Synchrony Financial (SYF) Earnings Call Transcript & Summary

Yes. So let me bring competition down into different pieces, right? So when you think about larger relations, you traditionally see or you had traditionally seen Capital One, Citibank to some degree your company as well in the mix for them. And you see branded people, you may see a U.S. Bank or Bank of America that has a corporate relationship. I sit back and say, when you look at that landscape for a second, Capital One, I think, is very prescriptive with their strikes on and where they show up. And so you don't see them all the time, but they're focused when they see a relationship that makes sense given their total portfolio. . I think Citi is a little bit more in a transition. I think that they want to keep some of the larger relationships, I presume, when you think about a Macy's or a depot, but some of the other ones, I'm not sure over the long term. What they've said is are they going to be quite as competitive to keep some of those. So that's an opportunity for us. Your company is probably a little bit more aggressive as it tries to get scale and relevance in the space, given the relationships that you guys have. So again, we're focused on what you guys do. So I think that's in the larger partner space. I think what you continue to see is more narrowly focused on fintechs that you see, whether it's in health and wellness, home specialty, outdoor, et cetera, that are focused into certain verticals. And most certainly, they have a different I don't want to say advantage, but they have differences in the regulatory framework they operate in, because it's generally unregulated, number one. And number two, what you see is they don't have the balance sheet in order to do it. So they have to rely upon the liquidity. Right now, there's a lot of liquidity, particularly in the private equity markets, et cetera. So we continue to watch them, but they're more focused on certain verticals. So it's really important for us to maintain, particularly in a fragmented side of the business, having a product that's really relevant and having good relationships and the ease of doing business with them. So again, I think it's different depending upon what part of the business you're talking about, but it's not 1 where we look at and say, it's significantly moving 1 direction or another direction unpack your question a little bit further with regard to relationships, our bigger relationships are all between 2030 and 2035. So I think we feel good about that. We have a handful of more moderate ones between now and 2030. But again, you try not to wait to the exploration that you're trying to work on these relationships every day and try to get that extension every day. And when there's an opportunity to change the value proposition change the way you drive marketing. It gives you an opportunity to extend those relationships without having to give up economics. So that's what we're focused on to continue to build them. And listen, there will be some opportunities probably in portfolio is in that $500 million to $1 billion, $1.5 billion range over the next couple of years from competitors, and we look to compete for those.

Got it. So I appreciate you don't comment on specific partnerships. One of your big partners has been in line this year. Maybe just talk about change of control, how Synchrony would potentially handle any renegotiation or potential loss of the partner.

Yes. What -- you're right. I don't talk about individual relationships, and I'm not going to talk about the 1 large relationship you're specifically referring to. But listen, what we try to do is say how do we make sure we are really relevant to that partner. And I think in any situation where there could be a merger and acquisition, if you're relevant to the partner and you provide a fair economic distribution to them. You're generally going to hopefully continue on with that relationship. And if it's a fair economic relationship, there's generally not an opportunity to have significant extraction. In larger relationships for all of our customers, there is some contemplation of change in control, both for us and for partners, and that's going to vary by partner. But again, they're all unique, but it's really important for us to maintain the focus of how do we maintain the best partnership and fair economics with our partners and that puts you in the best place regardless of what happens with them.

Got it. Makes sense. We'll switch gears and let's just touch on RSA and loyalty costs, both have been increasing as credit performance have improved and value propositions have become richer. How do you think about balancing partner economics customer value props and Synchrony's target returns when you price new business?

Yes. So I hope for those who are in the room and online listen to the webcast. On the stock, you own the stock for a couple of reasons. Number one, an incredibly attractive for the asset class return on assets. Number two, the stability in that return on asset profile. And the key for us is the RSA. And we've been doing this for over 20 years. I've been with the company 28 years. We've been doing it well over 20 years, where we align the interest with our partners. So when losses go down, RSA goes up. When loyalty goes up, RSA goes down. So it balances up, but it provides that stability. So yes, under that model, we may give up upside, but we also protect the downside, but it aligns the interest. I think from an RSA standpoint, the partners really do understand and I think we spent a lot of time with them about what a good value prop is and what a good value prop isn't, something that creates adverse incentives for a consumer to not engage with the card in the right way, we really spend time with the partner to go through that and ones in which we're trying to incent the behavior and what they want from the car, given it's the most loyal customer is a big focus. I think 1 thing over time, Terry, that we have a track record for us, we're very disciplined when it comes to pricing and how we think about it, and we're incredibly transparent. I think you're not going to wake up someday and half of our earnings go away because we share that P&L with the part, the profit pool. And we can have a discussion about what's depending upon where the levels are set with regard to sharing how that profit pools to shipped. I think when you've done that for a long period of time, you have the trust of a partner sit back and say, okay, I understand it. Your interests are aligned much -- it's more easy to get that alignment of interest. I think when we approach new relationships, I think we go through that philosophy with folks and go through a long education process because it's really critical to the model that we have is we want to have aligned interest. So Again, we're very disciplined when it comes to pricing, but a key element is going to be that retailer sharing arrangements and transparency.

Got it. That's helpful. So let's touch on your fiscal year guide. You recently revised our PSG provided more color on just the cadence of expenses, expecting OpEx to be similar in second half to first half, can you touch upon some of the tech investments you're excited for? And where should we expect to see the benefits, whether it's customer acquisition or something else?

Yes. So technology for us, and we've scaled up our technology over the last 5 years. If you think about the big thing, we're probably 20-plus minutes into this. We haven't talked about AI, but we've spent a lot of time on AI and a lot of money and investment there. And that's really kind of spread across different things. There's foundational elements that you have to build as you get the workforce to engage with that technology, number one. But then you look at where we're deploying our AI investments, right? So there are some that are more productivity oriented. So we're working on deploying agents into a dispute channel. So a credit card transaction, it's really complicated, labor-intensive. If you've ever done it, every credit card should tell you it takes 30, 60 days to resolve a dispute. Because it's cumbersome. I think AI is going to speed that up and will certainly help us to drive productivity there. But then you go on to the other side of the equation, you say, okay, how do I use it to drive growth and engagement? And 2 examples there, is 1 is on our merchant onboarding process, if I can get a merchant up faster and get them engaged quicker, they tend to pass us more applications, particularly in the fragmented business, number one. Number two, it's our investment around agent e-commerce and how do you get into that discoverability phase and and relevance as consumer behavior will shift over time into Agentic commerce. So AI is a big investment. We're in probably your 2 or 3-year journey on cloud. We're going to move a lot of applications there, which ultimately will have a cost benefit as I think about in '28, but really drive capacity and the ability to do things faster. So that's 1. I think when you look about the investment for multiproduct offering, so we can pop an offer to you that has an installment loan, a dual card loan or do card offering. At the same time and have offer persistence, that digital capabilities that we have there, we launched the marketplace. So it's all around digital assets for us as we continue to do that as we do that. And we're also not exciting, but on the back side of this business, we're redoing the technology stack inside our operations to make it easier for the consumers to our associates to kind of get through that process as they need to contact us. So we'll continue to focus there for the medium and long term. We think things that -- particularly on the digital side and Agentic, commerce will differentiate ourselves.

Got it. You previously mentioned that Synchrony could potentially see double-digit EPS growth in '27 and beyond. Can you maybe touch on your confidence in achieving that? And what does the path to improved efficiency ratios look like?

Yes. The way our framework, our long-term framework works is our core earnings power should match our receivable growth. Now we talked quite a bit about this year. Most certainly, when you get into in the lending business, step function changes in growth rate, that creates either headwinds or tailwinds. We were negative to last year. We're going mid-single digits. That step-up creates effectively what's a flattish EPS. If you look at the outlook versus last year, a flattish EPS look as you kind of get behind that. Once you're kind of in a relative range, even if you accelerate a point you don't really feel that. So again, I think what you're going to be -- hopefully see is that earnings power of the core business matching receivables. So if you say, okay, I want to be high singles or mid-singles take this year, if you can get to mid-single core earnings growth. And then the strength of this business, Terry, is just we generate because of that high and the excess capital we have, we just have a lot of capital to deploy. So I can move that mid-single-digit EPS or high single-digit EPS through a very reasonable share repurchase program, assuming I don't have opportunities to grow the organic side of the business to double digits. So I think, again, what we have to do is focus on getting that core earnings back expenses. We've significantly increased technology. I think now what we're trying to focus on is, okay, what do we need to stop doing in order to reallocate dollars versus continuing to just add on the dollar. So -- this year, we'll end up with headcount, that's probably down year-over-year. Part of that is just driving productivity and AI into it. And we're going to continue to drive that. So we should see better operating leverage, I think, as you move into '27 and beyond, which just helps you get back to that core EPS growing in line with receivables.

Got it. That's helpful. Since you mentioned it would just maybe just touch on excess capital. You recently issued $500 million of press. Your CET1 ratio is above 13%. How should we think about the balance between supporting loan growth and just capacity for capital return?

Yes. To unpack that a little bit, Terry, the preferred stock offering, that was the very last piece of having a fully developed capital stack for us. So when I think about maximizing the Tier 1, I take away that as any form of binding constraint not that it was, but that now we're just back to CET1 that focus. Again, this business generates. So you sit back and say, you have a high 2s to call it a 2.7 or so ROA, you just generate a lot of capital. Our first preference is to have RWA growth, right? That is -- that is solely focused. That's what we prefer to do because the return on investment and that return on capital is the best alternative. Will then have a reasonable dividend. It's going to be, I think, in line on a yield basis and a percent of net income. And then we get back into inorganic versus share repurchase. Inorganic, we're very disciplined. I don't think you'll see us do large transactions. A lot of times, they don't end up working or take too long in order to pay back. We tend to focus on some more bolt-on things when you think about Allegro when you think about Ally, when you think about what we do with Pets Best, that's probably where a better use of capital for us if we go down that path. And in an asset prices, to be honest with you, it's probably not in line with reality of the earnings power of available assets. So again, that brings you back to share repurchases. So you combine the earnings power of the business with excess capital we have today. We're hopeful that when Basel III comes at at the end of the year, there is some incremental relief that's there. And we're going to try to move the CET1 ratio, which again was 13 plus at the end of 2Q, down closer to our target externally of 11%.

Got it. Maybe we just touch on NIM. NIM benefited from the APCs while lower late fees have been -- as you look ahead, what do you see as the key drivers of NIM in the second half and beyond? And then just longer term is 16% NIM roughly the right target? And what needs to happen for you to get back there?

Yes. So we haven't changed our long-term framework, which had 16%. I think it's important to kind of go back and unpack that framework for 1 second. That framework had essentially a Fed funds rate around 2.5%, right, and had a loss rate, call it, 575 at the midpoint of the range. and it carried a certain revolve rate with that. So when you look about where we are today, I have a loss rate that's lower, right? I'm not -- I don't have the same revolve rate which is a headwind to NIM to the target. I have an elevated funding costs, which more impacts you on some of your fixed rate loans, which is a promotional financing program. So while we have some mechanism to offset price through our merchant discount, it doesn't fully do that. So you have some compression there. those are headwinds to that target. What's kept us closer to the target has been the PCs. So I think as you say, okay, how does it gravitate up over the long term, you're going to sit back and say, when does that funding cost begin to come down 2.5% to 3%. I'm not going to be like the Federal Reserve and give a point, call it, 2.5% to 3%, relieve some of that pressure. How do I get more of the revolve rate that's associated with, call it, 575-ish type loss rate, that's going to help give you momentum and then you have the CPCs that sit on top of that. So there should be strong momentum. As you think about the back half of this year, 1 of the things we said is you should -- is coming out of 2Q, you should see sequentially move up here. in the third and fourth quarter. That's partially because you're not necessarily comping some of the negatives when it comes to late fees -- the interest rate environment, again, assuming the Fed doesn't move this week or the back half of the year is a little bit more favorable than it just comes down to liquidity, which is going to go a little bit lower. So again, you should see a push up in the back half of the year, which I think most people have have set that expectation.

Okay. Got it. Just a few minutes left. I'll just open it up to the floor for any questions if there are any.

Everyone's excited about the Giants win last night.

Yes. All right. So just 2 minutes left. Maybe just to close out the discussion -- it sounds like there's a lot to be excited for moving forward. As you look out over the next 3 to 5 years, what do you think investors are underappreciating most about the Synchrony story today?

I think people I think people think about this business and they think about the downside with the consumer and how the consumer is going to come through credit and they're afraid of that. I think 1 thing we demonstrated whether you go back to '16 to '17 or most certainly in the period post 2023, we've been able to control credit. We've been able to do it. We've been -- we've done this for 90-plus years. the technology and the investments we've made, we call Prism and our advanced underwriting. I would believe, and I'm sure others would say for their own companies is really a differentiator for us. So I think people are probably more concerned, hey, listen, your non-prime and you're exposed to the consumer more. We're less nonprime Capital One. We're most certainly significantly less nonprime than read. So I think we can weather that storm quite a bit. I think the diversity of the business and the ability for us to generate a high and the amount of capital that we have. And again, we hope positive effects of Basel III rules when they come out at end of the year, it's going to create a tailwind. So I think when you think about that return. When you think about the ability to control credit as well as we have, when you think about the partnerships that we have, the multiproduct offering, I just think there's a lot of tailwinds on to this business. And I'd say the last thing, Terry, we've spent a lot of time trying to be a leader here as the landscape is now shifting most certainly when it comes to AI and Agentic commerce. You've seen a lot happening in discoverability. We're on the front lines of that, whether it's with OpenAI and anthropic, et cetera, we are trying to push that and be a leader in that space. So I think that gives us momentum. So it's a high return, controller credit, just a tremendous set of partners and diversity in the platforms.

Okay. Great. With that, I think we're out of time, we'll just end it there. Thank you.

Great. Thanks, Terry.