Synchrony Financial — Q2 2022 Form 10-Q
Business context and reporting period. This filing covers the quarter and six months ended June 30, 2022. Synchrony is a consumer finance company operating primarily in the U.S. through retail, digital, health and wellness, and other partner programs; it reports one business segment. Its principal products are credit cards, commercial credit and consumer installment loans.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $4.074B | $3.578B | $8.096B | $7.320B |
| Net interest income | $3.802B | $3.312B | $7.591B | $6.751B |
| Provision for credit losses | $724M | $(194)M | $1.245B | $140M |
| Net earnings | $804M | $1.242B | $1.736B | $2.267B |
| Diluted EPS | $1.60 | $2.12 | $3.38 | $3.84 |
| Net interest margin | 15.60% | 13.78% | 15.70% | 13.88% |
| Net charge-off rate | 2.73% | 3.57% | 2.73% | 3.59% |
- Purchase volume was $47.2B in Q2, up 12.1% year over year, and $87.7B for the first half, up 14.1%. Average active accounts were 68.7M in Q2.
- Loan receivables were $82.7B at June 30, up 5.5% from June 2021 and 2.4% from year-end 2021. Excluding the portfolios sold in Q2, year-over-year loan growth was 11.5%.
- Net interest income grew 14.8% in Q2 and 12.4% in the first half, primarily from larger average loan balances and higher loan yields. Q2 interest expense rose 2.3%; first-half interest expense declined 11.2%.
- Retailer share expense increased 12.0% in Q2 and 11.8% in the first half, reflecting strong program performance. Other expense rose 14.2% and 12.9%, respectively, including higher employee, marketing, technology and operational costs.
- Operating cash flow was $3.213B for the first half; investing cash flow was $766M and financing cash flow was $(1.875)B. Cash and equivalents increased $2.104B, including restricted amounts, to $10.790B.
Financial position, credit and capital
- At June 30, total assets were $95.2B, deposits $64.7B and borrowings $12.2B; total equity was $13.4B. Deposits represented 84% of total funding sources.
- Liquid assets were $15.2B, compared with $13.0B at December 31, 2021. Additional available liquidity included $3.2B of undrawn securitization capacity, $0.5B under an unsecured revolving facility, and more than $25B of unencumbered Bank assets.
- The allowance for credit losses was $8.8B, or 10.65% of period-end loans, down from 11.51% a year earlier. Over-30-day delinquencies increased to 2.74% from 2.11% a year earlier and 2.62% at year-end; over-90-day delinquencies were 1.22% versus 1.00% a year earlier.
- Company capital ratios included a 15.2% common equity Tier 1 ratio; the Bank’s was 16.6%. Both Synchrony Financial and the Bank met applicable well-capitalized requirements. The Company’s CET1 ratio declined from 15.6% at year-end, partly due to the phase-in of CECL regulatory capital effects.
Material changes, outlook and risks
- Year-over-year earnings declined as the prior-year periods included substantial credit reserve releases; Q2 2022 provision expense was $724M compared with a $194M provision benefit in Q2 2021. Current-period reserve increases were $157M in Q2 and $120M in the first half.
- Synchrony completed sales of $3.8B in receivables from its Gap Inc. and BP portfolios in Q2, receiving $3.9B and recognizing a $120M gain. The sales contributed to lower Corp, Other loan balances and interest and fees.
- Management cited continued elevated customer payment behavior, seasonal credit patterns and an uncertain macroeconomic environment. The filing provides no specific earnings or credit guidance. The company said it would continue monitoring liquidity and economic conditions.
- In April, the Board approved an additional $2.8B share repurchase authorization through June 2023 and plans to raise the quarterly common dividend 5% to $0.23 beginning in Q3. The company repurchased $1.7B of stock in the first half; $2.4B of authorization remained at June 30.
- Interest-rate sensitivity estimates show a forecast 12-month net interest income decrease of $14M for an immediate parallel 100-basis-point increase and $62M for a 100-basis-point decrease. The company is transitioning contracts referencing LIBOR to replacement benchmarks.
- Key risks include consumer credit deterioration and CECL estimate uncertainty, funding costs and deposit growth, interest-rate changes, partner concentration and retention, securitization access, regulation, litigation, cybersecurity and operational disruptions. Management reported no material changes to the risk factors in the 2021 Form 10-K.
- The filing describes ongoing legal and regulatory matters; management estimated reasonably possible losses that it could quantify as immaterial and did not identify a pending matter it believes would materially harm financial condition or liquidity. Outcomes remain uncertain.
Important facts for investors to verify
- Whether rising delinquencies persist and translate into higher charge-offs, provisions or allowance requirements as stimulus-related payment effects fade.
- How much of reported earnings growth in net interest income is sustained as funding costs and deposit rates adjust to changing interest rates.
- The impact of the Gap Inc. and BP portfolio sales on ongoing receivables growth, revenue and partner mix, apart from the one-time $120M gain.
- Whether deposit funding, liquidity resources and capital ratios remain sufficient under stressed economic and funding conditions, including the phased-in CECL capital impact.
- Whether planned dividends and buybacks proceed as announced, given regulatory, market and capital constraints.