Synchrony Financial — FY 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Synchrony is a U.S.-focused consumer lender operating through Retail Card, Payment Solutions and CareCredit, with Synchrony Bank deposits funding its lending activities. On November 17, 2015, GE completed its exchange offer and Synchrony became fully independent of GE. The company reports one business segment.
Financial performance and position
| Metric | FY 2015 / Dec. 31, 2015 | Prior comparable period |
|---|---|---|
| Interest income | $13.228 billion | $12.242 billion in 2014 |
| Net interest income | $12.093 billion | $11.320 billion in 2014 |
| Net earnings | $2.214 billion; diluted EPS $2.65 | $2.109 billion; diluted EPS $2.78 in 2014 |
| Net interest margin | 15.77% | 17.20% in 2014 |
| Return on assets / return on equity | 2.9% / 19.1% | 3.2% / 26.7% in 2014 |
| Loan receivables | $68.290 billion | $61.286 billion at year-end 2014 |
| Deposits | $43.447 billion | $34.955 billion at year-end 2014 |
| Total borrowings | $24.344 billion | $27.460 billion at year-end 2014 |
| Cash and equivalents | $12.325 billion | $11.828 billion at year-end 2014 |
| Operating cash flow | $6.184 billion | $5.340 billion in 2014 |
Purchase volume rose 10.1% to $113.615 billion; period-end active accounts increased to 68.3 million. The non-GAAP platform revenue measure was $10.833 billion, up from $10.126 billion in 2014. The efficiency ratio rose to 33.5% from 31.7%. Cash flows were $10.803 billion used in investing activities and $5.116 billion provided by financing activities; cash increased $497 million during the year. Equity was $12.604 billion at year-end.
Material changes versus 2014
- Net earnings increased 5.0%, while diluted EPS declined from $2.78 to $2.65, alongside an increase in weighted-average shares.
- Net interest income grew 6.8%, mainly from receivables growth; interest expense rose 23.1% as funding balances and costs increased. Net interest margin compressed, reflecting a larger low-yield liquidity portfolio and slightly lower loan yields.
- Loan receivables grew 11.4%; deposits grew 24.3%, led by 50.8% growth in direct deposits. The company continued shifting funding away from GE-related financing.
- Net charge-off rate improved to 4.33% from 4.51%; over-30-day delinquency declined to 4.06% from 4.14%. Provision for loan losses nevertheless increased 1.2% to $2.952 billion, mainly due to portfolio growth.
- Other expense increased 11.5% to $3.264 billion, including investment in stand-alone infrastructure and separation, business growth, and EMV card rollout costs. Fraud-related losses rose to $219 million from $154 million.
Outlook, risks, contingencies and unusual items
- Management expected near-to-medium-term interest income growth from receivables growth, with yields and customer pricing relatively stable. It expected near-term charge-off rates to remain relatively stable, but provision expense to grow faster than in 2015 as receivables expand and credit-quality improvement benefits fade.
- Management anticipated higher retailer-share payments and marketing and loyalty costs under extended partner agreements, while expecting these investments to support partner promotion and purchase volume. Seventeen of 22 Retail Card agreements, representing 89.7% of platform revenue, extended to 2019 or later.
- Funding and liquidity at year-end included a $14.8 billion liquidity portfolio, $6.1 billion of undrawn committed securitization capacity subject to conditions, and more than $25 billion of unencumbered Bank assets. The company had $13.6 billion of securitization borrowings and $6.6 billion of senior unsecured notes outstanding. It prepaid a further $2.7 billion of Bank Term Loan debt after year-end, leaving $1.5 billion outstanding.
- Fully phased-in Basel III CET1 was estimated at 15.9%. Dividends and share repurchases remained subject to board and regulatory approval; management expected to retain earnings until it received Federal Reserve non-objection.
- Key exposures include reliance on consumer credit conditions, partner concentration (the five largest programs represented 49% of platform revenue and 51% of receivables), funding-market access, interest-rate mismatch, securitization early-amortization triggers, fraud and cyber risk, vendor dependence, and regulatory or litigation developments.
- CFPB-required CareCredit remediation of up to $34.1 million was completed; the company estimated ongoing annual costs of about $2 million. Debt-cancellation refunds and the broader collection-offer remediation were also completed in 2015. The DOJ consent order terminated in January 2016. The filing says reasonably possible losses on other legal and regulatory matters that could be estimated were immaterial, but outcomes remain uncertain.
- The online deposit platform transition from FIS to Fiserv was expected to be completed in 2016. The OCC terminated the Bank’s 2013 Operating Agreement in February 2016, also ending the related capital and liquidity support agreement.
Most important facts for investors to verify
- Whether margin compression, rising funding costs and higher partner-share, loyalty and operating expenses continue to outpace revenue growth.
- Whether credit quality remains stable as receivables grow, and whether the $3.497 billion allowance remains adequate; also monitor the 4.33% charge-off rate and 4.06% over-30-day delinquency rate.
- Whether the company can maintain diversified, cost-effective funding and liquidity, including continued direct-deposit growth and access to securitization markets.
- Whether major Retail Card partners renew and continue promoting Synchrony products, given partner concentration and contractual termination rights.
- Developments in CFPB and other regulatory scrutiny, pending litigation and the tax-sharing indemnity obligations associated with the GE separation.
- Execution of the 2016 Fiserv transition and the effect of stand-alone operating costs, fraud losses and technology or security incidents.