Synchrony Financial — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Comparisons are primarily with Q1 2023, or with December 31, 2023 for period-end balances. Synchrony provides consumer and commercial credit, principally through Synchrony Bank, and operates as one business segment.
Key financial results
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Interest income | $5.57 billion | $4.79 billion |
| Net interest income | $4.41 billion | $4.05 billion |
| Net interest margin | 14.55% | 15.22% |
| Provision for credit losses | $1.88 billion | $1.29 billion |
| Net earnings | $1.29 billion | $601 million |
| Diluted earnings per share | $3.14 | $1.35 |
| Purchase volume | $42.4 billion | $41.6 billion |
| Period-end loan receivables | $101.7 billion | $91.1 billion at March 31, 2023; $103.0 billion at December 31, 2023 |
| Deposits | $83.6 billion | $81.2 billion at December 31, 2023 |
| Total borrowings | $16.1 billion | $16.0 billion at December 31, 2023 |
| Cash and equivalents | $20.0 billion | $14.3 billion at December 31, 2023 |
Q1 net earnings included a $1.1 billion pretax gain, or $802 million after tax, from the Pets Best sale. Higher interest income and lower retailer-share payments also supported results; higher credit-loss provision and funding costs were offsets. Other income was $1.16 billion versus $65 million a year earlier, chiefly reflecting the sale gain. The filing does not provide a net-earnings figure excluding that gain.
Interest and fees on loans rose 14.7%, primarily with higher average receivables, lower customer payment rates and higher benchmark rates. Interest expense rose 58.2% to $1.16 billion; average cost of funds increased to 4.74% from 3.43%. The efficiency ratio was 25.1% versus 35.0%, a comparison materially affected by the Pets Best gain.
Net cash provided by operating activities was $2.25 billion, investing activities provided $798 million, and financing activities provided $2.60 billion. Investing cash flow included $1.94 billion of acquisition outflows and $491 million of net Pets Best sale proceeds. Financing cash flow included $2.40 billion of deposit growth, $488 million from preferred stock issuance, $600 million of note repayments, $300 million of common-stock repurchases and $113 million of dividends paid.
Credit, liquidity and capital
- Net charge-offs were $1.59 billion; the annualized net charge-off rate increased to 6.31% from 4.49%. Delinquencies over 30 days were 4.74% of receivables, up from 3.81% a year earlier and flat with year-end. Receivables 90 or more days past due were 2.42%, versus 1.87% a year earlier.
- The allowance for credit losses was $10.9 billion, or 10.72% of period-end receivables, compared with $9.5 billion and 10.44% a year earlier. The quarter’s $1.88 billion provision included a $299 million reserve build, including $190 million related to Ally Lending. Management said net charge-offs were expected to continue increasing in the first half of 2024.
- Deposits represented 84% of funding. The company reported $21.9 billion of liquid assets and additional available capacity of $10.8 billion at the Federal Reserve discount window, $2.5 billion under securitization programs and $0.5 billion under its unsecured revolving facility. Management described liquidity as strong.
- At March 31, Company capital ratios included 12.6% common equity Tier 1 and 15.8% total risk-based capital. Synchrony Bank reported 12.9% common equity Tier 1 and 15.1% total risk-based capital; both entities met applicable well-capitalized requirements.
Material developments and outlook
- CFPB late-fee rule: The March 5, 2024 final rule lowers the credit-card late-fee safe harbor to $8 and removes its automatic inflation adjustment. It was scheduled to take effect May 14, 2024, but industry litigation made timing and outcome uncertain. Synchrony said the rule would adversely affect 2024 results and, if effective as scheduled, materially affect 2024 net income. Management expects identified product, policy and pricing changes to offset the reduction over time, but said the offset will take time and depends on execution and customer behavior.
- Transactions: Synchrony acquired Ally Financial’s point-of-sale lending business on March 1 for approximately $2.0 billion cash consideration; acquired loan receivables had $2.2 billion unpaid principal. The acquisition added a provisional $190 million allowance for expected losses and a $271 million loan discount. Synchrony sold Pets Best in March for cash and an equity interest valued at $605 million.
- Capital returns: The company repurchased $300 million of common stock and paid a $0.25-per-share common dividend in Q1. In April, the Board authorized an additional $1.0 billion repurchase program through June 30, 2025, bringing authorization to $1.3 billion, and management said it intended to maintain the quarterly dividend at $0.25 per share. Future distributions remain subject to Board discretion and regulatory constraints.
- Risks and contingencies: Key risks include consumer credit deterioration and CECL estimate uncertainty; deposit and market funding costs; interest-rate exposure; partner concentration and performance; CFPB and other regulatory changes; litigation; cybersecurity and third-party disruptions; and potential constraints on dividends or repurchases. The company reported no material change to its previously disclosed risk factors. It said reasonably possible legal and regulatory losses that it could estimate were immaterial, while noting actual outcomes could differ.
- The filing gives no general earnings or revenue guidance. A 100-basis-point parallel rate decrease was estimated to reduce forecast net interest income by $209 million over the next 12 months; a 100-basis-point increase was estimated to raise it by $45 million.
Most important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time Pets Best gain, and how underlying earnings perform thereafter.
- The timing and financial impact of the CFPB late-fee rule, including litigation outcomes and the effectiveness of Synchrony’s mitigation measures.
- Whether delinquencies, charge-offs and reserve needs continue to rise, particularly during the first half of 2024.
- Ally Lending’s realized credit performance, acquisition accounting adjustments and contribution to growth and profitability.
- Deposit growth and pricing, funding costs, liquidity resources, and the ability to sustain capital returns while meeting regulatory requirements.