Synchrony Financial (SYF) Earnings Call Transcript & Summary

All right. We're going to get started here. Kicking off the conference, we are excited to once again have Synchrony Financial joining us. Synchrony's continued to manage credit in a prudent way, while growing loans double digit and returning significant amounts of capital to shareholders joining us to share their insights on the road ahead and how they will continue the momentum as CEO, Brian Doubles; and Chief Financial Officer, Brian Wenzel. Today's presentation is going to be fireside chat. So we're going to go through a handful of questions. And if there's time at the end, maybe we'll open up the audience. We get the clock working, that would be great.

Maybe just to start off high level. The consumer is in great shape by historical standards. Credit losses are still very low. But we're obviously seeing the impact of inflation, weighing. We were just talking about that in the room next to us. Interest rates have obviously gone up 400 basis points in a short period of time. Maybe just talk about broadly what you're seeing out of the consumer, any sort of shift and where you see the consumer headed?

Yes. I think, Brian, and again, thanks for having us. Really excited to be here. I think the consumers we see it today is still really healthy. And no matter how you look at it, you look at spend levels, still really strong. We're seeing great spend and demand on our products across all of the industries that we operate in. If you look at payment rate is still very elevated relative to historical standards. -- consumer balance sheets are strong. The data we have says that 60% of consumers still have some stimulus savings left only 40% of spend at all. unemployment, job growth, wage growth, no matter what you look at today, sitting here, looks really good. So we feel good about the operating environment sitting here today. But obviously, there's a lot of things that we're watching very carefully. We're looking at the impact of inflation and how we think that's going to transition in terms of credit as we get into next year. We're watching that very carefully. There's nothing that we see right now that says it's going to put us outside of our target range. But you have to remember, today, we're sitting here with 3% net charge-offs, which is just a little more than half of our long-term average. So credit is really strong today. We fully expect that to normalize. We've been clear about that. And we're starting to see that. So again, it's nothing that we look at and say there's concern -- big concerns on the horizon, we think, very manageable. But a lot of things that we're watching very carefully in terms of inflation, the impact on both spend and credit. But sitting here today, we continue to feel pretty good. There's just a lot more uncertainty as you get into next year, not necessarily the first half as you get into really the back half of next year.

Brian, you mentioned spend, of course, then was up 16% in 3Q. We're a couple of weeks post the start of the holiday season. Maybe just talk about what you're seeing in terms of quarter-to-date spending? And also, how is the holiday season shaping up? Any noticeable trends? And any updates on loan growth or credit that you're seeing in the near term?

Yes. So let's talk a little bit about holiday. I think the first thing... As I frame it for you, your comparable against last year was really -- 2021 was an incredibly strong year as you're going through the pandemic. We tend to look at the holiday season. It's really November 1 on. You have seen this shift really outside of what's traditionally Black Friday. [indiscernible] used to be open on Thanksgiving or not. You see obviously, cyber money takeover. So when I look at spending behavioral patterns from November 1 through call last Friday, when you exclude GAAP and BP and again, comparing against a tougher 2021, we see spending up 9% to 10%. And -- so fairly strong across the board. When you double-click inside that a little bit, and again, Brian mentioned this, we continue to watch -- try to watch things around deflation, transaction values are flat year-over-year. So the consumer is purchasing a little bit more on a frequency basis. We obviously have more active accounts, but they're spending inside of the budget and they're spending on certain things. So we're pleased with that. I think it's generally in line with what we thought. And there's a long way to go right now before you get to the end of the holiday season. So again, it's a tough competition. We feel good about a 9% to 10% up in holiday so far. Maybe to focus on some strategic aspects of the business.

So Brian, last year, when we were sitting here buy now pay later was the big discussion point. That's narrowed obviously see go down a lot. Maybe the offering was a little bit too narrow and focus. But -- can you maybe just talk a little bit about what you're seeing competitively, both from traditional and fintechs and how partners are leveraging the variety of products that you're offering and where are you seeing the most success?

Well, I think let me start with the partners because we're out there every day talking to all of our partners, hundreds of thousands across a lot of different industries. And the thing that's really interesting and what's changed a little bit is during the pandemic, I think everybody, which is -- I need customers, and I need sales and I'm willing to offer basically any financing product in order to attract them to my site, to my mobile app, whatever it is. And what's changed a little bit is now we see our partners really taking a step back and saying, "I have to rationalize the financing offers that I provide, okay? Their checkouts have gotten crowded a little bit clunky. They know that buy now pay later appeals to a cross-section of consumers out there. It's not going to go away. But they've taken a step back and say, okay, how do I not only attract consumers to my brand, but how do I retain them? What's the loyalty angle? How do I make sure that I have an 8- to 10-year relationship with that consumer and it's not just transactional. It's not just that purchase and then they're gone to one of my competitors. And the other piece of that is we're looking at it and saying, I also have to rationalize the economics in a really low interest rate environment, a pain product is affordable as interest rates start to increase, it gets more expensive and they start to look at other alternatives. What we've been anchored in from the beginning is our strategy of having a multiproduct solution. And sometimes, they're buying out palate is going to make sense depending on the partner, depending on the consumer and depending on, frankly, the interest rate environment and the credit environment. We think it's a great way to attract consumers, but it's not the end game for us, right? There are other products that we want to offer them in order to have more of a lifetime relationship. So in some cases, it's a [indiscernible] to start, then it moves into a revolving credit card that you can do an equal pay promotion on. Sometimes you can do subsequent purchases on standard terms and that appeals to everyone. It can't be a one-size-fits-all solution. And that's what we're spending a lot of time with our partners is helping them figure out how to rationalize both the consumer experience but also the financial profile for them as they try to drive sales.

And maybe to dig a little bit deeper. You talked about more products rationalizing. You've obviously been investing a lot in tech and the like to meet some of your partners' needs. And I think you showcased a lot of that at the Investor Day last year. Maybe talk a little bit about expanding on some of the points that you just made -- what are some of these major investments in the business today? And how are they contributing towards the customer experience?

Yes. So obviously, we've been investing and we'll continue to invest. You're never done investing in the technology platform. A big part of it is the product suite that we talked about, but the product is actually the easier part of it. I mean doing a paying in 4 or pay in 12, that's not complicated necessarily from a technology perspective, but figuring out how to get that integrated into a multiproduct platform so that you can do what I just described, which is you start them out on an entry-level product and migrate them over time. and giving them choice at the point of sale. So that's also something that we've been working on so that you can prequalify once and then get multiple financing offers depending on what you're purchasing, how you want to purchase, depending on the partner, et cetera, and what the partner wants to offer -- that's actually a bigger technology build than just the product. It's figuring out how to integrate it all cohesively. So it's seamless to the consumer. They put in their data and then they get multiple offers or at least have a choice between 2 financing offers. And then the other big piece of that is making it seamless for the partner to integrate. -We know that as much as we can put on ourselves and take off of the technology teams of our partners, the more likely we are to be successful with that offering. And you know our partner set. We have really big, sophisticated digital players like PayPal and Venmo and Amazon, where through our API stack, we integrate seamlessly. So if you're in the Venmo app, you don't know if you're in a Venmo technology build or Synchrony bill, it is absolutely seamless. And that's on one end of the spectrum. On the other end of the spectrum, we have furniture stores. We have single dentists, just kind of one shop merchants and providers that we also have to integrate we they don't have technology teams -- so we have to have the architecture and the technology platform so that it's super easy and super seamless. And one of the things that we did when we announced the Clover yield, that allows us to do that. It's a one-to-many integration. We build it once it's integrated at any of our partners that use Clover have it. It's right every finger tips, they can download it in seconds and offer the Synchrony product suite.

So those are the big areas that we're really investing in. So given all these investments, you guys have actually been able to grow loans at a pretty fast clip. I think we're running at about 12% in 2022. I know we'll get a more formal update in January. But I think the last time we talked about the year ahead, we were talking about growth potentially in excess of the 7% to 10%. Can you maybe just talk about where you see growth heading for the company and really what is driving this?

Yes. So Brian, the way to think about growth in the short term is you have this accelerated payment rate which has been well discussed with regard to what's driving it with the excess spending. You are seeing wage growth to partially offset inflation, probably lower discretionary spend by consumers. So you have this excess liquidity, which is funding today a lot of purchase line growth I think as we see it, and you're starting to see it today, and I'm sure we'll probably talk about it later is you're starting to see the payment rebend a little bit back closer or starting to move towards a more normalized rate. So that's going to help you in the short term, just grow assets as you will build balances on existing accounts, number one. We think as that begins to bend, you're not going to see as much purchase volume deceleration. Once you get to a certain point in the payment rate, you would then start to see the purchase volume deceleration, but it's that bend in the payment rate that will probably give you a little bit of lift versus a normalized period of time, then purchase volume will come back in line, and then you'll be back to what will be a normalized rate, assuming the macroeconomic environment remains okay.

Brian, maybe to just put a finer point on that, you preempted my next question. So payment rates, I think, were down 10 basis points in the third quarter, but 20% in September. And I think at a conference, you may have noted down 50 or 60 in October. Talk about what you've seen, where they headed? And maybe just talk about which cohorts you're seeing for the most normalization? And what could that mean for revolve rates over time?

Yes. payment rate has been one thing for us and everyone in the industry that has confounded us. We did see a decline year-over-year in acceleration in October of 56 basis points. That slowed a little bit in November. So it's still down year-over-year, but not down to that magnitude. We expect it down in November and down in December. So it is continuing to come down on that trajectory. So again, when you start going underneath the hood and seeing what's happening, we don't talk a lot about it, but there is a little bit more of a K-shaped recovery. So some folks that are on the bottom end, whether that's prime or nonprime, they are normalizing a little bit faster than the higher end. So that's really the cohort that you're getting back to. But when we look at the behavior that Brian has talked about, it's generally healthy. So we see units back to 2019 or moving back to 2019 levels, but it's not any worse position or a position in which we're concerned at this point.

Makes sense. Brian, maybe pivoting back to growth. If I look across the platform, digital, which is where many of your online partners you referenced earlier, sit and health and wellness, mostly the old care credit. We've obviously seen outsized growth in those platforms. Maybe just talk about what is driving the outsized growth there? And how does that position you to succeed in those businesses in 2023 and beyond?

Yes. I'd say, look, those are 2 of the platforms we're most excited about, obviously, start with digital. Really good growth. First, we're partnered with really strong digital players in PayPal, Venmo, Verizon. So the new programs are growing really well, and we're really happy with the performance there. That's also where we have the Synchrony Mastercard. And we continue to invest in that product, and we like the return profile that we're seeing. We like the growth. We're testing a lot of different value props and offers we're originating now direct-to-consumer. So we're pretty excited about that as well. and then we refreshed the PayPal MasterCard [indiscernible]. So now that's 3% in PayPal 2% everywhere else. So really attracted [indiscernible], and that's doing exactly what we designed it to do, and we're seeing really good growth there as well. And then as you shift to health and wellness, this is -- I think this is an underappreciated platform for us. It is one of our best platforms, really strong market position and frankly, a huge market that we're going after. I mean there's $700 billion of out-of-pocket spend. We're positioned really well there. We have first mover advantage in the big health systems. That was something we did 2 years ago. As you see more consolidation in the industry, we recognize the need to be in these bigger health systems. That doesn't mean it's easy. These are complicated big organizations. But we're in there. We're offering Care Credit product. We like what we're seeing so far, we've got really good relationships. I think we're in 16 or 17 now. And then we also bought a pet insurance company pet. That's performing really well. We bought that in early 2019, and it's 5x bigger than it was when we bought it. Part of that was just fortuitous timing with the pandemic puppy boom. So we rode that wave. But it's a great team that we acquired, and there's a natural synergy there with CareCredit. That was something that 3 years ago, we identified pet insurance as really a competing product to CareCredit. So if you're in the vet and you're taking care of your pet, if you have pet insurance, you use pet insurance, if you don't, you repair credit. And if you don't have to care credit, then you use a general purpose card or some other means. And so we looked at that and said, "Wow, okay, this is an opportunity for us to take out a competing product, and there's just a natural synergy between the 2 inside of that. So that's an area that we're super excited about. And then the last thing that we're doing there is rolling out all of these new products and the integration of new products. So traditionally, that's been a promotional financing business, longer-term installment, but we're doing more -- we're offering paying for now. We're offering the shorter-term promos for some purchases. And so I think that that's going to drive a lot of incremental growth as well in the future.

And my kids are pushing for the pets for the holiday season. So we might have to...

We'll give you the friends and family discount stuff.

Brian, maybe to just round up the discussion on growth. Maybe just talk about what the opportunity set looks like for new business wins. What does the pipeline look like for organic, maybe even wrap in with some of the newer portfolios you're doing? And are there any portfolios that you're currently looking at?

Yes. We're always looking at whatever is on the market today. I would say we've renewed all of our big programs, as you know. And I think many of the other big issuers that we compete with have done the same. So most of what we're looking at in the pipeline are more start-up de novo program opportunities with high-growth merchants and retailers that we're excited about. But we also recognize those take time to build. And so we're very active on the business development front across all 5 of the platforms. But there isn't one big program that we're out there hunting at the moment. I think a lot of those have been recently re-upped and renewed similar to what we've done. I will say, though, as you -- as we look at the portfolio, we're probably even more excited about growing the new programs that we have. Venmo is still a very new program. Verizon still a very new program. So as we think about allocation of investment dollars, those are -- those are programs that we look at to say we haven't even scratched the surface in terms of opportunity. $1 of investment there will go further than going out and competing or starting another de novo program. I mean those are kind of once in a decade opportunities, both of them. We were fortunate to get them both at the same time. And we're spending a lot of our time and energy and investment dollars just really trying to grow those as well.

Maybe let's switch a little bit to the operating environment. So Brian Wenzel, the balance sheet is slightly liability sensitive at this point. Can you maybe just talk about the drivers of the sensitivity in the margin into 2023? And where do you see the margin ultimately shaking out once the [indiscernible] is done? And what are the drivers behind that?

Yes. Most certainly, it's been a dynamic market, which -- if you think about our base having a significant concentration on retail deposits, it's competitive base, right? It's very different than end of last year where consumers didn't really have as much choice because everything was somewhat nominal now when you're at a rate where you can get 3.75 and a money market fund or the like, and there's more competition in the digital space, it is more competitive, right? So as you think forward some of the framework as you think into 2023, the first is where is the terminal rate for the Fed going to come in, right? There's some that say 5, there's something to say 5.25% what the clarity you see around that in the beginning part of next year. So what that drives you to think about net interest margin obviously drives our interest-bearing liabilities. Again, we're slightly asset sensitive. We try not to take interest rate risk. But as you think about that, there's also positive to that. Number one, we get investment portfolio yield which happens pretty immediately given the investment types that we have, number one. Number two, we have variable rate cards that will continue to rise as prime rate rises. We have the ability in a large portion of our home and auto and lifestyle business to pass along higher interest rates through our merchant discount. So you have some positive things that offset some interest rate liability. I think as you also think about that rising interest rate, you do see payment normalization that would happen, you would expect to happen. So you will see higher interest of fee yield come through the portfolio as a positive. And then at the end of the day, given the competitive market, the thing that we've done this year, I know a lot of folks have focused on margin is really what's the right amount of liquidity we want to hold. And given the competition now, I do think there is some favorability for us because as mortgage origination or auto origination flows, there's less demand from some. In our business, we're going to continue to need deposits, so we'll be more active. So I do think managing that lever on much liquidity do I have and can I manage it more tightly, which I think we've demonstrated the last couple of years is the last lever. So it's really that mix as well as some of the headwinds and tailwinds that generally have offset each other, which we demonstrated this year, and we hope to manage that aggressively in 2023.

And you talked about some of the levers that you have to manage the margin on the asset side. You've got some floating rate, you talked about liquidity. What would you define as success from a deposit beta perspective, where do you see this ultimately heading in the environment that you laid out?

Today, I think if you ask us how we look at betas, we're probably 7% to 8% on high-yield say, a little bit higher on seas, probably about 10 points higher, give or take. That will be success. And that's where I think we'll end up, to be honest with you. I do think that there's been a lot of talk, [indiscernible], about this is higher than the last cycle. You just got to remember where we started from, and this is read of where we are -- it's just a different environment. So I think you have to think through that. And I think also versus last rising cycle, we saw there's a lot more competition that's out there. So those 2 factors play in. But again, it's somewhat rational. It's moving with Fed funds. So we think it's something that we can manage our business. At the end of the day, it's a really attractive source of funding. I mean we put a lot of liabilities on in the midterm CD market, which is interesting to me because you sit there and say, "I'm surprised some people are betting 18 months on interest rates, but they want to lock in the rates. And so we think that's really attractive. I feel as attractive today, but 6 months from now, it's going to feel attractive.

And to your point, Brian, on the beta, I think a lot of investors have evolved to thinking about more relative to Fed funds, just to your point, the starting point of where we were. Maybe to switch talk about credit and we start with you, Brian, and then we'll switch over to Brian. We've heard of a handful of issuers talking about pulling back or tightening underwriting. You talked before about the first half of the year, potentially looking good uncertainty in the back half of the year? And can you maybe just talk about, one, the changes that you have made into. What would you need to see in the economy to make further changes? And if you did, what are the type of enhancements that you would be making to underwriting and customer acquisition?

Yes. I think one of the important things for us, Ryan, is what we try to do with our partners is provide consistency. So in really good times, we don't hit the throttle and go a lot deeper and then pull way back when things start to change. We pride ourselves on that consistency. It's important to our partners. So we've had historically low losses over the past couple of years, but we haven't necessarily taken that opportunity to go and dig a lot deeper because we know what happens on the other side of that is you have to pull way back. And so that consistency and maintaining discipline around the credit box is really important for us. And so with that said, we are still in the best credit environment that any of us have ever seen. With that said, we know that we're entering this period of normalization. And so for us, it's not a risk on, risk off. It's not an event. So our credit teams are out there today, someone is tweaking a dial somewhere in some programs because they saw something, right? We're looking at thousands of indicators and data points every hour, every minute and saying, okay, let's change that dial a little bit, all in the spirit of getting to that targeted risk-adjusted return that has net charge-offs in that 5.5% to 6% range, our long-term target. And that's what we're trying to dial in. So I think what's a little bit different about us is it's not, okay, we're all in, we pull our chips off the table, then we're all in and pull our chips up... It's not a poker game. Because obviously, we understand how we're impacting our partners there and the consistency is important. But I can tell you that we're running a lot of scenarios into 2023 and 2024, trying to dial in that long-term loss rate. And we're ingesting thousands of data points every day and tweaking those dials a little bit. And so I just think that's a prudent way to manage the business and it's so important. And that's really a differentiator in terms of how we think about our business because of the partner impact. Then if we were just a direct-to-consumer player and you see an opportunity, you go fast and then you know you can pull that at some point.

I guess, to think very long term, a lot of us are looking at the monthly data as sort of an indicator. And we have started to see a little bit of an increase in terms of flow to loss on the credit. Can you maybe just talk about what is driving that. And Brian, I know you mentioned you're really not seeing that much. But what are the signs that you guys are looking for to see if we are seeing the beginning of a broader deterioration?

Yes. The way -- let me think about some of the operational metrics and then we'll get to the credit metrics. We first look to see when the consumer is starting to show sign distress. And what they're doing at that point -- they're changing their spending behavior patterns. You really see it a lot in gas and grocery, which is getting a little bit harder to understand with inflation, but they'll have smaller baskets, more frequency, you'll see them shift to certain periods of time when we believe they're getting paid. You'll see gasoline the same way. They won't fill up that the gas bank will go more frequently in order to make dollars go longer. You'll see people rotated to discounts. So on the consumption side, you start to see some of those signs. You'll see some more signs on the payment side as well. So you'll see a rotation into minimum payments. You'll see people shifting even auto payments that may have been full statement pays down. So you begin to see things on the payment side. Again, it's all about a long gaming liquidity for them. Then -- so that's what you kind of see how the consumer behaves, then you start to see it really in your credit metrics as you start to see your entry rate rise a little bit and then how they perform an early-stage collection in a late stage. And I think today, what you've seen over the past 12 months, what you're seeing is a little bit into the [indiscernible]. The back end has been probably the toughest has been ever, I think, as far as collectibility. That's because we haven't had much inflows into delinquency. So what gets into the late stage is really tougher to collect. So a credit indicator for us will be when we start to see more flow in the front. We would expect a little bit of the back end to come back. And then the last thing I'd say anecdotally is when you listen to collection calls and see what people are talking about, you get a real set of what's happening with the consumer. And I'd tell you, if you listen to calls back in 2019. The reason why people are in trouble and Trinseo, "Hey, I lost my job. I had a medical incident of either my family with myself, and I just can't pay to that. Today, we do not hear that. What we hear today is, hey, listen, I can't make my rent payment. It's up, inflation is killing me on gas and grocery. So you see that. I do think when you get into a macroeconomic event and an employment starts once that starts coming back and that will be an anecdotal way as we just start to engage with the customers, and they give us a read of what's going on. But one of the things you talk about the investments, we don't talk as often about it, but we invested quite a bit in the pandemic on digital collections that really make it easier for the consumer to resolve in the situation where they have had been, they can't pay, we try to make it easier for them. And that's really helped our recovery rates in collections and even really post charge-off.

Maybe just one follow-up on credit and credit losses. So you've talked about credit going back towards that 550% to 6%, I think, by the end of 2023. What do you see driving -- obviously, we're still in the low 3s right now. What do you see driving that normalization? And if we are able to soft land, could we outperform those expectations?

Well, let me start where you ended. -- absolutely can outperform the 5.5%. There is a scenario that we have that we think you could be below and even in 24%, a 5.5% rate. I do think you're going to see a more rapid rise. I think people are going to try to continue to project that. Where it's coming from -- again, I talked a little bit about this K-shaped recovery, what you're seeing is normalization of some of the lower credit bands, I think a lot of folks are looking at your stratification with regard to credit. Now for us, that's really important, but we have so much data and what our credit team to say is we look at an array of data as you look at the consumer, some of that's migration back, right? That's kind of coming through and they're performing back like they were prepandemic. So you see it really at the bottom end of each of the credit bands, but really the lower end on a unit basis is flowing through to delinquency. It's not problematic. It's not worse than 2019, but it's normalizing. It's normalizing at a rate that I would say is in line with our expectations. But the last point I'd make, Ryan, to kind of clarify certain things, as other issues have talked about [indiscernible] the margin we're tightening -- there's a lot of folks that were surprised when you had -- there's a lot of score migration up. So when people started to originate more on the margin, they're performing back like they were before they migrated up, which probably wasn't accounted for fully in the models. And I think that's where you're seeing -- and when Brian makes the point of, we don't really flex the box that much, and you can have a bad. We're probably a little bit more immune to that type of behavior.

Maybe one more for you, [indiscernible] one before we switch it back to Mr. Doubles. So when you think about the allowance, almost 10.6%, well above day 1 CECL, you've talked about based on credit performance, you could be below day 1, although there's obviously some qualitative reserves in there. I guess -- looking ahead and given all the uncertainty, do you think we've seen the bottom in the allowance ratio for now? And if there were to be a modest downturn that I think a lot of people think there's going to be, I'm guessing, we don't go back to 13% on the allowance. How should we think about where reserves can head over time?

Yes. So again, I would think about the 3 layers that we have today, right? So if you solely look at delinquency formation, solely look at the performance of what's in the stages now, that reserve ratio would be well below day 1, right? If I tell you that our expectation within a 12-month window is to be back to our mean loss rate, implicitly, you have an unemployment rate in deterioration apps in there. Now it may not be model exactly, but you said if I get to a 55% it's not going to happen at a 3.7% unemployment ratio. So you have a rise back to what I would say is historical norms. That would probably get you back somewhere in the range of day 1. Now when you look at that being above day 1, that's the macroeconomic overlay, which is some level of deterioration that you're taking into account for what's happening in the environment. And that provides a buffer. So now the question becomes, okay, if the macroeconomic environment deteriorates is it worse than that expectation of being above. And that's where I think you'll see for us, and what we said is our view of how those assumptions play out, we think as we go into 2023, the more worth related reserve post than I would call rate-related reserve post as you move forward. So again, you have to think about -- because you're above day 1, you are implicitly having unemployment, which drives our loss rate higher than the 3.7% today.

And Brian, markets are clearly worried about recession in 2023. Again, you referenced back half uncertainty. If fund employment goes up, let's call it, 5%, 5.5%. What is the playbook for Synchrony in that environment? And what levers do you have to manage through it? I didn't even ask you about the RSA... Put it up there for you.

Look, I think -- I mean, 5.5% unemployment, that's hardly -- I mean that's a normal operating environment really. I mean, it's hard to think about that as being something really dire that you need to go in and make a whole lot of changes for. But I do think, look, we're prepared for higher unemployment. We're prepared for the normalization that's coming. It's not going to require us at least as we see things today to go in and make dramatic changes. And I think part of that is we're starting with the consumer in such a position of strength, and we're starting from 3% losses. We're not starting from a normalized loss rate. We're starting from half of what our normalized loss rate is. We think that right now, as we see things, we're going to see gradual normalization. And we're going to go in and we're going to -- like I said, we're going to tweak the dials and try to hit that long-term loss rate. But it's not whether unemployment is 5%, 5.5%. That's -- I think to most companies, that's a normal operating environment. That's probably -- that's what we kind of assume in most years. This has been very abnormal, what we've experienced over the last couple. So obviously, anything significantly more elevated than that, then we have to go in and make some changes, but 5%, 5.5%. It's pretty naive.

The one thing -- let me just add a point on to this is when you look in an adverse macroeconomic environment, where your loss content really comes from -- the bottom end is going to be the bottom end, but severity is really capped there because of the way the line structure we do pose, it's really that first cut of prime that creates your loss content, right? And as the consumer sits here and Brian's talked about this, is the consumer -- that consumer has excess savings so they have the longest runway to protect against a high loss or a deteriorated environment. So that buffer has to come back because that's the one for every issuer comes to get you because they're the ones that are most exposed, but they have a buffer today that you really have to account for as you think about that. That environment.

Maybe a couple of other questions to round this out here. Brian Doubles, -- let's talk a little bit about capital allocation. So you're still in the 14s on capital, but aggressively managing it down, still above the 11% target. Talk about how you're focused on capital allocation for now? And what -- how are you thinking about capital return? And maybe just stick with the theme of if we do see a modest downturn, can you continue to repatriate capital to shareholders in a meaningful fashion?

Yes. So I mean, just in terms of priorities, they haven't changed. Organic growth is still our top priority, our best use of our capital. We talked about all the exciting growth things that we've got going on in the business, whether it's Venmo, Verizon, all the new programs, the really strong growth that we're seeing in health as well in the Synchrony Mastercard. So we're really excited about that. And when we look at capital allocation, we said that's still our best use of capital. With that said, we have a lot of excess capital, that's not lost on us. You've seen us throughout the year be very aggressive around buybacks and repurchases. We're really pleased to be able to do that. It's an important part of our capital allocation strategy. That won't change. And then I'd say the other thing that we look at in kind of along with that is we run a very active screen on M&A. As you know, we're very disciplined known around earnings profile, buying real companies where we have the ability to leverage our scale to grow them. I think Allegro is a great example of that. [indiscernible] is a great example of that. We've talked about the growth in both of those. And so we run a very active M&A screen. I'd say we're very disciplined there. What has become a little bit interesting now as you've seen valuations finally check up for the first time in a couple of years. And so -- that's something that we have a big team out there working and looking at whether it's technology capabilities, new products, if it's faster to build it or buy it and to build it, we'll look to do that as well.

I've got 2 last questions I wanted to hit on one for each of you. Brian Wenzel, we've beaten the theme of latest death. I think it remains somewhat of an overhang on the stock. Is there any way you can provide just whether it's a range of outcomes or importantly, do you see a scenario of meaningfully lost profitability?

Yes. So the first thing I always go back, late fees are to turn to losses, right? If I didn't get a fees, the credit criteria would change. I go back into when you think about any change in leaf fees, it's the most regulated fee. It will have a substantial amount of really review in order to be supported in the long term if the CFPB decides to change it and change that precedent. But you go back to 65% of it runs through RSA today. So our partners are going to be heavily incented in order to modify where it's credit, the value proposition, their economics in order to do that. And in 95-plus percent, we have the ability to either change pricing or renegotiate. So I think we have the production. I would just take you back, Ryan, to -- we showed the chart [indiscernible]. Page 7 of our second quarter earnings deck, it shows resiliency. We went through the CARDActand we had no change in the margin. And that's the way we would approach this that there wouldn't be a fundamental change to the business. At the end of the day, if we can't economically changeable credit profile in order to do that. So you may have a lower margin, lower loss book, but I think we can get there either way. And so we're not -- we're focused on it. We watch it, but it's not something that we sit there and say that's our #1 risk as we enter into 2023.

I haven't heard the applause from [indiscernible] yet, that means we could squeeze in one more. So Brian, the stocks had a decent rally recently but still down somewhere in the 20% neighborhood, trades at roughly 6.5x next year's earnings, which is clearly a big discount to [indiscernible]. As you speak to investors, do you sense this is all about macro concerns? And if so, what are some of the things you think investors are missing about the story right now?

Look, I think the story is really strong. We're really excited about -- well, first, we reorganized the whole company for growth, new platforms, deeper industry focus. We're moving faster. We've got the investments we've made around product and capabilities, that's resonating with all of our partners. So the company is incredibly well positioned as we sit here today. And then as we're out talking to people, it really is the macro uncertainty. Investors don't like uncertainty. And as you get into -- maybe we have a pretty good understanding collectively as an industry in the first half of next year. But as you get beyond that, it's anybody's guess. And so look, I think whatever that macro environment looks like, we're ready for it. We're ready for it. We'll change and adjust and adapt. We're running the company not with annual plans anymore. We're running the company with monthly plans, and we're adjusting and adapting, and we'll respond to that, whatever it looks like. But when I look at the core fundamentals, I feel great about how we're positioned.

Fantastic. Well, please join me in thanking the Synchrony Financial.