Synchrony Financial — Q2 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2023; financial comparisons are with the corresponding 2022 periods unless noted. Synchrony is a U.S.-focused consumer finance company offering credit cards, commercial credit and installment loans through partner programs, funded primarily by customer deposits. It operates as one business segment.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $5.0 billion | $4.1 billion | $9.8 billion | $8.1 billion |
| Net interest income | $4.1 billion | $3.8 billion | $8.2 billion | $7.6 billion |
| Provision for credit losses | $1.4 billion | $724 million | $2.7 billion | $1.2 billion |
| Net earnings | $569 million | $804 million | $1.2 billion | $1.7 billion |
| Diluted EPS | $1.32 | $1.60 | $2.73 | $3.38 |
| Net interest margin | 14.94% | 15.60% | 15.08% | 15.70% |
| Net charge-off rate | 4.75% | 2.73% | 4.62% | 2.73% |
For Q2, earnings before taxes were $742 million, retailer share arrangements were $887 million, other income was $61 million, and other expense was $1.2 billion. The efficiency ratio was 35.5%, versus 37.7% a year earlier. Return on assets was 2.1% and return on equity was 17.0%, compared with 3.4% and 24.0%, respectively.
Balance sheet, funding and cash flow
- At June 30, loan receivables were $94.8 billion, up 14.7% year over year and 2.5% from December 31, 2022. Total assets were $108.7 billion and equity was $13.4 billion.
- Deposits were $75.8 billion, up 5.6% from year-end and 84% of total funding sources. Borrowings totaled $14.2 billion. The average cost of funds rose to 4.04% in Q2 from 1.41% a year earlier.
- Cash and equivalents were $12.7 billion; the liquidity portfolio was $16.4 billion. Additional available capacity included $2.5 billion under securitization facilities, $0.5 billion under an unsecured revolving facility, and more than $25 billion of unencumbered Bank assets.
- For the six months, operating cash flow was $3.8 billion; investing activities used $4.5 billion, including a $5.0 billion net increase in loan receivables; financing activities provided $3.1 billion. Deposits increased by $4.1 billion.
- Company regulatory capital ratios at June 30 included 15.2% total risk-based capital and 12.3% common equity Tier 1. The Company and Bank met applicable well-capitalized requirements.
Material changes and management commentary
- Q2 net earnings fell 29% year over year, while six-month earnings fell 33%. Higher credit-loss provision and sharply higher interest expense more than offset higher interest income and lower retailer share arrangements.
- Interest income increased 23% in Q2, principally from loan growth and higher benchmark rates. Net interest income rose 8%, but the net interest margin declined 66 basis points. Management cited higher funding costs as rates and funding liabilities increased.
- Credit metrics weakened: over-30-day delinquencies rose to 3.84% from 2.74% a year earlier, and 90+-day delinquencies were 1.77% versus 1.22%. Past-due balances were $3.6 billion. Management said lower customer payment rates and credit metrics trending toward historical levels contributed to the deterioration.
- The allowance for credit losses was $9.8 billion, or 10.34% of receivables, compared with $8.8 billion and 10.65% a year earlier. The year-over-year increase in the allowance balance primarily reflected portfolio growth; the coverage ratio declined.
- Purchase volume was $47.3 billion in Q2, roughly flat year over year; average active accounts were 69.5 million. Digital and Diversified & Value volumes grew, while the comparison was affected by the 2022 sales of the Gap and BP portfolios.
- Other expense increased 7.9% in Q2, with growth-related costs, operational losses and technology investment cited as drivers. Other income declined, largely because the prior-year period included a $120 million portfolio-sale gain.
Outlook, capital actions and risks
- The filing provides no specific earnings or credit-loss guidance. Management said it expects payment rates to continue moderating and delinquencies and net charge-offs to trend toward historical averages; seasonality also affects receivables and credit metrics.
- The Board approved up to $1.0 billion of additional share repurchases through June 30, 2024. The Company repurchased $700 million of common stock and paid $199 million of common dividends during the first half. Management stated an intention to increase the quarterly common dividend to $0.25 per share beginning in Q3 2023; future distributions remain subject to Board discretion and regulatory constraints.
- Average consolidated assets exceeded $100 billion in 2023, bringing enhanced prudential standards after applicable transition periods. The Company expects formal Federal Reserve capital plan submission requirements in 2024 and stress testing beginning in 2026. A proposed regulatory-capital rule discussed in July 2023 could increase capital requirements if adopted.
- Key risks include consumer-credit deterioration and uncertainty in the economic outlook; funding costs, deposit retention and liquidity; interest-rate mismatch and margin compression; partner concentration and performance; securitization triggers; regulatory changes; cybersecurity and operational disruption; and legal or regulatory proceedings.
- A securities-litigation settlement for $34 million received preliminary court approval in April 2023. The filing says estimated reasonably possible losses for legal and regulatory matters that management could estimate were immaterial, while cautioning that outcomes may vary. No securitization early-amortization event had occurred by June 30.
Important facts for investors to verify
- Whether delinquencies, charge-offs and provision expense continue to rise, and whether the allowance remains adequate as payment behavior normalizes.
- How deposit pricing and other funding costs affect net interest margin and earnings, including deposit growth and reliance on brokered deposits.
- Whether growth in receivables and purchase volume is sustained across platforms, especially after accounting for prior-year portfolio sales.
- Capital and liquidity capacity under enhanced prudential standards and any finalized regulatory-capital requirements; confirm the status and conditions of planned dividends and repurchases.
- Developments in the securities settlement, other legal or regulatory matters, and any material change in securitization excess spreads or funding access.