Synchrony Financial (SYF) Earnings Call Transcript & Summary

Kicking it off, we are excited to have Synchrony Financial, fresh off its Investor Day where it laid out its differentiated business model and refreshed strategy that is poised to see close to double-digit growth and mid- to high 20s returns. The company did an outstanding job during the pandemic and is now poised to deliver solid growth across its 5 key platforms and appears well positioned to compete and win against emerging fintech players. Joining us for the first time as CEO, but as a veteran of the GS conference is Brian Doubles. Also, I wanted to give a nice intro and talk about the great things that CFO Brian Wenzel has done, but talking about things that he's improved, but I thought it would be a direct insult to Brian. So I'll just say that we're delighted to have Brian Wenzel join us today. Today's presentation is going to be a fireside chat. So Brian, maybe kicking it off. You're 9 months into being CEO as you took over in April. Can you maybe just talk about how the transition has been now that you hosted an Investor Day and laid out your strategy. Can you maybe just talk about what the key priorities are for the year ahead?

Yes, sure, Ryan. Look, I think from my perspective, the transition has gone pretty well. It's been a very busy first 9 months. We obviously announced a reorganization which we laid out at our Investor Day. I think that's gone really well, but it was a heavy lift in terms of moving to 5 platforms. I think that's allowed us -- and you saw this a little bit at Investor Day, allows us to get even deeper domain and an ability to anticipate what our partners need. And the fact is that what a digital partner wants from us is very different than one that is omnichannel. And so as we build out our products and capabilities, and we're having these deep discussions with our partners, it just made a lot more sense to align by industry. I think the other thing that we did as part of that was establish a growth function. So we brought together data analytics, customer experience, product, all into 1 group, which is really helping us move a lot faster to address what our partners want from us. And you saw that with the announcement of [Audio Gap] purchase. That happens now in seconds. And it can happen when you're sitting there waiting to check out just by scanning a QR code. So it's not just the big digital players that are driving that growth. We're transforming the -- whether you're in store or even in a provider. So in CareCredit, you can be sitting, waiting for your appointment at the dentist, getting braces for your kids, you scan a QR code, fill out the application, you can use that to complete the purchase. So it really is powerful. That's on the applied side. On the buy side, what we're spending a lot of time doing is getting the financing offer integrated into the purchasing path. So you've a lot of our partners, you'll go if you're looking up a big screen TV, you'll see the buy now, pay later equal pay offer right there. And you're part of the decision around the purchase now. So you're actually driving sales. So we go and we sit down with our partners and say, look, you put the financing offer here, placement matters. We can show you an incremental lift of X, right? you get that integrated and you have to make it -- you have to make it really easy for them to integrate, right? We all know -- I mean our partners, retailers, they've got a huge IT prioritization queue. And so you got to go in and say, "Hey, look, you can just plug in this widget, the financing offer shows up, make it really easy for their customers to leverage financing. And then lastly, on the servicing side, this is where today, people don't want to call and service their account. They want to do everything through the mobile app. And through SyPI, we can plug in all that servicing functionality into the digital assets of our partner. So we really think about it very comprehensively.

You referenced the 3 big new partners that you've rolled out over the last 18 months. Maybe just talk about what the opportunity set looks like for new business wins from here? Are there more nontraditional relationships similar to the ones that you've added recently?

Yes. I would say we've got a good pipeline in each of the 5 platforms, probably weighted a little bit more towards start-up opportunities and definitely some nontraditional potential partners out there. And 1 of the things that the team is doing is they're taking a different approach to how we think about partnerships, right? Partnerships can be anything from a one-to-one partnership like we've had traditionally. Partnership can be like what we announced with Clover what we -- an expansion of a partnership like what we're doing with PayPal. So we're thinking about partnerships more broadly both in terms of the products we offer, but partnering around distribution of those products, right, and trying to get a one-to-many relationship in some cases.

So speaking of partners, you guys are obviously partnered with Amazon. And there have been several announcements recently, with regarding their partnership with the firm. It's no longer accepting Visa cards in the U.K. Can you maybe just talk about how any of these items whether directly or indirectly impact Synchrony? And second, whether specific to Amazon or the ecosystem. There's a lot of buzz regarding all these new entrants. Are you seeing any impact on your business from buy now, pay later and maybe these other fintechs.

Yes. So I'd start by saying, look, we've got a great relationship with Amazon. It is 1 of our fastest-growing programs. We would expect it to continue to be one of our fastest-growing programs. So there's just -- there's a ton of opportunity there, just given their size and their growth. We offer our own version of buy now, pay later, which we highlighted at Investor Day, and we're seeing good growth on that product. No real comment on the Visa announcement other than to say that our product runs on our rails. We don't charge interchange. So that really doesn't have any impact on our program and what we do with Amazon. But I think just taking a step back, I think, more broadly, whether you're talking about interchange or merchant discount, I think this is one of the things that is really going to evolve over the next a year or 2 as you think about buy now, pay later can be a very expensive product for a retailer to offer. And I think this is 1 of the things that is we're out talking to our partners. There's still a question around economics. It used to be interchange. Now it's merchant discount depending on the product. I think, our partners, they don't want to pay more than they have to. And I think the jury is still out a little bit in terms of how this is going to evolve over time. And I think it's one of the things that I think advantages us because having a multiproduct strategy, we can, let's say, we do paying for, and that doesn't necessarily have to be achieving the same return of some of our other products. We can look at that as cost to acquire a new account and then migrate them over time to one of our other products, long-term installment private label or dual card.

Brian, maybe to get you involved in the discussion here. We'll jump right in. We're obviously just over 2 months into the quarter. Maybe just give us a sense of how the fourth quarter is progressing in terms of spend volume, I think you highlighted 16% at the last conference. Maybe give us an update on what you're seeing in the holiday season? Are things still being impacted by supply chains? And any other comments you want to make, whether it's growth, credit or margins?

Yes. Great. Thanks, Ryan. So again, let me just ground where we came out of the third quarter. So third quarter for us, we are roughly mid-teens in volume growth, very consistent every week throughout the quarter. So it's very steady. As we saw, we were actually very excited about the fourth quarter. I did say maybe in part in November, we were up 16%. As we've seen the quarter develop, right, we've actually seen the acceleration first started on weekends. I'd say the last 3 weekends for us are the best 3 out of 4 weekends in the last 2 years. So we actually have seen an acceleration of purchase volume, which is what we -- the outlook we provided back in October. So right now, we're probably high teens on a volume perspective. Again, some of that may be a little bit of pull forward. But again, there's not as much promotional activity that's happening. So volume perspective, I'd say a little bit ahead of our expectations, strong. I'd say the other thing is across all our platforms. So I think when you look at loan growth for us, each of the 5 platforms will have a positive comp year-over-year, which we have not had. And then we also talked about at the end of the third quarter, asset growth, right? We said we're going to see a modest acceleration to asset growth. Again, stepping back, we were 1% in the second quarter, 2% in the third quarter. We're at 4% now. So we are seeing that acceleration. So I think we're very pleased. Application volume is doing very well for us. So again, that origination engine, which we don't have to spend a lot on marketing to come through is really performing well. So we are optimistic as we close out the holiday season is what we're saying.

You talked about 4% asset growth. One of the big discussion points across the industry has been payment rates. I think you were 250 basis points above historical levels. Can you maybe just give us a sense for what you're seeing there. And then second, you gave some stats. I think it was on the earnings call regarding customers who are making full payments, minimum payments, less than minimums. Can you talk about how you're seeing payment rates evolving, whether it's across different FICOs? And is that -- is there any particular cohort that you're seeing more normalization relative to the others?

Yes. payment rate is interesting. We look for any little sign that it's turning. I would say it's relatively consistent, right, with the third quarter, maybe a little bit more elevated given the volume that comes in, which is a little bit traditional. So we have not seen it abate. Now we start with where is the consumer and savings. And the consumer and savings have gotten back to prepandemic levels. When you look at the spend across the industry, that is consuming some of that excess savings rates that the consumers have built up. So again, we've modeled out several scenarios where that begins to bleed down. But we are -- we do see little signs. We did talk about the migration of people who may be paid full balance is sliding down. That's continued. So we're positive on that metric. With regard to FICO, it's a little bit tougher now because you've seen migration up throughout the pandemic from a credit perspective given people's pay down of balances. But we haven't seen anything that's concerning to us from a credit standpoint, but it will remain elevated here in the fourth quarter. The good news for us is we are seeing that purchase volume accelerate, which is giving us asset growth as we exit 2021.

You did bring up credit losses last quarter. I think were at the lowest level, I think, we've ever seen in the history of the company. And you've been talking about multiple different scenarios. I think most investors are probably thinking about the latter one about a gradual normalization I guess can you maybe just talk about the pace at which you expect delinquencies and charge-offs to normalize over the last years? Obviously, this has been a big discussion point in the investor community. And given that loans are just starting to grow, plus the economy is very strong, can we remain below that your -- the level you outlined at the Investor Day for an extended period of time?

Yes. So let's talk a little bit how we got to where we are today, Ryan, right? So when you think about credit refinements, they generally take 12- to 18-month this season, right? So what you're seeing in the third quarter and fourth quarter were really the actions that we took at the start of the pandemic, which is what we expected, credits migrated up, you had this tremendous inflow of cash into the system that paid down balances. At the beginning part of this year, we've outlined, we took refinements again more to roll back some of the refinements we did a year ago. So if you think about that for a second, that will be a back half of '22 item, which you'll start to see those flow through. When you look at credit, again, it is probably the all-time best at the end of the third quarter. I again caution people to look when you look at our delinquency, factor out the held-for-sale portfolios because it does mask a little bit of the performance, which again has been very positive. So now as you think about the 2 scenarios. Again, let me just make sure we're grounded on the gradual rise back. We are underwriting today to a 5.5%, 6% loss rate. So you will ultimately get back there. That is what we're underwriting to. That's the risk-adjusted margin we want in the business. That's where we think this business performs at the highest ROA. So it will get back there. In that gradual scenario that you'll see, again, when you think about the refinements we did this year, you will see delinquencies rise throughout '22, more at a modest pace, so very modest as you move through. But again, you should see that in that lower case where you don't go above the 5.5% in part of next year is where you're going to get back to probably more traditional types of delinquency levels. The other scenario we talk about, which is would you have a higher loss rate and almost like I would call it [indiscernible] comes really for forbearance accounts. So people were -- they were getting mortgage forbearance, auto forbearance, student loan forbearance, and they have been harmed in the recession and through the pandemic period, and they're not able to sustain. That could come through. Again, we are closely monitoring that. We worked quite a bit with the credit bureaus in order to identify those people, track those people, mitigate our exposure to those. Again, that's a scenario that could play out. Again, we will have to see how it develops here. We'll see a little bit of delinquency increase, I think, is what we indicated at the end of the third quarter, and that's consistent with our outlook where we sit here today.

Brian, maybe switching back to you. You outlined 7% to 10% medium-term growth at the Investor Day. I know you don't have '22 guidance just yet. However, if you think about some of the things you talked about, more digital, more e-commerce focus, new kinds of partners, 3 big ones that could be top 10, $3 billion to $4 billion each, which provides obviously really nice tailwinds over the next few years. Can you maybe just talk about how you're feeling about the prospect of growth across each of the platforms as we head into next year? And what are some of the key milestones and KPIs that you're watching to see if we're on track for this type of growth?

Yes. Well, I think the biggest 1 that we feel like we control is obviously purchase volume. That's been trending really well. Whether it's new programs, you look across all 5 of the platforms we're seeing really good growth there. I think the thing we've been waiting for, as you know, is receivables growth. And to Brian's earlier comments, we finally got there. So in all 5 of our platforms are growing receivables now, up 4% for the company quarter-to-date. So all the signs are there. I feel really good about the 3 programs that we've talked about already. I'd say the other -- the 2 platforms where I think we'll have above-average growth are digital, just given the partner set there and health and wellness. I do -- I feel like there's a ton of opportunity. We're positioned really well in health and wellness. We're making our way into these larger health systems. There's been this wave of consolidation in the industry. And I think we've got a really good strategy there. We're integrating. And these are complex integrations. Our team always jokes once you've seen 1 health system, you've seen 1 health system, right? So they are big integrations. They take a lot of time. But once you're positioned there, I think that we'll see a lot of growth into the future. We also have some exciting kind of new-ish programs with the Synchrony Mastercard. We continue to make investments there. That's a product that we like. We like the returns. We're not competing in the super prime space. So we think we've carved out a really nice niche for ourselves. We're launching new value propositions. We're still doing a lot of testing there, but the early returns are really positive. And then the other thing I would just highlight again back in the health and wellness space is Pets Best. We bought this company a couple of years ago. We've tripled the number of pets in force just since we've had it. It's a perfect example of the type of M&A that we like to do, where we can buy small and leverage our scale. We're in over 70% of [ vets ] to really grow that business. So a lot of positive momentum, I think, no matter where you look in the portfolio, there's not 1 that I don't feel good about. We've got, as I said, positive receivables growth in all 5. So I think we're well positioned. And then the other thing I would just again go back on products and capabilities. I do feel like there is even more opportunity in our existing partner base, right, to take more share?

So you just referenced products and capabilities. I think 1 product that has become more in focus over the last couple of quarters has been SetPay. And obviously, you have a $15 billion portfolio in there, which I think is obviously, well in excess of most of the new entrants in the marketplace. Can you maybe just talk about how you're using this product as part of your suite of products with merchants? And do you foresee a push to accelerate growth in this product just given the changing consumer preferences towards installment lending?

Yes. Look, I think it's installment lending is now buy now, pay later is something we've done for a long time. It really does come down to the partner. It comes down to the partner and what they want. And they're obviously listening to their customers. buy now, pay later is here to stay. It's something that customers want. Our partners, they look at them and they say, I can either offer that fixed end installment, which makes sense for some customers and some purchases. I can do it on -- tied to our revolving account, so you can actually do multiple buy now, pay later loans without going back for another credit check and you can still take advantage of the value prop, right? And what we've seen in the research we've done is sometimes consumers want 0% 6-month, 12-month buy now, pay later loan. Sometimes they want to take advantage of the 5% off, depending on the purchase, ticket size, et cetera. What I really like about our strategy is we can go into a partner, an existing partner or prospective partner and say, "We have all these products. Let's show you which ones we think make the most sense for your customer based on what they're buying." And we can show them lift rates, and we can show them all this data that we have that's actually really powerful. And they can sit back and they can kind of tailor an approach that makes sense for them. And the thing that they're also taking into account there is what's the cost to them, right? What am I getting in terms of incremental sales, but then what's it costing me? Or on the flip side, for us, what are they going to earn through the RSA, right? And that's not an easy decision for some partners, right? They're looking at a fairly significant merchant discount or cost to them relative to making a pretty healthy payment through the RSA mechanism. And so I can tell you, that's why I say the million-dollar question here is how does this all shake out over time. You referenced -- there's always been pressure on interchange, right? This is a new version of that, right, with the merchant discount. And I think it's still really early innings. And part of that is to look at interest costs are as low as they've ever been. Credit is as pristine as it's ever been. In some of these products can't withstand a normalization of credit, right? And so that's why I say this is still very early innings, but we like how we're positioned because we can offer a suite of products. Some are going to be more profitable than others. Some are going to make more sense for some partners than others but it's going to come down to choice and what our partners want to offer and the economics to them.

Maybe just to follow up on that. So you did decide as you referenced earlier, Pay in 4 product. I guess what drove that decision to do that? And I put you on the spot here to say, how do you expect the economics of buy now, pay later to evolve over time?

Well, look, we took a step back. We looked at our product suite. We had SetPay. And we went as short as I think, 2 months. So it wasn't that far off from a more traditional Pay in 4. I think as we think about the economics, we're not just focused on the economics of 1 product. We take a step back and we say, okay, we want to offer multiple products to our partners and their customers. And so we will have products. We offer a secured card as well in some of our partners. That's a great starter product, right, that we can then get a feel for the customer over time as they demonstrate strong payment behavior, we can upgrade them into a private label card and ultimately, a dual card. So that migration strategy has always been there for us. That's always been a cornerstone of kind of how we think about the evolution with the customer. And this was just a natural extension of that. When I say the jury is still out on the economics, I do believe that. I don't think we're really going to know for a couple of years. But let's just say for a minute that, that product in and of itself wasn't profitable for us through the migration strategy and the structure of the relationship with the partner that can be very attractive. And so we can take a holistic view to the economics with the partner, which again, I think is an advantage for us.

One of the things that you referenced is that, obviously, the credit environment is really strong, and this is probably helping a lot of these newer players. So I guess, given the environment that we're in and Brian laid out, a view that credit likely is going to be good for an extended period of time. Are you seeing any evidence of this buy now, pay later take any share from your business? I think you highlight investors something like 2% of your customers have it. and it was more the [indiscernible] centric customers. Just curious, anything that you're seeing across your customer base?

It's very consistent with what we laid out at Investor Day. It's a relatively small piece today. But look, this is a product that's here to stay. That's -- we're not confused about that. It's a product that will offer our partners for those that want it. And no, we're not seeing a material impact in any of our relationships or our business today. But I think this is a product we're going to compete on, too, right? We're going to offer it. I think we can do it in a way that is differentiating because of the other things that we can bring to that partner. So I'm optimistic, but we're not seeing a big impact at this point.

Maybe thinking a little bit about capital. You guys have the highest capital levels in the industry over 17%, and you've laid out that you've been pretty aggressive returning capital in the past. So a 2-part question here. One, maybe help us understand the path to getting to an 11% CET1 ratio. And two, more near term, just based on the recent level of your repurchase program, you should be done potentially by year-end. So when should we expect to get another capital plan from you guys?

Yes. So let me start with the latter part of your question to unpack it. Our next capital plan will be second quarter next year, right? So now we said that -- that's the process we go through and the testing we do. We do testing all the time. We're in dialogues with both our Board and stakeholders about how do we think about capital, the capital generation we had this year and whether or not we can amend that, and we'll continue to do that. You talked about maybe it will be done by the year end. We haven't given a cadence. But we did demonstrate to the market that we can return significant amounts of capital, did $1.3 billion in the third quarter. If you look at the prepandemic period, we've done under $1 billion a couple of quarters. The year before the pandemic, we did $3.3 billion. So we do have the ability. Again, for us, remember, it is a journey we started out really [indiscernible] our former parent in order to ensure that we could get regulatory approval. We went down from 18% of prudent. So I think for us, we're going to continue to go through the priorities. We want to be able to grow the business. We will do that first. We will continue to pay the dividend at an appropriate amount relative to our profile. And then we will be aggressive but prudent to get there. And I think we've demonstrated the ability to do that. Now, again, you have to think about our pathway back. You want to bring your stakeholders along with you, right? So the stakeholders still look at it, our regulators, et cetera, and say, well, credit's all-time low, what is going to happen? Right? When do you see normalization? So they look at things a little bit differently, and they want to check things off. We look at the pandemic. When we all try to feel the pandemic's largely in the rearview mirror, they're [indiscernible], what does that mean? What is going on here? So I think for us to be prudent with them, but aggressive to return that capital and find ways to deploy it. So we haven't given the exact time frame, but that framework, I think we demonstrated in the third quarter, and we'll continue to demonstrate as we move into '22.

Kind of a handful of topics that I wanted to hit on the last 5 minutes here. But maybe to bring it back to Brian. We've had some in the industry talk about the need to ramp up investments. I know every business model is a little bit different to keep up with innovation. In 2021, you guys obviously made a lot of investments in business, but you had the big cost-cutting program, which you were able to use to make investments in the business. You had the Investor Day, you talked about -- you have companies like PayPal standing up saying, we're continuing to challenge you as a partner and you're delivering. Can you maybe just talk about what the investing priorities are into 2022 and whether it's customer experience? And what does it mean for your ability to drive engagement and efficiency in the company?

Yes. I think we're different in the sense that our cost to acquire is really low. And so we don't run a huge direct-to-consumer marketing program where we're competing in that kind of super prime space, and we're going to have to make a massive investment there. Where we're investing is we talked about some of the areas already. The 3 big programs that we're continuing to invest in and where we're seeing really good growth. We're investing in products and capabilities. And that's a journey that never ends, right? You're constantly refining your product road map and adding new capabilities and features, and you're never really done there, right? The bar continues to get higher. We're investing a lot in making it easier to integrate our financing offer into our partners' digital assets. And we've made great strides there. We are really good with the medium- to large-size partners. Now we're trying to take that same sophistication and offer it to our smaller partners. And so that's an area we're investing. We are investing in the Synchrony Mastercard. As I mentioned, that's a space that we like. But again, not competing in that really aggressive super prime space. And then we invest in every year, and Brian can add on to this. We've got a list of projects that we invest in that are very growth-oriented. A lot of things I just talked about. And we've got a list of things that are very efficiency oriented, right, where we're making investment today, but has a very good payback in terms of reducing costs into the future to get down to that long-term efficiency ratio that we highlighted at Investor Day. I don't know if you want to add anything?

Yes. No, listen, I think there's been a change in the way in which we approach traditional productivity. It used to be how do you drive average handle time down? How do you drive that? Now it's about a real transformation to say, how do we get the customer to self-serve and not call it all, right? So there's more a digital mindset that we've driven across the business. And really investing more in AI and the ability to understand customer needs and get ahead of customer needs, that's really going to be the transformational process. And I think bringing in the reorg tech and ops together is a huge sign, and actually an acceleration to that mindset.

So we've got about a minute left, so I'm going to give you both 1 question to end with. Obviously, I couldn't have done the whole presentation without asking about RSAs, Brian. So as we move to the next phase with credit beginning to normalize, Brian Wenzel, how should we think about the offsets to the RSA and maybe any color in the near term? How do you think about the approach back to 4% to 4.5%. And then for Brian Doubles, the stock is up 35% year-to-date, but still trades at a discount to broader financials. As you go around and meet investors, what do you think is still the most understood part of the story?

That's a lot to cover. Those are 2 -- maybe I'll do the first 1 and Brian can do the RSA. I think -- I don't think there's -- I don't think there's a lot that's underappreciated. I think we are more diversified than we can credit for, for sure. I think the reorganization has helped us. One, I think it's going to help us just commercially as I said, with our partners. But I think an ancillary benefit of that is, I think it's clear for our investors. I think retail card wasn't retail card. We had PayPal and Venmo and other stuff in there. And now just aligning it by industry, you're going to see every quarter who's performing and who's not and where we have some challenges and where we're seeing really outsized growth and opportunities. And I think that, like I said, it wasn't the reason we did it, but the external presentation of that makes it easier, I think, for investors to get their head around. There's a lot that could be a 10-minute answer. But...

I will try to give you a 30-second answer. I know it's not a big focus for you, Ryan. But listen, the RSA is elevated, right? The RSA is elevated. You have to go back to the conversation because the profitability of the business is elevated. As we move through the next 2 years, right, so think about how charge-offs will drive incremental revenue, those 2 for right through the RSA at times. We are -- we've given our long-term guidance, it's between 4% and 4.5% as the revenue and as the losses move, that will directly flow through. So it will be responsive again. Our outlook for the fourth quarter is consistent with where we sit here today. And again, it's a meaningful differentiation versus our peers as you think about the value of the company. It gives away upside [indiscernible] when things are good, but [ it's actually ] on the downside. So we're -- we love that feature of the company.

Great. Well.