Synchrony Financial — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020 unless noted. Synchrony provides consumer credit and deposit products through Retail Card, Payment Solutions and CareCredit. It reported one operating segment.
Financial performance and position
| Metric | Q1 2021 | Prior comparable period / change |
|---|---|---|
| Interest income | $3.742 billion | $4.407 billion, down 15.1% |
| Net interest income | $3.439 billion | $3.890 billion, down 11.6% |
| Net earnings | $1.025 billion | $286 million, up 258.4% |
| Net earnings available to common stockholders | $1.014 billion | $275 million |
| Diluted EPS | $1.73 | $0.45 |
| Provision for credit losses | $334 million | $1.677 billion, down 80.1% |
| Other expense | $932 million | $1.002 billion, down 7.0% |
| Net interest margin | 13.98% | 15.15% |
| Net charge-off rate | 3.62% | 5.36% |
| Over-30-day delinquency rate | 2.83% at March 31 | 4.24% at March 31, 2020 |
| Loan receivables | $76.858 billion at March 31 | Down 6.8% year over year and 6.1% since year-end |
| Allowance for credit losses | $9.901 billion; 12.88% of receivables | $9.175 billion and 11.13% at March 31, 2020 |
Profit growth was driven mainly by substantially lower credit-loss provision and lower other expense, partially offset by weaker net interest income. Interest income fell as customer payment rates rose, delinquencies declined and average loan balances contracted. Interest expense fell 41.4% to $303 million, largely reflecting lower benchmark rates; the cost of funds decreased to 1.57% from 2.50%.
Purchase volume increased 8.4% to $34.749 billion year over year, while average active accounts declined to 66.3 million from 72.1 million. Average loan receivables fell 7.2%. Retail Card purchase volume rose to $26.540 billion; Payment Solutions was $5.561 billion and CareCredit was $2.648 billion.
Cash flow: Operating activities provided $1.839 billion, investing activities provided $4.637 billion, and financing activities used $979 million. Cash and equivalents were $16.620 billion at quarter-end, compared with $11.524 billion at year-end. The investing cash inflow included a $3.996 billion net decrease in loan receivables.
Funding, debt and capital: Deposits were $62.761 billion, approximately 81% of total funding sources; $52.2 billion were direct deposits and $10.5 billion were broker-originated. Total borrowings were $15.160 billion, including $7.193 billion of securitization borrowings and $7.967 billion of senior unsecured notes. Liquid assets totaled $22.6 billion, with $4.9 billion of undrawn securitization capacity, $0.5 billion under an unsecured revolver and more than $25 billion of unencumbered Bank assets available as additional liquidity. Synchrony and the Bank met applicable well-capitalized requirements; Company CET1 was 17.4% and Bank CET1 was 18.5%.
Material changes and notable items
- Net charge-offs decreased to $699 million from $1.125 billion, and past-due balances fell to $2.2 billion from $2.5 billion at year-end. Management attributed stronger payment behavior in part to government stimulus; first-quarter customer payments as a share of beginning receivables were about 200 basis points above the prior five-year first-quarter average.
- The allowance balance declined by $364 million from year-end, but allowance coverage rose from 12.54% to 12.88%. The filing attributes the coverage increase principally to seasonal patterns, despite improving credit metrics.
- Synchrony repurchased $200 million of common stock and paid $128 million in common dividends and $11 million in preferred dividends. A repurchase authorization of up to $1.6 billion runs through December 31, 2021; $1.4 billion remained authorized at quarter-end.
- Synchrony completed its acquisition of Allegro Credit in February 2021. After quarter-end, it announced it would not renew the Gap Inc. program agreement when it expires April 30, 2022. The company said available strategic options were expected to be accretive to dilutive EPS relative to renewal terms; a portfolio sale could generate a gain and release approximately $1 billion of capital.
- Effective April 1, 2021, Brian Doubles became President and CEO, Margaret Keane became Executive Chair, and Jeffrey Naylor became Lead Independent Director.
Outlook, risks and contingencies
The filing does not provide specific earnings or financial guidance. Management described economic conditions related to COVID-19 as uncertain and said it would continue monitoring liquidity. Results remain sensitive to customer payment behavior, loan growth, credit losses, interest rates and seasonal receivables patterns. Management noted that higher customer payment rates and lower delinquencies support credit quality but reduce interest and fee income.
Principal disclosed risks include macroeconomic and pandemic effects; partner and program concentration; partner financial performance; credit-loss estimation and CECL assumptions; funding costs, deposit growth and credit ratings; interest-rate and margin risk; securitization early-amortization triggers; cybersecurity and operational disruptions; competition; regulatory, compliance and litigation exposure; and limits on dividends and share repurchases. A 100-basis-point immediate parallel rate decrease was estimated to reduce next-12-month net interest income by $112 million; a 100-basis-point increase was estimated to increase it by $64 million.
No securitization early-amortization event had occurred, and Synchrony reported compliance with senior-note covenants and no default under credit facilities. Management said estimated reasonably possible legal and regulatory losses were immaterial where estimable, while noting actual outcomes could vary; it did not believe pending matters would materially affect consolidated financial condition or liquidity. The securities litigation appeal was dismissed in large part, with one Exchange Act claim remaining. The filing reported no material change in risk factors from the 2020 Form 10-K.
Important facts for investors to verify
- Whether elevated payment rates and lower receivables persist, and how that affects net interest income, margins and purchase-volume growth.
- Whether credit performance and the $9.9 billion allowance remain adequate as pandemic conditions, stimulus effects and seasonal trends evolve.
- Deposit stability, funding costs and access to securitization and unsecured markets, including the outlook associated with the disclosed negative Fitch outlooks.
- The economic and capital effects of the Gap program’s 2022 expiration and any portfolio sale or other strategic action.
- Capital distribution capacity and regulatory conditions affecting the remaining share-repurchase authorization and future dividends.
- Developments in litigation, regulatory matters and tax examinations, including outcomes not currently estimable by management.