Synchrony Financial — Form 10-Q Summary
Business context and reporting period
Synchrony Financial provides consumer credit products, primarily through Synchrony Bank and partner programs across retail, digital, home and auto, health and wellness, and lifestyle markets. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. The company operates as one business segment.
Financial performance and position
- Third-quarter results: Net earnings were $628 million, down from $703 million; diluted EPS was $1.48, compared with $1.47. Net interest income rose 11.0% to $4.36 billion, but provision for credit losses increased to $1.49 billion from $929 million. Earnings before taxes were $833 million versus $922 million.
- Nine-month results: Net earnings were $1.80 billion, down from $2.44 billion; diluted EPS was $4.14 versus $4.86. Net interest income increased 8.8% to $12.53 billion, while provision for credit losses rose to $4.16 billion from $2.17 billion.
- Revenue, costs and margins: Third-quarter interest income increased 23.3% to $5.35 billion, while interest expense increased to $992 million from $414 million. Net interest margin was 15.36%, compared with 15.52%. For the nine months, margin was 15.17%, versus 15.64%. Retailer share arrangements declined 7.4% in the quarter and 15.4% year to date. Other expense rose 8.5% in the quarter and 8.0% year to date, partly reflecting growth, technology investment and higher operational losses.
- Credit performance: At September 30, loan receivables were $97.9 billion, up 13.8% year over year and 5.8% from December 31, 2022. Third-quarter net charge-offs were $1.12 billion, with a 4.60% rate, versus $635 million and 3.00%; the nine-month rate was 4.62%, versus 2.82%. Loans over 30 days past due were 4.40% of receivables, up from 3.28% a year earlier. The allowance was $10.18 billion, or 10.40% of receivables, compared with 10.58% a year earlier.
- Liquidity, funding and debt: Deposits were $78.1 billion at September 30, up 8.8% from year-end and equal to 84% of funding sources. Liquid assets totaled $17.6 billion. The company reported $15.64 billion of cash and equivalents, $15.23 billion of borrowings, $2.5 billion of undrawn securitization capacity and $0.5 billion available under its unsecured revolver. It also reported more than $25 billion of unencumbered Bank assets available as a potential liquidity source.
- Cash flow and capital: For the first nine months, operating cash flow was $6.28 billion, investing cash outflow was $7.07 billion, and financing cash inflow was $6.16 billion; cash and equivalents increased $5.37 billion, including restricted cash. Company and Bank common equity Tier 1 ratios were 12.4% and 13.4%, respectively; both were classified as well-capitalized. The company repurchased $850 million of common stock and paid $303 million in common dividends during the period.
Material changes versus prior periods
- Higher average receivables, purchase volume and benchmark rates lifted loan interest income. Higher benchmark rates and funding liabilities also sharply increased funding costs.
- Credit costs rose materially alongside lower customer payment rates, higher delinquencies and charge-offs, and portfolio growth. Management said it expects net charge-offs to continue to increase.
- Purchase volume increased 5.5% in the quarter and 2.7% for the nine months. Average active accounts were 70.3 million in the quarter, up from 66.3 million.
- Year-to-date comparisons are affected by the 2022 sales of the Gap and BP portfolios, including prior-year portfolio revenue and a $120 million gain on sale.
- Adoption of ASU 2022-02 on January 1, 2023 reduced the allowance by $294 million and increased opening retained earnings by $222 million, net of tax.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management describes a period of uncertain economic conditions and cites lower customer payment rates and expected further increases in net charge-offs.
- Key risks include consumer credit deterioration and uncertainty in loss estimates, higher funding costs, interest-rate mismatches, reliance on deposits and partner programs, and potential effects of regulation, litigation, cybersecurity incidents and third-party disruptions.
- Synchrony’s average consolidated assets exceeded $100 billion in 2023, making it subject to enhanced prudential standards after applicable transition periods. Proposed bank capital and resolution rules could increase capital needs or funding costs; the company was assessing their potential impact.
- A securities class action settlement for $34 million received final court approval in August 2023. Management estimated reasonably possible losses for legal and regulatory matters it could estimate as immaterial, while noting actual outcomes could differ.
- The company reported no material off-balance-sheet arrangements. Unused credit card lines were approximately $426 billion and are unconditionally cancellable by the company. Securitization early-amortization events had not occurred, and the company reported compliance with note covenants and no default under credit facilities.
Important facts for investors to verify
- Whether delinquency and net charge-off trends continue to worsen, and how that affects provisions, allowance coverage and earnings.
- Whether loan yield growth can continue to offset higher deposit and other funding costs, and the impact on net interest margin.
- The sustainability and mix of deposit funding, liquidity levels and access to securitization and unsecured funding.
- The assumptions underlying the allowance for credit losses, including macroeconomic forecasts and the effect of seasonal credit patterns.
- The eventual requirements and company-specific effects of enhanced prudential standards and proposed capital and resolution rules.
- The status and financial effect of legal and regulatory matters, including the settled securities litigation.