Synchrony Financial (SYF) Earnings Call Transcript & Summary

So welcome, everyone, and we're here kicking off our first annual TD Cowen Financials Conference, and we're very, very pleased to have with us Synchrony Financial. Synchrony, largest private label issuer branching out into co-brand as well. I think what Synchrony has done is also kind of to build its own networks within its card business. We're very pleased to have with us Brian Wenzel, EVP and CFO. And with this, welcome, Brian. And to just ask you if there's anything that you'd like to kind of kick off in terms of any updates or anything you'd like to open up the commentary.

Great. First Moshe, thank you for inviting us and by Synchrony and congratulations on your inaugural conference. Hopefully, its a success. So Yes. Let me start by giving a little bit of frame for the quarter, which we generally think is constructive. But let me just kind of step down how to think about it. When I first think about -- I think about volume for a second. And volumes for us, I think when you look year-over-year, we're company has a very strong year. I think you're going to see trends similar to the first quarter, essentially be flat year-on-year. But from a receivables standpoint, again, the receivables have held into our expectation is really on lower payment rate. So we feel good about the receivables. The volume again, kind of trailing the same trends that you saw and then we'll probably go a little bit later around some of the softness and some of the bigger discretionary purchases in home and auto, lifestyle, et cetera. When you step into net interest margin, net interest margin is largely consistent with the first quarter, probably down about 10 or 15 basis points, mainly on liquidity and excess liquidity had, which Moshe, I look at this interest rate environment is not necessarily the worst thing. It funds growth for the back half of the year, we are actually getting a pretty good rate of return from the Fed. So it's kind of neutral to positive. So it's not necessarily the worst thing. I think -- around credit or very sensitive people are focusing on that. I think people -- when people looked at our April 8-K, they wonder about trajectory. Our view is, as I see today, that is the peak of net charge-offs. So you should see when we publish our May net charge-off -- the charge-off rate should be down, delinquency should be down as well. So we're pleased at which sets up to the first half being higher than the second half, which we consistently had talked about. The provision overall, so I think about the reserve change, reserve coverage will be essentially similar to the first quarter that you kind of go through. And then lastly, I think expense is up slightly from the first quarter, mainly because this is a bulk of when we've done a lot of our CITs legal. I'm sure you're going to ask you about these. So we're not really getting any better from the CITs that's more third quarter, fourth quarter for the benefit of our pricing -- our PPC actions or product pricing and policy actions at the third quarter, fourth quarter, the bulk of the CIT costs will be here in the second quarter and in the expansion for quarter. So I look at that as a largely constructive relative to our expectations.

Well, great. That's a really great update. And not to disappoint you, we are going to talk about late fees. You were early in kind of putting those changes into place. I think a number of your competitors are also doing similar things, but I think you've actually probably taken more real pricing actions. And then can you talk a little bit about -- you alluded to some of those expenses kind of being there in Q2. Talk a little bit about what you've done, how that's gone with your partners and the impact on Synchrony for the balance of '24 assuming the late fee will goes into effect? And then maybe we can talk about what happens if it does.

Sure. So first, Moshe, the way we approached it is we wanted to get to ROA neutrality, right? And we wanted to do that on a basis where we preserved as many sales as we can with our partners. That was the goal. And I think going to one of your questions in the middle of that, how is it going with partners, that led to very productive conversations because we had aligned interest rate to our RSAs, we also have aligned interest on how to solve the goal. So when you think about getting that borrowing neutrality and trying to do that with relative speed, there is a combination of items that come through. Some of which comes through over a longer period of time was or APR increases, which we put in across a lot of the portfolios. There were some that have more immediate impacts when you think about a paper statement fee, which we said either you can elect to go into e-bill and avoid the fee, right, which saves us dollars on OpEx or we can charge you a fee. We have certain promotional financing fees that we're burning into the marketplace. They were already there before. And then there are some policy things around how we assess interest, waivers, things like that. If late fees go lower, we'll waive as many of them. So there is a combination of actions. And that combination was designed to try to get to a mitigation faster than some of our peers. We're substantially complete with a lot of the CITs here in the second quarter, so we should done. There's always a trail. So if you open an account with us in November, you're going to get a CIT in the back half of this year. So there will be a trail that goes on for a period of time, not as material, but clearly, there will be a trial that goes in. So what you'll see, based upon that timing is the financial benefit begins to head in the third quarter mainly, there's a little bit of [indiscernible] but not something people should be looking at saying, I expect something when I look at mid-July at our earnings and then say, okay, I see some of the third, it builds in the fourth, right? Now we gave back on March 5, we gave some guidance that said, okay, if that rule comes out in October, here's where you have, there's an impact in the fourth quarter you have late fee then as you move in over 3 quarters, it gets to what I would say is a normalized run rate because your reversals take a little bit longer. So if you think about that sliding a little bit, if it comes sooner than October, obviously, the impact is going to be more negative than we anticipated more RSA would have to absorb that. If it shifts later in the year, it's the other way, you're going to have the RSA go up because you have these benefits, then that will be shared with partners. So that timing and how litigation plays out here over the coming months will dictate a little bit.

Right. And certainly, your shareholders will benefit from the existence of the RSA, although your retailer partners and you are trying to get this to neutral kind of back to where it was without taking advantage, if you will, of the RSA. I think the litigation, or I should say, the implementation of the rule right now has stayed. And I guess we would hope, perhaps even expect that, that stay is extended through the litigation. I assume that you have a similar view. I don't know if you have anything to add to that at this point.

Yes. Moshe, it's probably really difficult for us to say with any certainty what the outcomes are. You're 100% right. It is stayed right now. There was a motion to move the jurisdiction, right? There's a motion then to oppose that. So now I believe that the defendants have the -- I have an obligation to file a briefing tomorrow. So we'll figure out whether or not that stays. That will hold in place until at least June 18, and then they'll roll on. From there, whether it's in Texas or it's in District of Colombia, the Defense can choose to ask for the waiver or the temporary restraining order where injunction to be lifted. Obviously, I think the chamber would have posed that. And again, when the initial kind of rulings came out of this record, they said, "Hey, listen, the other arguments here besides the constitutionality which is now taken out toward are very compelling." And so that gives us hope to potentially the injunction gets put into a more permanent status until with the full litigation bears through. But again, there's a lot of different scenarios here, Moshe, to be honest with you. I think we've a [indiscernible] for implementation, I think we have to be as a company for it to happen as soon as possible. So that's how we're proceeding as an organization.

Got you. Okay. We'll move on to more maybe traditional topics. And can you talk a little bit about and you alluded to this a little bit in terms of your quarter outlook, but how you're thinking about account growth, I think one of the things that distinguished Synchrony during the pandemic from some of the other publicly traded peers, you didn't have as much account growth and didn't have as much negative seasoning impact perhaps as some of your peers. Where are you in that right now in terms of where you sit -- from an underwriting standpoint? And how do you think about where you are with your partners?

First Moshe, we talk about it all the time. We are consistently looking at the portfolio for the [indiscernible] type events. So if I see a partner channel product not performing, we're going to take credit actions in there in order to make sure we get the right risk-adjusted return. We've taken actions in '23 and '24 and around problem areas that we see. Number one, last year was around score migration. So if you were a 680 FICO for argument sake or branded score and you moved basis points into non-prime, we think you had a greater risk. So we took actions on those accounts. That could be anywhere from stopping proactive things and line expansion to actually closing accounts. When you look at this year, we looked at 2 other areas, one around debt consolidation. So people are taking out these types of loans. And then the second was nonpayer of student loans, even though they're not being reported as delinquent. We can see the balance is not changing. We looked at those as ability to pay and say that could hurt us in the future. So we've taken broader actions on those groups. So there's some impact to credit sales and account originations when you have those things. Generally speaking, we don't record any credit box. So we're not pulling -- we don't pull way in. We don't expand way out to drive growth. So what you're seeing is the effects on in retail of lower traffic, whether it's online traffic, store traffic, we are seeing lower traffic of the people who are consuming less goods, a little bit more services right now, but we do see services trailing down. So that's impacting volume here, a little bit of trade down effect. And the consumer who -- we talked a lot about how it being resilient, being healthy, I think consumer is managing at this point. It hasn't really shifted, but it's managing. So I think we look at the growth where we're getting growth, we're happy about the risk-adjusted returns, and we're going to continue to operate in a cautious manner as we move forward.

One of the things that's been, I think, an issue for investors about the private label card businesses, I think they've generally believed that the power set with the retailer or the partner as opposed to the financial institution. And I'm kind of reminded not the least of which, given that 1 of your large former partners is now -- has left their short-term partner, I guess, shall we say. And it doesn't seem to find -- hasn't been able to find anyone to kind of assume that partnership -- and all of this whole issues around the late fees, it does feel like some of that power is returning. I guess, would you agree with that statement? And talk a little bit about the competitive dynamics at play in the private label market right now?

I would say, Moshe, most certainly over the last number of years, there has been a shift in the dynamic, right? The conversations we have with partners around -- what are your digital capabilities? How do you make it seamless to customers? How do you do things [indiscernible]? That is really important. So I think where you get -- I say power, but you're going to see the table at partnership is your ability to integrate seamlessly in all their channels, whether it's products, whether it's capabilities, et cetera, that's what you're driving to be honest with you, to play with on a competitive landscape. You then combine that, we always control credit. But of the things we say to our partners is, listen, if you provide data that we can just help make credit decisions, that's beneficial to you because I can then bring 140 million [ trade ] lines I have combine it with that data and make better underwriting decisions. Those are the types of things. No one can meet the power and scale of how to bring that data sources and data sources directly from the partner and the merchant at the time of play into the underwriting process. So I think when we look at that, that's where people focus initially, always economics come to play at some point, but that's not really where they're going first. The other thing and the final thing I'll say on this is that ability to create marketplace and create activity where you can bring customers and take customers and provide incremental value associated with their card. That drives a lot for the partners. So that's where we're focused on in order to deliver value, driving new customers, delivering value -- competitive value propositions, dynamic value propositions and having a multiproduct approach.

Got it. During the pandemic, you launched a number of large new partnerships and also developed a number of kind of networks. Could you talk a little bit about some of those the Walgreens, Verizon and Venmo partnerships and anything that you can kind of share with us in terms of the growth of those. And then we can talk a little bit about some of those new verticals as well.

Yes. So let me start with the 3 new partners, we launched during the pandemic, which, to be honest with you, and I know there's a lot of -- always talk about -- can you be innovative during a pandemic working on. We launched 3 terrific programs in that window. As we said back then, they had potential to be large programs with us. As I sit here today, one is a top 10 program already. One is just outside the top 10, and we expect that it will hit that. So -- and what it is, is that's where we deliver products to a partner that were really designed at their most loyal customers. And that product was integral into our partner base. That's where we succeed where we have the right to win, where we have the right capabilities and we can deliver it. So we're excited about those relationships. One of the big strategic focuses for us Moshe shows around health and wellness, that's our branded network card around health and wellness. That we're leaning in pretty heavily because the returns are very attractive. The product is very desirable and has a high Net Promoter Score. So that's a place where we're leaning in. Other places you've seen us, and I'm sure we may get it at some point is in the home, right? You think about what we did with Allied Lending and leaning into home specialty. But that home and auto, really around auto and you think about the cost of auto was today, more people are keeping their car, they are long gaming holding cars, which means you're going to have more tires, more mufflers, more accessories, things like that. So credit card that goes across all types of auto spend has been terrific for us. You'll see more around that in the home that we're doing. So those networks. We look at places and say, okay, do we have a rate to win? Is it a fragmented marketplace? And do we have the right products and capabilities to meet our partners' needs? So we will reach out more to the masses than we have with regard to some, I'd say, large partner.

Got it. You talked a little bit about credit again in your outlook for the quarter. But and said that you would expect things kind of to be lower in the second half. Maybe we can kind of drill down on that a little more. What is it that gives you the confidence, I guess, that that's going to be the way that it proceeds and talk a little bit perhaps about the cadence in the coming months and quarters.

Yes. So Moshe, the first thing is you look at your delinquency trends, and we continue to see favorable entry into delinquency. And we've seen very stable performance through most of the delinquency buckets other than 2 deal. So it's going to be 2 payments deal. That gives us a little bit of confidence to say the flow is slow. It's slower than 2019 flowing in and it essentially steady. So that's point one, right. Point two is we've taken a number of actions last year in the beginning part of this year. Last year's actions begin this season, you will see the effects of those really starting in the latter part of the second quarter into the back half of the year. And you will begin to see some early effects of some of the actions we've taken earlier this year into the portfolio. So it's a combination of delinquency performance, #1. And then #2, the actions that we've taken in order to try to maintain the loss target or loss range of 5.5% to 6%. That's where we underwrite to. It doesn't mean every period will be in there, but that's what we underwrite to, and we will work hard in order to try to deliver that for all our periods.

And certainly, I think if we had this conversation a couple of years ago, I wouldn't have thought that in this current unemployment environment that losses would be where they are for the industry, I think inflation has had a bigger impact certainly than we thought beforehand, how do you think about the impact of that as we go forward? I mean, it seems to be -- things seem to be moderating. I mean but any thoughts that you would add to that as it relates to Synchrony.

Yes. Historically, this industry, Moshe, and you and I have been around long enough [indiscernible] has correlated pretty well on unemployment claims, right? And unemployment claims take a -- you also saw a correlation over the last number of years, the last 5 decades, gasoline prices to delinquency, they correlate very highly. I think what you're seeing now in the labor market is structurally different right, with the number of baby boomers that have come out of the workforce, there are number of people who are trying to enter the workforce. You look at women that have exited the workforce. I think some of that dynamic around unemployment may not be necessarily the leading indicator in every single period, particularly here in the short run. You are seeing, though, right, pressure for people who are in that kind of middle bucket is not necessarily the low credits, but the right kind of new income buckets that are sitting around saying, yes, I'm getting wage gains, but I'm just trending [ water ] relative to inflation, right? I think there's probably a pretty good consensus around this last mile of getting from a 3-ish to a 2-ish is going to be tougher to get done. So that's going to put pressure. I think the longer it goes on. You're going to see probably some middle market businesses that struggle, but people are going to take employees. They struggle after the pandemic to get employees. They have enough work, there's probably not enough workers today. Going back to the structural dynamics of unemployment. So I do think over the course of the product in the next 18 months, this inflation story relative to real wage gains and hourly gains will play through.

Great. And you mentioned that in the second quarter, you expected the reserve to be fairly stable as a percentage of the portfolio. As you get into the second half and you end up with that the lower losses that you're expecting, can you tell us like how to expect that reserve rate to evolve over time?

Yes. We've been outspoken and say, listen, you should expect it to go down from here. Let's talk long-term for a second, Moshe. There's not a belief that we have that says it doesn't get back to an adjusted day 1, adjusted with TDRs. Getting back to day 1 absent a little bit of portfolio mix, so trending back there. I think if you think of a interest rate that next year is flat, then you're really flat to eventually slightly down. So that's how we think about the trajectory. And again, when you think about losses in the back half of the year, that in the front half, that trajectory should flow through is how you think about 2025.

Got you. Got you. And as we think about the RSA Obviously, most of the profitability measures or at least net interest income, credit losses and some of your expenses kind of factor in there. But how should we think about that kind of over the course of the next few quarters? And maybe just to give us a sense as to how much of the late fee burden if it were to change, would be shared by the RSA with your partners?

Yes. I think what you're going to see this quarter, obviously, is they're bearing a little bit more of the loss. They're still bearing a higher interest-bearing liability cost because we -- while we've seen rates come down on deposits, they haven't come down materially. So there's probably even a little mix shift where it could be up 5 basis points or so. But essentially, it's a flat environment. So you'd expect the RSA from traditional measures to be down. I'd say probably think about it first quarter plus a little bit. Then you think about the back of the year now, what happens is if losses come down the RSA naturally left, right. They're are starting to see some of the late fee mitigants flow through, which will also help or also in theory, increase the RSA, absent the rule going into effect. And we've kind of talked about when the rule could go in effect. Now we haven't broken out at this point, give us uncertainty around timing, Moshe, and the variables until we have a date certain relative to when we think the actual implementation date of the rule goes into place. We're not really going to break out the RSA offset, but obviously, it will bear some of the burden. But the longer we can stay on -- when we say in a period where we're building the mitigants, the better off will be.

Brian, one of the questions that did come in was about your comments in the second quarter on NIM. And you mentioned slightly lower NIM in Q2. I think you said 10 or 15 basis points on liquidity factors, does that also lower dollars of net interest income? Or is that just kind of a numerator denominator kind of impact? And kind of anything when you think about how that will play out over -- in the future, will you be -- will that persist? Or will that turn around in the second half?

It should turn around, right? We expect to see our ALR percent which we expected to be a more larger portion of our total earning assets is generally going to be flat with the first quarter. So it's more of that composition that's driving it than anything else.

Okay. You did mention Ally Lending and the home vertical. I guess maybe 2 questions related to that. One is, can you give us any sort of update as to how that's kind of helped in the home vertical. And any other areas for expansion or acquisition that you'd be looking at, at this stage?

Yes. So first of all, we are very happy with the associates and the partners that we got through the Ally Lending acquisition. It's a great acquisition for us. It sets us up as the only issuer that can do installment lending or do a revolving lending with a promotional financing inside and offering that at the same time to the consumer, and to the contractors say what better meets your needs. That's part of our multiproduct strategy. That's why we're -- we believe we're ahead of the peer set, it gives us a competitive advantage in that. Some of the things that we looked at from a synergy perspective, we believe we're taking hold here in the back half of the year and the plans and the execution around that. So we feel really good about it. What's great about that business is we have a real domain expertise. We're now in service side in other places where we have the ability to -- and the right to win, we have the products to win and have the capabilities now of a full suite of products to win. So we're excited about that. So if there are opportunities in the whole specialty space, again, we are very disciplined when it comes to portfolio acquisitions and new relationships on pricing. So that sets the right price potentially something in the home specialty space. We're always looking in the home, health and wellness space as well because that's just a really attractive marketplace. And is there a different, call it, specialties or verticals we don't play in today. Think about behavioral as you think about potentially in vitro fertilization, things like that. There is a place for us to play, maybe. So really, it's going to go back to other things that are -- we're probably going to do more bolt-on than something larger, even the Ally was to [indiscernible] it wasn't a very larger acquisition. So I think they're going to be small bolt-in and in these segments where we have that right to win.

Got you. And then maybe let's just talk a little bit about your capital position. How -- where does it sit relative to where you want it to be? And how do you think about capital return in that equation?

Yes. Listen, Moshe, we've been on a journey since 2016. We came out overcapitalized from our payer. That was intentional to get through the Fed to stand up the processes that defend and [indiscernible] line. And from 18, the high watermark, we begin to march down. We got down to 14 and people said we wouldn't go any lower. We're now down to 12. We have a target of 11, and we're going to continue to do that. What's important for people to understand is you have to bring all your stakeholders. I just said okay, I'm [indiscernible] tomorrow. I think the regulators and everyone else in this environment heightened sense of what we just went through it, they're going to be a little bit more reluctant on financing. So for us, we are on a long-term view from where we are at 18 to where we want to get to, and that's consistent. And I think our capital allocation strategy, first around RWAs that we have today, second around the dividend and then gets did to share repurchases or inorganic. And when I think about that first bucket RWA, we really want to play in places where we're going to get a better right to win, a better return profile so you think about health and wellness, you think about the home specialty. We want to over-index into assets like that, that can hopefully bolster the overall ROA in this business.

Yes, certainly a very different conversation when you've got strong asset growth at periods of time when you hadn't. I got a follow-up question just about your commentary on spending volumes, recognizing that spending volumes is not as big a profit driver for Synchrony. But can you just -- I guess the question, first of all, just asked if you would kind of restate it because I think they were -- in terms of the goods versus services commentary and what you're actually seeing -- so maybe if you could just do that from the time we have left.

So first, you start to top of the house, we'll probably see flat volume year-over-year. Again, we had record second quarter volume. I know it sounds cliche to say I'm confident it's a record year, but we're confident it's a record year translate a little bit into that. So I want to discount that. But when you look underneath, right? What we saw in the first quarter, that's continuing into the second quarter is in the auto. You'll see purchase volume down. [indiscernible] Home Specialty, which is up in the teens. You saw lifestyle down, right? There's less spending in music and jewelry luxury but again we're still seeing good spending in outdoors. So there, you begin to see some of the pieces that are less favorable right now for the consumer. They're not going to spend on big ticket things unless they have to. What you're also going to see is continued strength in health and wellness as people continue to need dental work [indiscernible] and those types of things. So that will be a leader. And I think digital, when I go back to traffic in the digital, there is traffic down. So a little bit of softness relative to the first quarter in the digital platform. So I think when you look at it, it's not something that is dramatic. It's not something that's happened overnight. It's a continuation of the trends that we saw coming out of the first quarter.

Got it. Well, with that, unfortunately, we're out of time. I've still got other questions here. But Brian, I wanted to thank you for your participation and all the insights that you shared with us.

Great Moshe. Thanks for having a great conference.