Synchrony Financial (SYF) Earnings Call Transcript & Summary

All right, everybody. Before we get started, I'm going to read some quick disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. So today, I'm delighted to have with us Synchrony's Chief Financial Officer, Brian Wenzel. Brian, welcome.

Good morning, Jeff. Thanks for your invitation to be here.

Yes, you looks like you brought some good news with you today. So maybe before we get into that, let's talk about the positioning of the business. Lots has happened over the last few years from the regulatory side or the CFPB late fee rule, you've had rising consumer delinquencies across the industry. But it looks like we're finally moving past some of these issues. Given this backdrop, can you just talk a bit about how you see the Synchrony story evolving over the next few years? What are your top priorities as you manage the business?

Yes. So thanks for that question, Jeff. I'd like to start off with the fact that you talk about this environment. We've come through a pandemic, a very unique credit environment with really a lot of extension of credit to individuals. You look at the regulatory environment and how that shifted and the execution by the entire Synchrony team, we're incredibly proud of. So as we move through this period, that execution really is a foundation as we move forward. I think as you think about the stories that plays out, number one, we've invested heavily in our capabilities over the last large number of years. And so when you look at our digital capabilities, our abilities to embed our products with our partners, the way to meet the customer where they want it to be. If you look number two, at our multiproduct strategy and the ability to have multiproduct, so we can meet customer needs, we can meet our partners' needs, things like that. You look at the continual advancements that we've made in our advanced underwriting platform, that is all positioning, and we're going to continue to invest in those areas. We have -- I'd like to say some productive paranoia about competition. We always want to stay ahead. So I think those are things we're going to continue to invest that have both not only short-term benefits, but really for the long term. And the way that manifests itself into the company is, number one, we hope and really believe that the partnerships that we have that we'll be in a good position to extend those partnerships. We have a large number of our top 25 that are beyond '27 expiration date. So we want to continue to have a good track record on renewing those ones and showing our desire. I think number two, I think when you look at new relationships in the market, that we're going to win our fair share of those. I mean we're always going to maintain pricing discipline. That's one of our hallmarks. But we think we -- with our capabilities, we may not be the lowest price provider, but we're going to win our fair share of that. And I think we're going to continue to build on what is enviable among a lot of people is incredible amount of scale. When you have 70 million unique customers, that is scale that most people find attractive, particularly to our partners who are looking for not only to increase sales, but to bring them new customers.

And speaking of winning your fair share, the other day, you just announced your new Walmart OnePay partnership. What brought you back to the Walmart relationship? How is this going to differ from the prior offering? Maybe any lessons learned in the prior offering? And can you speak to how that relationship on the corporate side is maybe different this time around? And then maybe dive into any of the preliminary details around economics, value propositions, goals, where do you see the size of that program going over time? Maybe you can give us all that info.

Yes, we only have 31 minutes left, but we'll try to unpack that question a little bit. So let's start at the beginning. So Walmart is an iconic retailer, it has tremendous scale, breadth, delivers values to -- or delivers value to millions of Americans. And so we're proud to partner with them. We're excited to partner with them. They have a unique ability to win in this retail environment. So we're going to build on our 2-decade-long experiences with them to continue to partner and drive that forward. It is a testament for us with regard to our capabilities. They obviously left in 2019 with -- went to another issuer. I think they had choices to make in this time around. And they came back to us, which really goes back to, again, our digital capabilities, our advanced underwriting and our ability really to execute in the retail environment. So again, for our team, it really is a confirmation of the things that we're doing right and investing in the business. We're also excited to work with OnePay. I mean they have created an app and a customer experience that we think when we're putting our product in there with that it's really going to drive engagement with consumers. And then you look at the way in which given their ownership structure, the way in which they secured placement inside of Walmart that our product is going to be offered to really drive value and drive incremental sales. As you take a step back and one of the questions you asked about how is this going to be different than last time. Number one, this is a de novo book, right? So the passbook is not coming. So we're starting from scratch. We're going to build from scratch. The value proposition is going to look different, the way in which it's going to be presented to the consumer, whether it's through the OnePay app or through other channels will be different. And really, that placement inside of Walmart is going to be one of the keys. So as you step back from that and say, okay, great, we're excited about the relationship. What does that really mean to Synchrony as we move forward. Number one, because it is a de novo book, you're going to look at something that has a different loss profile, different loss content than existed prior, number one. I think number two, the value proposition is going to be richer than it had been before in order to drive engagement, whether it's through the Dual Card in the world or back through Walmart's channels and properties. What that allows us to do is it allows us to drive greater engagement, allows us to drive incremental sales for Walmart. And then what it allows us to do is actually charge and have a pricing structure that is equivalent to a higher value proposition. So when you look at the risk-adjusted return, Jeff, we should see a higher risk-adjusted return than we had in the past relationship. And the way that culminates in a de novo program, as you would expect, there's a lot of technology costs this year, launch costs this year that we're going to incur. The first couple of years we're going to have significant reserve postings for the asset as it kind of comes on. When you get through the reserve postings, right, for these couple of early years in the deal, you then look at the return that our business case is built upon, that return profile is accretive to our long-term financial targets of 2.5%. So we look through it and say, we're willing to invest here for growth, we're excited about that. And at the end of the day, the profile of it's going to look different than it did back in 2019 when we exited the relationship. So we're excited about it. Again, it's a testament to our capabilities. We're looking forward to work with OnePay and really excited to deliver value for the Walmart consumer.

Okay. Great. So maybe a little bit of a J-curve there as you build it out, but bigger focus on the underwriting de novo program. Any sort of thoughts on the time line to maybe getting the full speed there or where that portfolio can go over time? Is that something that could become a top 10 for you?

Yes. Listen, when we started 20 years ago, it was a de novo program, right? And we built that program up to close to $10 billion in receivables. Clearly, Walmart has a scale that if we execute correctly, the 3 of us, it does have the opportunity to really be a top 5 program or a top 10 program. So that's not necessarily something we focus on. We focus on trying to sit back and say, how do we deliver value to Walmart, how do we deliver value to the Walmart consumers. But it has the potential, just given the size, and we're excited about the product that we're going to put out because we think it will resonate with those consumers.

Okay. Great. And maybe switching gears a bit. Let's focus on the consumer and the health of the consumer. So you previously talked about moderating consumer spend, but the absence of lower payment rates at the same time is kind of a positive indicator for consumers managing through. Are you continuing to see that? Has any of the softer -- the weaker soft data you've seen in confidence and some of these tariff-related concerns that have flared up. Has any of that shown up in your data yet?

Yes. A lot of times in our business, when you think about the discretionary aspects of our business, so thinking inside of the home side of our home and auto business or some of the things in lifestyle, we tend to see things sometimes before they resonate in consumer confidence. So I think the pullback we saw in discretionary spending, which really started the latter part of June last year through the back half of the year, that preceded the consumer confidence. If you go back to January, Jeff, one of the things we did show, which was weekly sales because everyone said the consumer is pulling back and you heard certain issuers talking about changes in their book. And what you saw with us was relative consistency, and you saw some of the seasonal changes that manifest itself in March. If you kind of roll that forward, we have not seen any significant changes from that pattern as we kind of move forward. So we're not seeing the consumer from a spending perspective, really change behavior. To go a step deeper into that, Jeff, what I'd say is when we look at ATF and ATV for a second, what we're seeing is some interesting -- some of the declines we've seen in average transaction value has slowed, so it's actually -- or improving is probably another way to look at it, is improving as we move through the second quarter, that's positive. We're seeing a stabilization. And we are seeing some green shoots in some of -- some areas of discretionary mainly around soft goods, not necessarily around hard goods. So we're seeing some signs. I think as we move towards the back half of the year, the comps do get a little bit easier. We came off a first quarter, which was a record first quarter for our company. Again, you're going to start lapping some of the softness that we see. I think to pull it up to 10,000 feet, I think as you look at our business, what you're going to see is greater pressure in home and auto and lifestyle and what you're going to see is flat to maybe some positivity really driven by health and wellness, digital and diversified value.

Okay. Great. So it sounds like there's some green shoots in discretionary spend. You haven't seen a pull forward either from tariffs, like you said last quarter or maybe anything else you can sort of talk through quarter-to-date on spending trends?

Yes, the consumer is concerned about tariffs, but it really has not impacted prices significantly other than some things in a grocery store. I don't know people went out and try to buy a guacamole, but they're fairly expensive now. So puts a different meaning on Taco Tuesdays. But really, the consumer has not altered behavioral patterns as it relates to tariffs yet. Clearly, we think if tariffs go in, there will be an inflationary aspect to it. But I think in our conversation with our merchants and retailers, they are working hard to try to figure out how to minimize the effect of tariffs. Most certainly, the larger partners have greater flexibility as it relates to adjusting their supply chains or not taking on that cost where I think some of the midsize and smaller sized merchants will have a tougher time if tariffs come into play. But to date, we have not seen anything that's discernible relative to tariffs.

Hopefully, you haven't given up your guacamole yet. But unlike -- not unlike the rest of the industry on credit, Synchrony has seen higher delinquencies and credit losses in recent years, but you've arguably performed better than peers. Your outlook now calls for losses to fall back in the long-term guidance range or the long-term framework of 5.5% to 6%. How have you been able to achieve this? What's different about the Synchrony approach? And then maybe you could also layer in the main numbers you just put out this morning, looked pretty solid. I think we saw a nice number, I believe, of -- I think it was for the losses for the quarter -- I mean, for the month of May, 5.2% versus the guide of 5.8% to 6% so maybe square those.

Yes. So let's just start at the baseline, Jeff. One of the things we've invested heavily in the last 8 years has been our advanced underwriting. So one of the keys for us is the use of data and decision-making process. So we're real time, and we're taking that data into real-time decisions. That differentiates itself. We're not on a lag score or trended score. Yes, we use scores, but we use other forms of data to make informed decisions. A lot of that data comes from our partners in order to assess their capabilities. So that baseline is key number one. I think number two, we have a discipline relative to credit where we have a line strategy that is generally lower than our peers. So what that means is when you have the probability of default and you have those defaults, the loss at default is generally lower. So we're able to control loss. Our volatility relative dollars will always be less and we've shown that chart where it's in our Investor Relations Day a couple of years ago and many times during earnings, we've shown it back to the great financial crisis, our volatility is generally lower than peers. So that's number two. I think number three, our focus is around risk-adjusted margins. And when we saw losses getting outside of that and really having a lower risk-adjusted margin, it wasn't very efficient for us from a capital standpoint. So we said, listen, we'd rather sacrifice growth, we'd rather make sure that we're efficiently growing here, and we've taken broader credit actions both in '23 and '24 in order to curtail what we thought were riskier populations, whether that was through score migration, people who had student loans that potentially had an ability to pay issue, whether they were people who were taking out that consolidation loans, we were tighter around credit. We thought that's prudent. Others may not have done that, but we were willing to sacrifice growth in order to accomplish that. And so that manifests itself of -- we've exceeded our loss target last year. We're going to be back inside that target, we hope, for 2025. And most certainly, the performance through May gives us an indication that, that has a higher likelihood of happening. I think when you look at May, we're pleased with the performance, right? Our delinquency is 4.2% on a dollar basis, it's one of the lower ones we've had. So that sets us up nicely for the back half of the year. I think when you look at the loss -- charge-off rate of 5.2% for the month of May, I caution people that is on a 25-day cycle, right? So -- but when you look at it on a cycle-adjusted basis, it is performing better month-on-month and better in seasonality. So the loss content itself is better. And I think when you look at delinquency and the way delinquency is developing, it's developing in line to better than seasonality. So when we take a step back, we're pleased with that performance and really what the credit actions we've done in order to kind of get back to that appropriate risk-adjusted margin, have really worked the way we hopefully designed.

And you just mentioned some of this on student, but that's been a hot topic of late for investors. I know you were taking some action there over the past few years. Can you just remind us of your exposure to students and maybe how those borrowers are performing versus some of the more draconian stats we see out there in the federal lending program, which may have some issues unrelated to you, but just maybe comment on that. And are you noticing any impact from things like lower credit scores for those consumers that forgot to pay?

Yes. So we did quite a bit of work when there was forbearance programs in place. And while there wasn't reporting on delinquency, we worked with the credit bureaus in order to understand attributes of who had student loans, number one. Number two, we had the ability to understand whether or not the balance was changing. So we didn't need a necessarily delinquency flag. We said, okay, if your balance was, for example, $100, and next month, it's $100, we could arguably say you're not paying your student loan. So we had unique data in there to look at. When you look at the bifurcation of student loans for the portion that's in our portfolio, the majority of those people are actually making payments, which is good. There is a portion that is not making payments. Overall, when we look at the student loan population, what you try to do is pull it apart, and we create against or look at it against similar credit cohorts. When I look at again similar credit cohorts, by that credit grade, what we see in behavioral patterns is that the student loan -- people who have student loans are performing at or slightly better than credit cohorts that did not have student loans. So we do not necessarily see a negative impact with regard to student loans. What I would also say, Jeff, is the noise around student loans, first of all, there's a lot of confusion with people who aren't paying and saying listen, my servicer changed 3 time. I don't even know who my servicer is. So I think the long period of time and the way servicers have shifted between -- prior to the pandemic, through the pandemic and now has created confusion in the market. Not everyone is actually reporting accurate information to bureaus or reporting to the bureau. So I think people just need to take some pause. What I'd sit back and say in our portfolio, most certainly, it's on par with maybe slightly better from a performance perspective.

Okay. Great. So it sounds like credit trends are going pretty good, so far this year. So given everything we just discussed, how should we be thinking about your reserve ratio from here? You don't really guide on that, obviously, but you talked about the 5.3% plus triangulated unemployment rate last quarter. I think we've seen some Moody forecast or industry forecasts out there go a little bit higher on that front. So how should we be thinking about that over the rest of the year as what would we take it higher or lower?

Yes, let's just kind of put a bow on credit. So I think we're pleased with the performance rates. When you think about reserving models, it's what's your performance. Again, for us, I'll just highlight again, entry rates better than pre-pandemic. We are seeing improvement in delinquency stages. There had been some -- we always get the question of you're credit restrictive today, are you going to be -- when are you going to start being less credit restrictive? And again, we continue to evaluate that, Jeff, and we focus on it. We will take some actions end of this quarter into probably the back half of the year to be in certain small pockets to maybe be slightly less restrictive. What that does is, okay, as we look forward, as I think about the quantitative portion of the model, that should be getting better as your loss forecasts get better and you're back inside your long-term underwriting targets, which is a downward bias on to the reserve rate, number one. Number two, I think when we stepped at the end of the quarter in March, I think this was right before Liberation Day, right before some of the questions with regard to the economy. So given some of the uncertainty, we posted a $200 million macroeconomic reserve in the first quarter, really based upon a deteriorated macro that was worse at that point. So go back to that February baseline, which informs the reserve, worse than Moody's S5, which is a fairly severe recessionary environment. As we step through, obviously, the baseline is out for May. That baseline is slightly worse than the February baseline. So in theory, there could be a minor impact to the quantitative reserve, but most certainly, I think the macro kind of covers it. As you look forward, I think a framework to think about it, Jeff, is if you continue to perform well on the performance of delinquency and the charge-off profile, number one. And I think we get some clarity with regard to tariffs and the impact on the economy, what you'd see is if I have greater certainty, the macroeconomic kind of comes down, the quantitative comes down, and you begin to get back to what would be a day 1 CECL of 9.7%. So the bias -- in theory, if the macroeconomic environment clears is to begin that trend. So we would expect it to move down. Obviously, if the macroeconomic environment deteriorates, then you may be in a situation where you have a higher rate for a little bit longer period of time. It's also important to note, as we've said before, our reserve model, if unemployment is under 4.5%, if it moves around a little bit under 4.5%, it doesn't really have an impact significantly on our model. So it's almost like a neutral rate of unemployment inside our reserving methodologies at that 4.5%.

And as you think about the growth outlook for the back half of the year, you mentioned the easier comps in the back half of the year, and you've also talked about how you'd consider maybe changing your profile and the underwriting a little bit if the credit continues to perform. Have delinquency trends improved enough at this point for that to happen to maybe have you start letting up the brakes a little bit? Or what else needs to happen there? And then maybe just broadening that out longer term, what gets you back towards your 7% to 10% long-term growth target?

It's important to understand, and I want to -- I'll start where you really ended, which is where are we today and then where we're heading, right? So let's just be clear, the impact today is twofold. Number one, the restrictive credit actions is a significant portion, the majority portion of the decline in purchase volume that's impacted receivables. The second is this discerning customer who has pull back on certain discretionary purchases, whether that's in the furniture space. We see it in health and wellness, when you think about LASIK or cosmetic and things like that. You see it in lifestyle, which are some of the platforms I indicated earlier that have some pressure. So that's a short term. I think I talked about we're going to make some minor adjustments to the credit profile in the back half of the year. That wasn't really factored into the guidance. I don't think it really has a material impact. But most certainly, we're beginning that. That's going to be a journey. And we've always talked about we're not going to flip a switch and just go back to the standards from 2022. It's also important to say we never really just -- we don't have accord in the credit box. So I think that in the short term, you're going to see some of the credit restrictions lifted over the course of 18 months or so, that helps. I think the important part is the consumer hopefully becomes more confident being willing to make those larger ticket discretionary purchases. That, combined with, I'd say, lower comps in the back half of the year, again, driven by those two factors, we should begin to see the ramp up. When we look at our partner mix, when we look at our penetration, when we look at the opportunities that we have with our partners, we feel good about the ability to get back to our long-term average and our long-term targets of being high single digits relative to growth.

So just to sort of put a pin on that, lifting of the credit actions not factored into the full year guide, but you're going to look to do that maybe over the next 18 months. Is that...

Yes, I mean, that's always the horizon. So the question becomes, when do you have the certainty. We like to have certainty. I'm sure a lot of other people like to have certainty around tariffs and the impact on the economy. Tariffs clearly are inflationary. It's unclear exactly where the tariff burden will fall inside the economic chain. So it's too early to say that, but that's something that we watch. But once that clears and we continue to see the performance we're seeing today, that would give us indications that, again, we should consider lifting those restrictions and it's going to come over time. We're doing things -- our plan this year that was included in the guidance is we're doing more upgrades than we did last year from private label to Dual Card. That's one of the benefits of having a multiproduct portfolio as we can migrate customers who really want a different product and are eligible for a different product. Those are things that we can do. Again, it's not materially driving the estimate, but those are things that we'll begin to do more in earnest as we get comfortable with the macro.

And maybe we could also talk about the PPPCs, the pricing changes you put through in advance of the late fee rule, which obviously didn't go through. How are you and your partners thinking about using these gains you've seen so far? Are most of the conversations you're having centered around maybe reinvesting that into value enhancements? Could those reinvestments maybe provide an uplift to loan growth over the next few years? And are you finding that those pricing changes you took a little bit more proactively, are they giving you a bit of a competitive edge in your conversations when it comes to renewals or new deals?

Yes. So I think Brian did a very good job of articulating our strategy in April. We had the -- I'd say this is the benefit of all of our CITs had test versus control. So we can go to our partners and we're going to our partners with a couple of things. One, here's the landscape that has changed over the last 2 years relative to pricing cards. Two, here is the impact on test versus control for accounts that received the change in terms and what that means. And then three, we sit back and say, based upon performance, here is the financial contribution or attributes that you have relative to the program. And so the discussions we're going to engage in is how do you think about those? There are situations where they'll just stay as they are. And there are situations where we may say, listen, we may take because we have extra or more revenue, will we take on a different credit profile to get back to a slightly higher but acceptable risk-adjusted return. Would we put more into the value prop, right? If you have a higher price, we can afford to make greater value, which would hopefully drive increased sales. Or do we just adjust price, which most likely does not necessarily lead to buying. So we're starting to have those conversations. It's not something that we've spread that. We're having those conversations with partners today. I think the thing where we've had probably the more focus has been around our promotional financing business, some of the promo fees that we charge that we're in the market, but we put in place. Those are ones that probably first will get some adjustment to really conform to market, number one; and two, really help to try to stimulate discretionary purchases. It's important to know on those promotional financing fees because what you record when you make the sale gets amortized in over the life of the promo, it really didn't have any financial -- material financial impact in our results to date. So if we adjust that going forward, that is going to be something that's more of a lost opportunity. But the conversations around the promotional financing fees going to our partners about mix of promos, between different types of promos. And really, when you think about whether we're an exclusive relationships or not, how is our product positioned relative to others. So those are ongoing discussions with partners, but that's probably the first thing. But again, we're taking a fairly methodical approach with our partners to engage them, the same way we did when we put the actions in place. With regard to competitive advantage, we obviously believe that the value that we provide in the cards and the price is fair to consumers. And so we look at the entire package of what we deliver for them, not only the product, but the experiences in order to deliver that. So again, we'll continue to work with our partners. We're engaged in those conversations now. And again, we'll get it done fairly expeditiously with what we want to do going forward.

And as you're having those conversations, could you also maybe just touch on broader competitive intensity out there? Have you noticed any shifts there around renewals or RFPs? Or other banks entering the fray? And maybe what are the most topical things that are coming up in those or pain points that are coming up in those conversations?

Yes. Competition has been -- it's interesting. I think it's been fairly consistent last couple of years. We see certain competitors in certain places, but we don't necessarily see people all the time in exact same places. So larger relationships, you may see one or two competitors were consistent in midsize relationships. So that $500 million to $1 billion, you may not see -- you may see different competitors there. So again, it'll be interesting to see. There's been some shifting in some of the competitive set. TD is exiting in the promotional financing business. So we'll see how that changes the landscape. There's been some consolidation, so we'll see how that changes. So I think it's evolving. I do think what we do see is, again, some smaller fintech-type lenders. So particularly in health and wellness, you see it in the home improvement space, et cetera, we're kind of coming in, in different verticals in order to do it. They don't have the same scale as us, either in that vertical or as a broader-based company. So again, you're seeing them a little bit more. I think you're seeing companies that have singular products, understand singular products probably are not a way forward. So they're trying to get to more of a multiproduct offering similar to us, but again, they don't have the same scale as us. And then you're seeing some evolution really at the point of sale, whether it's technology and in some of the waterfall capabilities, number one; or two, you're seeing more integration with software vendors and providers. So the landscape is shifting, it's moved faster over the last 5 years. And again, we have productive paranoia, and we take everything incredibly seriously, whether it's a renewal or a new opportunity. And again, it's evolving, but it's fairly -- it's not necessarily an aggressive marketplace. I'd say it's very balanced.

Okay. Great. And maybe last one for me. Just on capital return. You recently increased the dividend by 20%. You announced a new buyback authorization of about $2.5 billion. You're still operating with robust levels of capital here with the CET1 of 13.2%. What's your thought process on redeploying some of this excess capital from here? Is this the time to maybe take some swings on larger portfolios out there? Or maybe talk us through your thought process.

Yes. So we're obviously pleased with the capital plan we put out. Again, you referenced a 20% increase in the dividend to $0.30 per share each quarter. That most certainly is something we want to maintain as part of our capital allocation strategy, number one. I think when you look at the share repurchase, we're double what we did last year, at $2.5 billion this year, it was $1.2 billion last year. So when you look at that, you sit back and say, listen, we understand we're in a real position of strength when it comes to capital and how we return it back to shareholders, how we invest in the business. Our priorities, Jeff, have not shifted. Number one, organic growth is #1. So organic RWA, we just have tremendous opportunities with our partners that we got to continue to capitalize to drive share inside their franchise is one. Two, it's the dividend and maintaining that dividend for shareholders. And then three, it comes down to share repurchases or inorganic, and it gives us the opportunity to look at products or capabilities, to be honest with you, that we constantly look at, say, can this accelerate our development of something? Or are we better to build it or we can look at other relationships. Again, we'll maintain discipline when it comes to pricing. We don't need to do it. And if we don't have those opportunities, we'll most certainly be aggressive but prudent with our return to capital to shareholders via share repurchases. So we feel good about our ability to execute that. We demonstrated by retiring over half the shares since we went public. So I think that's our commitment to get that capital down. So -- and the final piece I'd say, Jeff, we made our final deposit on CECL and the transition, so that's behind us. But that was $600 million a year capital. So that gives us even more capital as we move forward besides the business that generates a ton of capital to give us really flexibility and be a competitive advantage as we move forward.

All right. Great. I think we're out of time. Brian, it's been a pleasure, always. Thank you.

Jeff, thank you. Thank you for your time today.