Business Context and Reporting Period
Company: Synchrony Financial
Filing Type: Form 8-K (Current Report)
Date: November 19, 2014
Reporting Period: Nine months ended September 30, 2014 (unaudited) and year ended December 31, 2013 (audited).
Context: This filing updates the Registration Statement on Form S-3 for the registration of up to $7.5 billion in debt securities. It incorporates "Form 10 Information" reflecting Synchrony's status as a savings and loan holding company following its August 2014 IPO. The company is in the process of separating from General Electric (GE), which currently owns 84.6% of the common stock.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2014 | Year Ended Dec 31, 2013 |
|---|---|---|
| Net Earnings | $1.578 billion | $1.979 billion |
| Net Interest Income | $8.342 billion | $10.571 billion |
| Platform Revenue (Non-GAAP) | $7.410 billion | $9.422 billion |
| Return on Assets (ROA) | 3.4% | 3.5% |
| Return on Equity (ROE) | 29.7% | 38.6% |
| Loan Receivables (Period End) | $56.767 billion | $57.254 billion |
| Total Deposits | $32.689 billion | $25.719 billion |
| Total Borrowings | $27.584 billion | $24.321 billion |
| Cash and Short-Term Investments | $14.1 billion | $2.3 billion |
| Net Charge-Off Rate | 4.57% | 4.68% |
| Over-30 Day Delinquency Rate | 4.26% | 4.35% |
| Basel III Tier 1 Common Ratio (Est.) | 14.6% | N/A |
Material Changes vs. Prior Period
- Profitability: Net earnings for the nine months ended September 30, 2014, increased 2.7% to $1.578 billion compared to the prior year period, driven by higher net interest income and a reduced provision for loan losses, partially offset by increased retailer share payments and operating expenses.
- Liquidity and Capital: Following the IPO, the company significantly increased its liquidity portfolio to $14.1 billion (19.2% of total assets) and raised total equity to $9.941 billion. Total deposits grew 27.1% year-over-year to $32.7 billion, driven by a 66.4% increase in direct deposits.
- Funding Mix: The company shifted funding sources away from related-party debt (GECC) toward third-party borrowings, securitized financings, and deposits. Interest expense increased due to higher cost of funds associated with third-party debt and increased liquidity holdings.
- Asset Quality: Credit metrics improved with the over-30 day delinquency rate decreasing to 4.26% and the net charge-off rate stabilizing at 4.57%. The allowance coverage ratio increased to 5.46%.
- Portfolio Growth: Loan receivables increased 6.6% to $56.8 billion, supported by purchase volume growth of 9.3% in 2013 and continued growth in 2014.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Separation from GE: GE targets completing the separation (via a split-off or other transaction) in late 2015. Synchrony expects to incur approximately $350 million in incremental annual expenses to operate as a standalone public company, including $100 million for branding and marketing.
- Growth Strategy: The company plans to grow by increasing customer penetration at existing partners, attracting new partners, and expanding direct banking operations. It expects to continue increasing capital and liquidity levels and will not pay dividends or repurchase stock until Federal Reserve Board approval for standalone status is received.
- Cost of Funds: Management anticipates funding costs will remain elevated compared to historical levels due to the replacement of low-cost related-party debt with third-party funding and the maintenance of a larger liquidity portfolio.
Risks and Contingencies
- Regulatory Approval: The separation is contingent on Federal Reserve Board approval for Synchrony to continue as a savings and loan holding company. Delays or additional conditions could impact the timeline and costs.
- Partner Concentration: The ten largest Retail Card partners accounted for 59.6% of total platform revenue in 2013. The loss of key partners (e.g., JCPenney, Walmart) or failure to renew agreements could materially impact results.
- Regulatory Actions: The company is subject to extensive regulation by the CFPB, OCC, and Federal Reserve. Recent consent orders with the CFPB and DOJ regarding debt cancellation products and collection practices resulted in remediation costs and ongoing compliance requirements.
- Macroeconomic Conditions: Deterioration in the U.S. economy could increase delinquencies and charge-offs, negatively impacting earnings.
Investor Verification Checklist
- Separation Timeline: Verify the status of the Federal Reserve Board review and the likelihood of the late 2015 separation target being met.
- Partner Renewals: Monitor the renewal status of the five Retail Card program agreements expiring in 2014/2015, which represent 3.3% of platform revenue.
- Standalone Costs: Track the realization of the estimated $350 million annual incremental operating expense required for independence.
- Regulatory Capital: Confirm the company's ability to maintain Basel III capital ratios above regulatory minimums as requirements phase in.
- Remediation Costs: Assess the ongoing financial impact of CFPB and DOJ consent orders, including the $34.1 million customer payment obligation and $3.5 million civil penalty.