Synchrony Financial — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are primarily with December 31, 2014, and operating results with Q1 2014. Synchrony is a U.S.-focused consumer finance company offering credit through Retail Card, Payment Solutions and CareCredit. GE owned approximately 84.6% of the company after its 2014 IPO.
Financial and operating performance
| Metric | Q1 2015 / March 31, 2015 | Comparable period / date |
|---|---|---|
| Net earnings | $552 million | $558 million, Q1 2014 |
| Net interest income | $2.875 billion | $2.743 billion, Q1 2014 |
| Provision for loan losses | $687 million | $764 million, Q1 2014 |
| Net interest margin | 15.79% | 18.83%, Q1 2014 |
| Loan receivables | $58.248 billion | $54.285 billion, March 31, 2014; $61.286 billion, December 31, 2014 |
| Deposits | $34.950 billion | $34.955 billion, December 31, 2014 |
| Total borrowings | $24.060 billion | $27.460 billion, December 31, 2014 |
| Cash and equivalents | $11.218 billion | $11.828 billion, December 31, 2014 |
| Cash flow from operations | $1.665 billion | $1.772 billion, Q1 2014 |
| Net cash from investing activities | $1.350 billion | $1.865 billion, Q1 2014 |
| Net cash used in financing activities | $3.625 billion | $625 million, Q1 2014 |
Purchase volume was $23.139 billion, up from $21.086 billion. Average active accounts rose to 61.6 million from 59.3 million. Net charge-offs were $668 million, or 4.53% of average receivables, versus $658 million and 4.86% a year earlier. The over-30-day delinquency rate was 3.79%, down from 4.09% a year earlier. The allowance was $3.255 billion, or 5.59% of period-end receivables, compared with 5.52% a year earlier and 5.28% at year-end 2014.
Return on assets was 3.0%, versus 3.9%; return on equity was 20.8%, versus 35.3%. The efficiency ratio increased to 32.2% from 26.9%. Earnings per diluted share were $0.66, compared with $0.79; weighted-average shares increased following the IPO.
Changes and drivers
- Net interest income rose 4.8%, principally on higher average loan receivables. Interest expense rose 44.7% to $275 million as the funding mix shifted toward more costly third-party debt; cost of funds increased to 1.86% from 1.58%.
- Retailer share arrangements increased 11.1% to $660 million, reflecting program growth and performance. Other income fell to $101 million from $115 million, primarily because loyalty program costs increased.
- Other expense increased 22.3% to $746 million. Higher staffing, professional fees and other costs reflected standalone-company infrastructure, business growth and separation planning. The comparison also includes a $44 million reduction in regulatory-matter reserves in Q1 2014.
- Net earnings declined 1.1%; increased retailer share arrangements and expenses more than offset higher net interest income and lower loan-loss provision.
- Receivables declined 5.0% from year-end, which management attributed primarily to seasonal customer paydowns. The allowance ratio rose during this seasonal first-quarter pattern despite improved past-due balances.
Funding, liquidity, outlook and risks
Synchrony issued $1.0 billion of senior unsecured notes in February and used the proceeds to repay term-loan debt. It prepaid $2.6 billion of the Bank Term Loan and repaid the remaining $655 million GECC Term Loan; GECC no longer funded the business at quarter-end. The company reported $13.8 billion of liquid assets, $6.6 billion of undrawn committed securitization capacity and more than $25 billion of unencumbered Bank assets available as potential liquidity sources. It was in compliance with debt covenants. The Bank’s Basel III common equity Tier 1 ratio was 17.6%; the company estimated a fully phased-in Basel III Tier 1 common ratio of 16.4%.
No quantified earnings or revenue guidance was provided. Management described continued investment in direct deposits and standalone operations, and expected to retain earnings and not pay dividends or repurchase stock until Federal Reserve approval of its separation-related application. Direct deposits increased 8.2% from year-end to $21.3 billion, while total deposits remained approximately stable.
Key risks include the planned separation from GE and related Federal Reserve approvals and readiness review; higher standalone operating costs; dependence on retail partners and concentration in a limited number of partners; funding costs, deposit gathering and access to securitization markets; interest-rate and consumer-credit risk; and extensive regulatory oversight. A 100-basis-point immediate increase in relevant rates was estimated to increase net interest income by approximately $79 million over the following 12 months.
Legal and regulatory matters include CFPB and DOJ consent-order remediation and compliance obligations, including additional estimated remediation of approximately $35 million identified in Q1. The filing also describes putative class actions, including TCPA matters, and other litigation; management estimated reasonably possible losses it could quantify as immaterial, while noting outcomes remain uncertain. Two partner portfolios with agreements ending in 2015 were classified as held for sale ($359 million); sales were expected in Q2, subject to customary conditions. Amazon’s Retail Card agreement was extended; Guitar Center was added as a Payment Solutions partner, with launch expected in the second half of 2015.
Important facts for investors to verify
- Whether loan growth and improving delinquency and charge-off trends persist, and how seasonal allowance coverage changes through the year.
- Whether higher funding costs and lower net interest margin continue to pressure earnings as the funding mix evolves.
- Progress and costs of operating independently from GE, including Federal Reserve approvals and any resulting capital or liquidity requirements.
- Completion and proceeds of the planned portfolio sales, and the financial effect of partner agreement changes.
- Remaining consumer remediation under consent orders and developments in the disclosed legal and regulatory proceedings.
- Deposit mix and stability, securitization access, and continued compliance with debt and regulatory capital requirements.