Synchrony Financial — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are to the corresponding 2021 periods unless noted. Synchrony provides consumer credit and deposit products, primarily through Synchrony Bank, in a single business segment.
Financial and operating performance
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Interest income | $4.342 billion | $12.438 billion |
| Net interest income | $3.928 billion, up 7.4% | $11.519 billion, up 10.7% |
| Provision for credit losses | $929 million | $2.174 billion |
| Net earnings | $703 million, versus $1.141 billion | $2.439 billion, versus $3.408 billion |
| Diluted earnings per share | $1.47, versus $2.00 | $4.86, versus $5.84 |
| Net interest margin | 15.52%, versus 15.45% | 15.64%, versus 14.40% |
| Net charge-off rate | 3.00%, versus 2.18% | 2.82%, versus 3.11% |
- Q3 purchase volume was $44.6 billion, up 6.3%; nine-month volume was $132.3 billion, up 11.4%. Excluding the portfolios sold in Q2, reported volume growth was 16.1% and 16.4%, respectively.
- Period-end loan receivables were $86.0 billion, up 12.6% year over year. Over-30-day delinquencies were 3.28%, versus 2.42% a year earlier; 90-day delinquencies were 1.43%, versus 1.05%.
- The allowance for credit losses was $9.1 billion, or 10.58% of receivables, compared with $8.6 billion and 11.28% a year earlier. The allowance increased from year-end 2021 primarily with loan growth.
- Other expense was $1.064 billion in Q3, up 10.7%, and $3.186 billion for nine months, up 12.1%. Management cited higher employee costs, operational expenses, technology and growth investment. The Q3 efficiency ratio was 36.5%, versus 38.7%.
- At September 30, total assets were $100.8 billion, total equity $13.0 billion, deposits $68.4 billion and borrowings $14.3 billion. Deposits represented 82% of total funding sources.
- For the first nine months, operating cash flow was $4.847 billion; investing cash use was $3.376 billion and financing cash provided was $2.904 billion. Cash and equivalents ended at $12.0 billion, excluding restricted cash.
Changes and notable items
- Earnings fell principally because the 2022 credit-loss provision increased while the prior-year periods benefited from reserve releases: $407 million in Q3 2021 and $1.6 billion for the first nine months of 2021. Higher net interest income partly offset the effect.
- Interest and fees on loans rose with average receivables and loan yields. Interest expense increased 72.5% in Q3, reflecting higher benchmark rates and funding liabilities; Q3 cost of funds rose to 2.05% from 1.31%.
- In Q2, Synchrony sold $3.8 billion of Gap Inc. and BP receivables for $3.9 billion in proceeds and recorded a $120 million gain. The sales reduced activity in Corp, Other and affected year-over-year comparisons.
- Q3 customer delinquencies increased with seasonal patterns and moderating payment rates. Management said payment rates remained significantly above historical averages, while credit metrics remained below historical averages; the Q3 net charge-off rate nevertheless rose year over year.
- The company repurchased $2.6 billion of common stock during the nine months and paid $331 million in common dividends. The quarterly common dividend increased to $0.23 per share in Q3; $1.4 billion of repurchase authorization remained at quarter-end.
Liquidity, capital, outlook and risks
- Management reported $16.6 billion of liquid assets, $3.2 billion of undrawn securitization capacity, $0.5 billion available under an unsecured revolving facility, and more than $25 billion of unencumbered Bank assets available as potential liquidity.
- Synchrony Financial’s CET1 ratio was 14.3%; Synchrony Bank’s was 15.6%. Both the company and Bank met applicable well-capitalized requirements. Capital ratios declined from year-end 2021, reflecting CECL capital phase-in, repurchases and dividends, partly offset by earnings.
- No specific earnings or credit guidance is provided in the supplied filing text. Management described economic conditions as uncertain and said it would continue monitoring liquidity. Seasonality typically lifts receivables into year-end and can affect delinquencies, charge-offs and allowance levels.
- Key exposures include consumer credit deterioration and uncertainty in CECL loss estimates; rising funding costs, rate mismatches and margin compression; deposit retention and access to securitization and capital markets; partner concentration and performance; and regulatory, cyber, operational and litigation risks. The filing says there were no material changes to the risk factors in the 2021 Form 10-K.
- Legal and regulatory matters are ongoing; management estimated reasonably possible losses it could estimate to be immaterial and did not believe pending matters would materially affect consolidated financial condition or liquidity, while noting outcomes could affect results in a particular period. The filing also identifies $200 million of investment commitments to non-consolidated VIEs.
Important facts for investors to verify
- Whether delinquency and net charge-off trends continue to rise as elevated customer payment behavior moderates, and how those trends affect reserve needs.
- How quickly deposit costs reprice relative to loan yields, and the effect of further rate changes on net interest margin and funding access.
- The sustainability of loan growth and purchase volume after the Gap Inc. and BP portfolio sales; compare growth measures that include and exclude those sales.
- Whether liquidity and regulatory capital remain adequate as receivables grow and capital returns continue; review restrictions on Bank distributions and repurchases.
- How the $120 million portfolio-sale gain, associated reinvestment spending and continuing partner relationships affect recurring earnings and expenses.