Synchrony Financial — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The filing was submitted September 5, 2014. Synchrony provides consumer credit through Retail Card, Payment Solutions and CareCredit. The financial statements are consolidated at June 30, 2014; earlier periods are presented on a combined basis and may not reflect standalone-company costs.
Key financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Interest income | $2.926B | $2.686B | $5.859B | $5.390B |
| Net interest income | $2.720B | $2.508B | $5.463B | $5.019B |
| Provision for loan losses | $681M | $666M | $1.445B | $1.713B |
| Other expense | $797M | $563M | $1.407B | $1.102B |
| Net earnings | $472M | $536M | $1.030B | $895M |
| Net interest margin | 17.8% | 18.4% | 18.3% | 18.3% |
| Net charge-off rate | 4.9% | 4.7% | 4.9% | 4.8% |
Q2 platform revenue, a company-defined non-GAAP measure, was $2.442B, up 8.2% year over year; first-half platform revenue was $4.891B, up 6.2%. Q2 return on assets was 3.1% versus 3.9%; first-half ROA was 3.5% versus 3.3%.
Balance sheet, cash flow and credit quality
- At June 30, total loan receivables were $54.873B, with $1.458B classified as held for sale; receivables including held-for-sale loans were $56.331B. The allowance for loan losses was $3.006B, or 5.5% of total receivables.
- Deposits totaled $30.462B, including $15.7B in direct deposits and $14.8B in brokered deposits. Total borrowings were $22.973B: $15.114B securitization borrowings and $7.859B related-party debt. Equity was $6.393B.
- Cash and equivalents were $6.782B, up from $2.319B at year-end. First-half cash from operations was $2.999B; investing cash use was $1.015B and financing cash provided was $2.479B.
- More than 30-day delinquencies were 3.8% of receivables, compared with 4.3% at December 31, 2013; 90-day delinquencies were 1.7%. Past-due balances fell to $2.097B from $2.488B.
- The Bank’s June 30 capital ratios were 17.8% total risk-based, 16.5% Tier 1 risk-based and 13.8% Tier 1 leverage, above the stated well-capitalized thresholds.
Changes and management commentary
- Q2 net earnings declined 11.9%, as higher other expenses and retailer-share payments more than offset higher net interest income. First-half net earnings increased 15.1%, primarily because the prior-year period included a $538M incremental provision related to allowance-methodology enhancements.
- Growth in average receivables and purchase volume lifted net interest income, but Q2 net interest margin contracted 0.6 percentage points. Management cited growth in lower-yielding cash balances and increased funding costs.
- Other expense increased $234M in Q2, reflecting business growth, standalone infrastructure, marketing and a $42M increase in reserves for a self-identified consumer remediation. The filing also reports resolution of CFPB and DOJ matters, which had no material Q2 impact because amounts had previously been reserved.
- Seasonality affected receivables, delinquencies and allowance levels. Management attributed the lower delinquency rate partly to seasonal paydowns and improving U.S. economic and employment conditions; it cautioned that seasonality contributed to the higher allowance ratio.
- Five Retail Card partner agreements were extended, representing $18.7B of receivables. Five other Retail Card partner agreements, representing $1.9B, were not expected to renew; two related portfolios totaling $1.458B were designated for sale, with closing expected in Q4 2014. PayPal’s agreement was extended to October 2016, with no further extension expected.
Outlook, transactions and risks
The filing gives no quantified earnings or revenue guidance. Management identified expected receivables growth, expansion of direct deposits, higher standalone operating costs, potentially higher funding costs, increased retailer-share payments, regulatory developments and higher capital and liquidity needs as important business conditions. It expects most GE-provided services to be replaced within two years of the IPO.
Subsequent to quarter-end, Synchrony completed its IPO and underwriters’ option, raising approximately $2.8B net; GE retained approximately 84.6% ownership. Synchrony borrowed $8.0B under a new third-party term facility, repaid $8.0B of existing GECC debt and borrowed $1.5B from GECC. It later issued $3.6B of senior notes and used $0.6B of proceeds to prepay term loans. Management expected to maintain elevated capital and liquidity and not pay dividends or repurchase stock before Federal Reserve approval related to separation from GE. These transactions occurred after June 30 and are not reflected in the quarter-end balance sheet.
Principal risks include partner concentration and non-renewals, consumer credit losses and allowance-estimation risk, deposit and capital-market funding access and costs, interest-rate changes, securitization triggers, regulatory and litigation exposure, and the operational and financial effects of separation from GE. The filing states no securitization early-amortization event had occurred and no material off-balance-sheet guarantees were outstanding.
Important facts for investors to verify
- Whether the planned portfolio sales close as expected and how partner non-renewals affect receivables, revenue and earnings.
- Whether credit performance, charge-offs and allowance coverage develop as seasonal effects unwind.
- The post-IPO funding mix, interest expense, liquidity position and cost of replacing GE services and funding.
- Progress and regulatory conditions for separation from GE, including capital requirements and restrictions on dividends or repurchases.
- Remaining consumer remediation obligations and any additional regulatory, legal or reputational consequences.