of years?

Yes. Look, I think CareCredit is a really exciting platform, tons of growth opportunity. I also think it's an underappreciated platform inside of our business. It probably doesn't get enough attention, which was part of the reason why we highlighted it at earnings. And just start with the market, right? It's a $400 billion market in elective health care. And there's certainly a secular trend here that really helps us. You've got rising health care costs, you've got less and less being covered by insurance. And then as we look at it, we're a relatively big player in the space, but we're only a small fraction of the potential spend that's available as you think about discretionary out-of-pocket spend. So there is just a ton of room for growth. And then if you look at the CareCredit business itself, CareCredit is now accepted at 250,000 locations in different health care providers. We're in 40 different specialties. Just in the last couple of years, we expanded into 13 new specialties with physical therapy, orthopedics, medical equipment. We just recently acquired Allegro, which helps consolidate our presence in audiology. And we've still got a lot of room to grow in the core. So as I was saying, we're -- in 80% of dentists, we're in 85% of that, but we're still a relatively small percent of payments in those offices. And so we continue to drive acceptance, continue to drive penetration. And then probably 2 of the most exciting new opportunities inside of CareCredit are health systems and pets. And so health systems, we've signed up 13 large partners. And this is really to take advantage of that growing trend of consolidation in the health care industry. We've seen this consolidation trend happen over the past few years. We -- I feel like we have first-mover advantage in there. We're getting integrated. There's a lot of opportunity for growth in the future related to health systems. And then pets, we talked about this a little bit at earnings as well. It's a very attractive space. We bought the Pets Best business at exactly the right time to take advantage of the buying of pets. During the pandemic, everybody went out and got a dog or a cat, and that certainly helped us to grow that business. That business is up 174% since we bought it just in 2 years. And it's growing like crazy. We can barely keep up with the growth, which is a great problem to have. And it's just a -- it's a terrific market for us, lots of opportunity, and we're excited about CareCredit.

I've got an old dog lying next to me, who's in the process of losing teeth. So I cover all of your -- I cover the dental work, the vet work. I might be a customer there soon as well.

That's great.

Let -- maybe let's shift to capital. It's always been a big strength of the company. You're over 17% CET1 right now. Obviously, there's some CECL transitional effects and things, but just in terms of a spot ratio. I chuckled to myself because when you announced the buyback a few weeks ago, $2.9 billion. The first investor e-mail I got was, why aren't they doing more? So no good deed goes unpunished. I recognize that. But maybe your latest thinking around the long-term outlook for capital? What you view as the right level to manage the company to? And how you think of transitioning from what is clearly in excess capital position today to more of that long-term steady state?

Yes. So let me start and then certainly Brian can jump in. And Brian, you're right, we are operating from a position of strength with regards to capital, and we understand that. Listen, we run a journey, right? When we left GE, we had an 18% CET1. That was by design to make sure we got Fed approval. We worked that down to 14%, and then the pandemic hit. Now we've kind of risen back up. The important thing, I think, when you think about the $2.9 billion is when that was formulated. We came through in December. We got confidence in the business. We got confidence in the environment. So we initiated a share repurchase back in January, did $200 million. At the same time back in that same period, we began our capital planning process, which really uses data from December. It uses assumption from that December, January time frame. And we formulated a capital planning and submitted a capital plan to our regulators and began the execution of that. Since then, a couple of things happened, right? Gap came in, number one, where -- that portfolio, we're releasing capital over -- part of this year really into next year. And then second, the environment really improved. So the $2.9 billion a trailing kind of view. We think we can deploy that and get it done faster. The same way we pivoted in December and started repurchases again from the first quarter of last year. There's nothing to say that we may not go back and reevaluate our capital position and think about whether or not that should be adjusted as we think about the same time horizon. But we're confident we can get this executed. Your question about the long term, our long-term view has not changed, right? If anything, we've shown tremendous resilience through this process through the RSAs, through the earnings power of the business, we never lost money during the pandemic. Not many credit card companies can say that. So I think when you look at that, we're really confident that we can be right in line with all of our peers over the long term on CET1 one basis. So there's no change to that. And we understand investors' desire to get there quickly, and we'll deploy capital the best we can. We have tremendous opportunities from a prioritization perspective to drive organic growth in the business, and Brian's talked about pent-up demand. We think we'll see some of that, so we can deploy it there. Clearly, we want to maintain the dividend with where it is. And then we'll either do repurchases or acquisitions like a Pets Best, like an Allegro, that makes sense that are kind of tuck in. So there's no real change to long term, and we'll continue to, I think, adjust the strategy as we move forward and gain more confidence in how the economy is going to play out.

Yes. I think, Brian, I am not surprised at all of that was the first question you got. When we announced the $2.9 billion, it's the first question we got when we announced the $2.9 billion. And obviously, there is a bit of a lag here, but it's not lost on us that we have a lot of excess capital. And we're very focused on allocating as best we can, returning it to shareholders when we don't have a better use for it. So I do think we feel good about that long term, getting closer to peers that hasn't changed. And if anything, we've shown that we can execute large repurchase plans. We've done that over time, we'll continue to do that.

Spend a minute on expenses. On the latest earnings call, you talked a little bit about the back and forth between continued realization of the efficiencies and the improved profitability from your cost-saving plan, which I guess started about a year ago, but also an increased willingness and opportunity to invest. I think some of the common questions I hear are, A, just trying to figure out what the relative mix of that is? How much of the efficiency program will drop to the bottom line? B, kind of the areas you're most excited about investing in right now? And then C, just trying to understand the pace of realization of those investments? I think people -- you've certainly earned the right to invest in the business and people appreciate that. But is this more of a short-term play around marketing? Is it more long-term opportunity around digital? So what are the areas you're excited about investing in right now? And how do you think about the time to generate returns on those investments?

Yes. Maybe I'll start on this and then Brian can get into some of the realization. I think -- look, one of the things that has really paid off for us in the last 5 years has been where we've invested, whether it's digital or product or capabilities. I said earlier, that's how you're winning new business. And that's how you're growing the programs that we have today. We wouldn't be the business we are today if we hadn't been investing. So that will continue. That has to continue. I don't see a step change in either direction. I feel like we've got a really good investment program, very disciplined around returns and payback on those investments. But it's so critical to stay ahead of the competition and just frankly, be competitive in an environment like today where you're up against the fintechs. You've got new competitors coming match at you all the time. If you're not investing in your core technology and digital capabilities, you're going to fall behind. And fortunately, we haven't fallen behind. We're developing solutions, and take what we've done with Venmo. There's nothing else like that out there in the market in terms of the way that we integrate inside of the Venmo app and offer our financing solutions. That's how you stay ahead, and that's how you compete and win for new business. So that, obviously, those investments have a tremendous payback. Part of which you can quantify, part of which is more of an intangible in terms of what new business are you going to be able to bring in because you've got best-in-class capabilities. And so I don't know, Brian, why don't you add one more color to that?

Yes. I think to framing up Brian, last year, when we entered the pandemic, the one thing that Brian Doubles and Margaret really mandated for us is to maintain the level of strategic investment and really fortify things in the business. So we did not reduce $1 of it last year, and that was one thing we want to protect, and we reduced a lot of other expenses. As we went through our strategic plan around cost, and we generated what will be $210 million of savings this year that all will flow through net of some RSA will flow through to the investors. So we maintained the investment last year. As we moved into 2021, we maintained the same level of investment off a lower base. So one would argue that it's actually a higher percentage, but we maintained that. We did not cut it. We did not reallocate it to other things to fall through. We've maintained that investment. So that's the sort of the productivity that we're dropping in the $210 million should flow all the way through and should be fairly ratable throughout the year. And that -- we hope, because some of the things that were in there were more digitally oriented that, that will accelerate as we exit out of 2021 into 2022. And the whole strategic cost plan was built around, if I look out to 2024 or 2025, having a business composition that we have, we look at the revenue and loss content that it has and say, how can I be the highest ROA credit card issuer out there? And that's how we framed it, and we'll continue to invest to get there.

Maybe before we go to investor Q&A. And as a reminder for people, again, you can submit questions. You should see a link up on the top right as well as some other conference resources. Credit quality. It's pretty remarkable, having gone through the biggest employment shock in any of our lifetimes. This is now question 12 on my list for the fireside chat. I just sneaked in right before the end.