Synchrony Financial — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Synchrony provides consumer credit and deposit products through retail, payment solutions, and healthcare partners. Results reflect COVID-19 disruption, the prior-year Walmart portfolio sale, and adoption of CECL.
Financial results and key metrics
- Q2 earnings: Net earnings were $48 million, down 94.4% from $853 million; diluted EPS was $0.06 versus $1.24. Six-month net earnings were $334 million, down 83.0% from $1.96 billion; diluted EPS was $0.52 versus $2.81.
- Revenue and margin: Q2 net interest income fell 18.3% to $3.40 billion; six-month net interest income fell 13.1% to $7.29 billion. Q2 net interest margin was 13.53%, versus 15.75% a year earlier. Lower loan balances, benchmark rates, and COVID-related fee and interest waivers weighed on loan income; reduced funding costs partly offset the decline.
- Credit costs: Q2 provision for credit losses rose 39.6% to $1.67 billion; the six-month provision rose 62.9% to $3.35 billion. The June 30 allowance was $9.80 billion, or 12.52% of receivables, versus 7.10% a year earlier. Q2 net charge-off rate was 5.35%, down from 6.01%; delinquencies over 30 days were 3.13%, down from 4.43%.
- Operating costs and returns: Q2 other expense declined 6.9% to $986 million. Efficiency ratio rose to 36.3% from 31.3%; return on assets was 0.2% versus 3.3%, and return on equity was 1.6% versus 23.1%.
- Portfolio and activity: June 30 loan receivables were $78.3 billion, down 4.3% year over year. Q2 purchase volume was $31.2 billion versus $38.3 billion; average active accounts were 64.8 million versus 75.5 million.
- Cash flow, six months: Operating activities provided $3.92 billion, investing activities provided $5.93 billion, and financing activities used $6.08 billion. Cash and equivalents were $16.34 billion at June 30, versus $12.15 billion at December 31, 2019.
- Debt, deposits, and liquidity: Period-end deposits were $64.1 billion, about 80% of funding sources; total borrowings were $16.1 billion, down from $19.9 billion at year-end. Liquid assets were $22.4 billion, with $5.2 billion of undrawn securitization capacity, $0.5 billion under a revolving facility, and over $25 billion of unencumbered Bank assets.
- Capital: Synchrony Financial reported a 15.3% common equity Tier 1 ratio and a 17.6% total risk-based capital ratio at June 30. The Company and Bank met applicable well-capitalized requirements.
Material changes and notable items
- CECL adoption on January 1 increased the allowance by $3.0 billion and reduced retained earnings by $2.3 billion after related tax effects. Q2 and six-month provisions included $483 million and $584 million, respectively, attributable to CECL versus prior guidance. Regulatory capital effects were deferred under the applicable transition rule.
- Lower purchase activity and loan balances reflected COVID-19, seasonality, and the Walmart portfolio sale; Synchrony also completed the Yamaha portfolio sale in January 2020. Walmart-related prior-year reserve releases also amplified the year-over-year increase in provision.
- During the first half, Synchrony repurchased about $1.0 billion of common stock and paid $263 million in common dividends. It suspended share repurchases in response to COVID-19; the existing repurchase authorization expired June 30.
Outlook, risks, and contingencies
- Management stated that its January 2020 expectations and guidance could no longer be relied upon. It expected slower interest-income growth for the rest of 2020 and anticipated higher delinquencies and net charge-offs in the second half of 2020 and into 2021, with outcomes dependent on the pandemic, economic reopening, unemployment, and government support.
- Temporary customer relief included payment deferrals and interest or fee waivers. About 1.7 million customers, representing $3.2 billion of receivables, entered short-term payment deferrals in the first half; approximately 0.5 million customers with $1.1 billion of receivables remained enrolled at June 30. Relief affects delinquency comparisons; waivers reduced first-half interest and fee income by $67 million.
- Key risks include a deeper or longer downturn, reserve-estimation uncertainty, funding costs or access, partner concentration and performance, regulatory requirements, cyber and third-party disruptions, and potential effects on credit ratings. Ratings outlooks for Company and Bank senior debt were negative.
- The filing reports ongoing litigation and regulatory matters, including a CFPB information demand concerning deferred-interest promotions and appeals or other proceedings related to consumer and securities claims. Management estimated reasonably possible losses it could quantify as immaterial and did not believe pending matters would materially affect consolidated financial condition or liquidity; outcomes remain uncertain.
Investor verification priorities
- Track delinquency, charge-off, and allowance trends as payment relief expires; reported Q2 credit metrics were affected by forbearance and CECL assumptions.
- Assess whether purchase volume, receivables, and interest income recover, and separate COVID-19 effects from Walmart and Yamaha portfolio changes.
- Review reserve adequacy and forecast assumptions, including the impact of unemployment and any changes in CECL estimates.
- Monitor deposits, liquidity, funding access, debt maturities, credit ratings, and capital distributions while buybacks are suspended.
- Follow the deferred-interest regulatory matter and pending litigation for developments that could change the company’s stated loss assessment.