Synchrony Financial — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2019. Synchrony is a U.S.-focused consumer finance company operating through Retail Card, Payment Solutions and CareCredit; its products include private-label and co-branded cards, promotional financing, installment loans and FDIC-insured deposits. The company reported one business segment.
Key financial results
| Metric | Q2 2019 | Six months 2019 | Comparison |
|---|---|---|---|
| Net earnings | $853 million | $1.960 billion | Up 22.6% and 46.7%, respectively, year over year |
| Diluted EPS | $1.24 | $2.81 | Compared with $0.92 and $1.75 |
| Net interest income | $4.155 billion | $8.381 billion | Up 11.2% and 10.6% |
| Net interest margin | 15.75% | 15.92% | Compared with 15.33% and 15.69% |
| Provision for loan losses | $1.198 billion | $2.057 billion | Down 6.4% and 22.1% |
| Retailer share arrangements | $859 million | $1.813 billion | Up 31.5% and 32.0% |
| Other expense | $1.059 billion | $2.102 billion | Up 8.6% and 7.1% |
Growth in net interest income reflected larger average loan balances, partly offset by higher funding costs. The effective tax rate was 24.4% for both periods, above the year-earlier rates of 22.0% and 23.2%. Reported returns on average assets and equity were 3.3% and 23.1% for Q2, respectively.
Balance sheet, credit, funding and cash flow
- At June 30, total assets were $106.4 billion, equity $14.7 billion and total borrowings $21.2 billion. Deposits were $65.6 billion, or 75% of total funding sources; direct deposits were $52.8 billion.
- Cash and equivalents were $11.8 billion. The liquidity portfolio totaled $16.7 billion; additional disclosed capacity included $6.6 billion of undrawn securitization commitments, $0.5 billion on an unsecured revolver and more than $25 billion of unencumbered Bank assets.
- For the six months, operating cash flow was $4.255 billion, investing cash flow was positive $628 million and financing cash flow was negative $3.114 billion. Cash and equivalents, including restricted amounts, increased $1.769 billion.
- Period-end loan receivables were $81.8 billion, 3.7% higher than June 30, 2018, but down from year-end following seasonal paydowns and the Walmart portfolio reclassification. The allowance was $5.809 billion, or 7.10% of receivables, versus 7.43% a year earlier.
- Over-30-day delinquencies were 4.43%, up from 4.17% a year earlier; 90-plus-day delinquencies were 2.16%, versus 1.98%. The annualized net charge-off rate was 6.01% for Q2 and 6.04% for the six months, compared with 5.97% and 6.06%.
Material changes and management commentary
- PayPal Credit acquisition, higher purchase volume and account growth supported receivables and interest income. Purchase volume rose 11.7% in Q2 and 10.8% for the six-month period; average active accounts increased 8.9% and 8.5%.
- The expected sale of the Walmart portfolio led to $8.1 billion of receivables being classified as held for sale. The company recorded reserve reductions of $247 million in Q2 and $769 million in the first six months, including a $522 million release upon first-quarter reclassification. These releases materially lowered reported loan-loss provision; the sale was expected to close in October 2019, subject to customary conditions.
- Interest expense rose 33.4% in Q2 and 36.2% for the six months, primarily from higher benchmark rates and funding growth. Cost of funds was 2.73% for Q2 versus 2.24% a year earlier.
- Management announced a share repurchase authorization of up to $4 billion through June 30, 2020, and planned to raise the quarterly dividend to $0.22 per share beginning in Q3 2019. The company repurchased $1.691 billion of shares and paid $295 million of dividends in the first half.
- Synchrony announced its entry into pet health insurance through the Pets Best acquisition. No quantitative earnings or revenue guidance is provided in the supplied filing text.
Outlook, risks and contingencies
- Management estimated that a hypothetical immediate 100-basis-point increase in interest rates would increase net interest income by approximately $75 million over the following 12 months; actual results depend on rate movements, repricing and balance-sheet changes.
- CECL was scheduled for adoption January 1, 2020. A preliminary estimate indicated the allowance for loan losses could have been 50%–60% higher had CECL been applied at June 30, 2019; management also expected a reduction in regulatory capital. The estimate was preliminary and subject to model refinement, economic conditions and regulatory discussions.
- Key disclosed risks include consumer credit deterioration, partner concentration and partner performance, funding costs and access, interest-rate mismatches, securitization early-amortization triggers, regulation, cybersecurity, litigation and the Bank’s dividend limitations. The company and Bank reported well-capitalized status and compliance with debt covenants at June 30.
- The filing describes ongoing legal and regulatory matters, including a CFPB information demand concerning deferred-interest promotions, bankruptcy-related credit-reporting litigation, TCPA class actions and securities and derivative litigation. Management estimated reasonably possible losses for matters it could estimate as immaterial, while cautioning that outcomes remain uncertain and could affect results or reputation.
Most important facts for investors to verify
- Whether and when the Walmart portfolio sale closed, the final sale proceeds and any resulting gain, loss or further reserve impact.
- How much earnings growth depended on the Walmart reserve releases and PayPal Credit acquisition, versus underlying organic performance.
- Subsequent trends in delinquencies, charge-offs, allowance coverage and portfolio performance after the Walmart reclassification.
- The eventual CECL allowance and regulatory-capital impact compared with the preliminary 50%–60% estimate.
- Execution of the $4 billion repurchase plan and planned dividend increase, considering regulatory constraints and capital needs.
- Developments in funding costs, deposit growth, securitization access and the disclosed legal and regulatory proceedings.