Synchrony Financial — FY2022 Form 10-K Summary
Business context and reporting period
Synchrony provides private-label, co-branded and general-purpose credit cards, installment loans and FDIC-insured deposits, primarily through retail, digital and healthcare partners. It reports one business segment. This 10-K covers the fiscal year ended December 31, 2022; the supplied filing text presents annual comparisons, not a separate Q4 income statement.
Key financial and operating metrics
| Metric | FY2022 / Dec. 31, 2022 | Comparison |
|---|---|---|
| Net earnings | $3.016 billion | Down 28.5% from $4.221 billion |
| Diluted EPS | $6.15 | Down from $7.34 |
| Interest income | $17.146 billion | Up from $15.271 billion |
| Net interest income | $15.625 billion; 15.63% net interest margin | Up 9.7%; margin was 14.74% |
| Provision for credit losses | $3.375 billion | Up from $726 million |
| Other expense | $4.337 billion | Up 9.4%; efficiency ratio improved to 37.2% from 38.9% |
| Operating cash flow | $6.694 billion | Down from $7.099 billion |
| Loan receivables | $92.470 billion | Up 14.5% from $80.740 billion |
| 30+ day delinquency rate | 3.65% | Up from 2.62% |
| Net charge-off rate | 3.00% | Up from 2.92% |
| Deposits | $71.735 billion | Up 15.2%; 84% of total funding sources |
| Total borrowings | $14.191 billion | Down from $14.507 billion |
| Liquid assets | $14.2 billion | Up from $13.0 billion |
| Common equity Tier 1 ratio | 12.8% | Down from 15.6% |
Purchase volume was $180.2 billion, up 9% year over year; excluding the Gap and BP portfolio sales, it increased 15%. The allowance for credit losses was $9.527 billion, or 10.30% of period-end loans, versus $8.688 billion and 10.76% a year earlier. Cash flows from investing activities were a net use of $10.234 billion, primarily reflecting loan growth; financing activities provided $5.284 billion, including deposit growth.
Material changes and unusual items
- Net earnings fell mainly because credit-loss provision rose sharply, reflecting current-year reserve increases and prior-year reserve releases. Net interest income increased, but higher credit costs and other expense more than offset that growth.
- Interest expense rose 47.4% to $1.521 billion as benchmark rates and funding liabilities increased. Cost of funds rose to 1.92% from 1.37%.
- In the second quarter, Synchrony sold $3.8 billion of Gap and BP loan receivables for $3.9 billion in proceeds and recorded a $120 million gain. The sales reduced related portfolio revenue and purchase volume.
- Synchrony repurchased $3.3 billion of common stock and paid $434 million in common dividends during 2022. The year-end remaining repurchase authorization was $700 million.
- The company reported a $0.3 billion estimated decrease in its allowance for credit losses from adopting ASU 2022-02 on January 1, 2023, on a modified retrospective basis.
Outlook, commentary and risks
Management expected loan receivables and interest income to increase in 2023, supported by continued purchase-volume growth, moderating customer payment rates and higher benchmark rates. It also anticipated further increases in delinquencies, net charge-offs and credit-loss provision as payment behavior normalizes toward historical levels. Funding costs were expected to rise further; retailer-share payments were expected to decline in absolute terms, subject to credit trends and program growth. The filing provides no numerical earnings or revenue guidance.
- Key sensitivities include a weaker U.S. consumer or partner sales environment, rising delinquencies and losses, funding-cost increases, deposit competition, and interest-rate mismatches. A hypothetical immediate parallel 100-basis-point rate increase was forecast to reduce 12-month net interest income by about $9 million; a 100-basis-point decrease by about $132 million.
- The five largest programs—Amazon, JCPenney, Lowe’s, PayPal and Sam’s Club—generated 53% of interest and fees on loans and represented 52% of loans. Loss or deterioration of a major relationship is a significant concentration risk.
- Liquidity included $2.5 billion of undrawn securitization capacity and $0.5 billion under an unsecured revolver, subject to conditions. No securitization early-amortization event had occurred. The company and Bank were well-capitalized, but capital ratios declined amid loan growth, capital returns and CECL phase-in.
- Synchrony’s four-quarter average assets were $98.2 billion, below the $100 billion threshold for certain enhanced prudential standards, although year-end assets exceeded $100 billion. The filing notes the threshold could be crossed on a future four-quarter average.
- Regulatory, litigation, cybersecurity, third-party service-provider and model risks remain material. Management estimated reasonably possible legal and regulatory losses it could quantify as immaterial, while noting outcomes remain uncertain. KPMG issued unqualified opinions on the financial statements and internal controls; no material weaknesses were identified.
Important facts for investors to verify
- Whether delinquency, charge-off and reserve trends continue to rise, and how actual losses compare with CECL assumptions.
- Whether 2023 loan growth and interest income offset higher funding costs, operating expenses and credit losses.
- Stability and renewal terms of major partner programs, given the concentration of revenue and receivables.
- Deposit retention, pricing and mix, liquidity availability, and refinancing needs for debt and securitizations.
- Capital levels after the continuing CECL phase-in and shareholder distributions, including any implications of approaching the $100 billion average-assets regulatory threshold.
- The impact of the proposed CFPB late-fee rule and other regulatory, legal or compliance developments on fees, products and profitability.