Synchrony Financial — Q1 2022 Form 10-Q
Business and period: Consumer financial services company offering credit cards, installment loans and deposit products, primarily through Synchrony Bank and retail, digital, healthcare and other partners. Results cover the three months ended March 31, 2022; balance-sheet comparisons are primarily with December 31, 2021. Synchrony reports one business segment.
Financial performance
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Interest income | $4.02 billion | $3.74 billion, up 7.5% |
| Interest expense | $233 million | $303 million, down 23.1% |
| Net interest income | $3.79 billion | $3.44 billion, up 10.2% |
| Net earnings | $932 million; $1.77 diluted EPS | $1.03 billion; $1.73 diluted EPS |
| Provision for credit losses | $521 million | $334 million |
| Other expense | $1.04 billion | $932 million |
| Net interest margin | 15.80% | 13.98% |
| Efficiency ratio | 37.2% | 36.1% |
Net earnings declined 9.1%, chiefly reflecting higher credit-loss provision, retailer share arrangements and operating expenses, partly offset by higher net interest income. Return on assets was 4.0% versus 4.3%; return on equity was 27.5% versus 31.8%. The effective tax rate rose to 24.4% from 22.1%.
Credit, receivables and operating activity
- Purchase volume was $40.5 billion, up 16.5%; average active accounts were 70.1 million, up from 66.3 million.
- Period-end loan receivables were $78.9 billion, down 2.3% from year-end but up 2.7% year over year. Excluding portfolios reclassified as held for sale, receivables increased 7.9% year over year. The Gap Inc. and BP portfolios accounted for $4.0 billion of loans held for sale; sale was expected in Q2 2022, subject to customary closing conditions.
- Net charge-offs were $558 million, and the net charge-off rate improved to 2.73% from 3.62% year over year. Loans over 30 days past due were 2.78% of receivables, versus 2.83% a year earlier and 2.62% at year-end.
- The allowance for credit losses was $8.65 billion, or 10.96% of receivables, compared with 12.88% a year earlier and 10.76% at year-end. The year-over-year decline reflected improved payment behavior; the quarter-end increase from year-end reflected seasonality and macroeconomic uncertainty.
Cash flow, funding, liquidity and capital
- Cash provided by operating activities was $1.40 billion, versus $1.84 billion in Q1 2021. Investing activities provided $1.82 billion, including a $1.42 billion decrease in loan receivables; financing activities used $976 million. Cash and equivalents, including restricted cash, increased $2.24 billion to $10.92 billion.
- Total deposits were $63.6 billion, representing 83% of funding sources. Total borrowings were $13.36 billion, including $6.14 billion of securitization borrowings and $7.22 billion of senior unsecured notes. Average cost of funds declined to 1.24% from 1.57%.
- Liquid assets were $14.7 billion. Additional disclosed liquidity included $2.6 billion of undrawn securitization capacity, a $0.5 billion undrawn revolving facility and more than $25 billion of unencumbered Bank assets.
- Synchrony Financial’s CET1 ratio was 15.0%; the Bank’s was 16.7%. Both were reported as well-capitalized. The company said the first phase-in of CECL regulatory capital effects reduced its CET1 ratio by about 60 basis points.
Outlook, management commentary and risks
Management cited strong purchase-volume growth and continued elevated customer payments, while noting some moderation in payment rates and an uncertain macroeconomic environment. Seasonal patterns typically reduce receivables in Q1 and Q2 and can raise interim-period allowance ratios. The filing provides no specific earnings or operating guidance.
In April 2022, the Board authorized an additional $2.8 billion of share repurchases through June 2023 and announced a planned 5% increase in the quarterly common dividend to $0.23 per share beginning in Q3 2022. Q1 repurchases were $967 million; Q1 common dividends were $114 million. Future distributions remain subject to Board discretion, market conditions and legal and regulatory restrictions.
Key risks identified include consumer and macroeconomic deterioration, credit-loss estimation, interest-rate and funding pressures, partner concentration and partner performance, deposit growth, securitization access, regulation, litigation, cyber and third-party disruptions, and execution of partner and product initiatives. The filing reported no material change to the risk factors in the 2021 Form 10-K. Management estimated reasonably possible legal and regulatory losses that it could estimate to be immaterial; a bankruptcy-related class settlement of up to $8.5 million received final approval in February 2022.
Important facts for investors to verify
- Whether the Gap and BP portfolio sales closed as expected in Q2, and the resulting effects on receivables, earnings and funding.
- Whether elevated customer payment rates persist, and how delinquencies, charge-offs and the allowance respond to economic conditions.
- Whether purchase-volume growth translates into receivables and earnings growth after partner shares, loyalty costs and operating expenses.
- How changing interest rates affect asset yields, deposit costs, net interest margin and liquidity.
- Execution and regulatory constraints on the announced repurchase authorization and dividend increase, including the ongoing CECL capital phase-in.