Synchrony Financial — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; interim financial statements are unaudited. Synchrony provides consumer credit and deposit products, primarily through Synchrony Bank and three platforms: Retail Card, Payment Solutions and CareCredit.
Financial and operating performance
| Metric | Q1 2017 | Prior comparable period / change |
|---|---|---|
| Total interest income | $3.913 billion | $3.520 billion, up 11.2% |
| Net interest income | $3.587 billion | $3.209 billion, up 11.8% |
| Net earnings / diluted EPS | $499 million / $0.61 | $582 million / $0.70; earnings down 14.3% |
| Net interest margin | 16.18% | 15.84% |
| Return on assets / equity | 2.3% / 14.1% | 2.8% / 18.1% |
| Purchase volume / average active accounts | $28.9 billion / 69.6 million | Purchase volume up 7.1%; accounts up 5.3% |
| Loan receivables at period end | $73.35 billion | Up 11.4% year over year; down 3.9% from Dec. 31, 2016 |
| Allowance for loan losses | $4.676 billion; 6.37% of receivables | 5.50% at March 31, 2016; 5.69% at Dec. 31, 2016 |
| Over-30-day delinquency / net charge-off rate | 4.25% / 5.33% | 3.85% / 4.74% in Q1 2016 |
| Deposits / borrowings at period end | $51.6 billion / $20.2 billion | Deposits were 72% of total funding sources |
Provision for loan losses rose 44.6% to $1.306 billion, while other expense increased 13.5% to $908 million. Net interest income after retailer-share arrangements and provision for loan losses was $1.597 billion, down from $1.636 billion.
Cash provided by operating activities was $1.750 billion versus $1.500 billion. Investing activities provided $1.420 billion and financing activities used $1.099 billion. Cash and equivalents ended the quarter at $11.392 billion, versus $9.321 billion at year-end 2016. These cash-flow figures reflect the quarter and should not be interpreted as a standalone measure of ongoing earnings.
At March 31, 2017, total assets were $89.05 billion, total liabilities $74.69 billion and equity $14.36 billion. Liquid assets were $16.2 billion; additional stated liquidity included $5.6 billion of undrawn facilities and over $25 billion of unencumbered Bank assets. The Company and Bank met applicable well-capitalized requirements; Company total risk-based capital was 19.3%, and Bank’s was 17.3%.
Changes and management commentary
- Earnings fell despite higher interest income and net interest income. Management attributed the decline primarily to higher loan-loss provision and operating expense.
- Receivables growth reflected higher purchase volume and account growth. Sequential receivables contraction was described as seasonal; management also noted seasonal patterns can raise interim allowance coverage and charge-offs.
- The higher provision reflected portfolio growth, an increased forecast of net charge-offs over the next 12 months and lower expected recovery pricing. Past-due balances declined from year-end, but delinquency and charge-off rates were higher than a year earlier.
- Deposit funding expanded year over year. In Q1, direct deposits grew 4.0% from year-end to $39.4 billion, partly offset by lower brokered deposits. Cost of funds declined to 1.84% from 1.90% a year earlier.
- The company repurchased $238 million of shares and paid $105 million in dividends. It expected to complete its $952 million repurchase authorization by the end of Q2 2017, subject to market, legal and regulatory conditions.
- Synchrony announced its acquisition of GPShopper and reported extending or launching several partner programs, as well as acquiring the Citi Health Card portfolio. The filing provides no quantified earnings or financial outlook for these items.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management cautions that results may differ from forward-looking statements. Key risks include consumer-credit deterioration and adequacy of loss reserves; economic conditions; interest-rate and funding-market changes; reliance on deposits, securitizations and a limited number of major retail partners; partner retention and program performance; regulation and supervision; cybersecurity and operational disruption; litigation; and limits on dividends or repurchases. A 100-basis-point immediate increase in rates was estimated to raise net interest income by approximately $131 million over the following 12 months.
No securitization early-amortization event had occurred, and the company reported compliance with debt covenants. The filing describes a CFPB inquiry concerning credit-bureau reporting and pending or other TCPA-related matters; management estimated reasonably possible losses it could estimate as immaterial, while noting actual outcomes could differ. The company also expects the future CECL standard to increase its loan-loss allowance, with the amount dependent on portfolio quality and economic conditions.
Investor facts to verify
- Whether rising delinquency, charge-off rates and forecast losses continue, and whether the allowance remains adequate.
- Whether receivables and purchase-volume growth can offset higher credit costs, retailer shares and operating expenses.
- Deposit growth, funding costs, securitization access and liquidity under stressed conditions.
- Progress and financial impact of GPShopper, the Citi Health Card portfolio and major partner renewals.
- Developments in the CFPB matter, TCPA litigation, regulatory constraints and the planned share-repurchase program.