Synchrony Financial — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Synchrony provides consumer credit and deposit products, primarily through Synchrony Bank and retail, digital, health and other partner programs. Comparisons below are year over year unless stated otherwise.
Financial performance and position
- Earnings: Q3 net earnings were $1.141 billion, versus $313 million; diluted EPS was $2.00, versus $0.52. Nine-month net earnings were $3.408 billion, versus $647 million; diluted EPS was $5.84, versus $1.04. The increase was primarily driven by lower provision for credit losses, not comparable growth in interest income.
- Interest income and margin: Q3 interest income was $3.898 billion, up 1.6%; net interest income was $3.658 billion, up 5.8%. Nine-month interest income was $11.218 billion, down 7.1%, and net interest income was $10.409 billion, down 3.1%. Net interest margin was 15.45% for Q3 and 14.40% for the first nine months, compared with 13.80% and 14.17%, respectively.
- Credit costs and quality: Provision for credit losses fell to $25 million in Q3 from $1.210 billion and to $165 million for nine months from $4.560 billion. The Q3 provision included a $247 million reserve release after the Gap portfolio was reclassified as held for sale; the filing reports an after-tax impact of $187 million. The allowance was $8.616 billion, or 11.28% of period-end loan receivables, versus $10.146 billion and 12.92% a year earlier. Q3 net charge-off rate fell to 2.18% from 4.42%; over-30-day delinquencies were 2.42%, versus 2.67%.
- Activity and receivables: Q3 purchase volume was $41.9 billion, up 16.4%; nine-month volume was $118.8 billion, up 19.7%. At quarter-end, loan receivables were $76.388 billion, with a separate $3.450 billion classified as held for sale. The reported loan-receivables balance was down from $78.521 billion a year earlier, largely reflecting the Gap reclassification; excluding it, management said receivables increased 2% year over year.
- Expenses and returns: Q3 retailer share arrangements rose 40.8% to $1.266 billion, primarily reflecting lower credit-loss provision and program performance. Other expense declined 9.9% to $961 million, partly due to a prior-year restructuring charge and lower operational losses. Q3 return on assets was 4.9% and return on equity 32.1%.
- Cash flow: For the first nine months, operating cash flow was $5.095 billion, investing cash flow was $950 million and financing cash flow was negative $7.750 billion. Cash and equivalents ended at $9.806 billion; including restricted cash, the total was $9.900 billion.
- Funding, debt and liquidity: Deposits were $60.353 billion, down from $62.782 billion at December 31, 2020, and represented 82% of funding sources. Borrowings totaled $12.760 billion, including $6.288 billion of securitized borrowings and $6.472 billion of senior unsecured notes. The company reported $14.7 billion of liquid assets, $3.2 billion of undrawn securitization capacity, $0.5 billion of undrawn revolving credit capacity and more than $25 billion of unencumbered Bank assets available to support liquidity.
- Capital and shareholder returns: Synchrony Financial reported a 17.1% common equity Tier 1 ratio; Synchrony Bank reported 18.6%. Both were reported as well-capitalized. During the nine months, the company repurchased $1.9 billion of common stock and paid $380 million in common dividends. The remaining authorization under the May 2021 repurchase program was $1.2 billion at quarter-end.
Material changes and significant items
- Customer payments remained unusually elevated: Q3 payment rates were approximately 260 basis points above the prior five-year Q3 average. Management attributed improving payment behavior partly to government stimulus and industry-wide forbearance, alongside lower receivables and delinquencies.
- In Q3, Synchrony agreed to sell the Gap-related loan portfolio. Approximately $3.5 billion was classified as held for sale; closing was expected in Q2 2022, subject to customary conditions. Management expected a gain on sale but did not provide a clear amount.
- The company announced new and extended partner relationships and acquired Allegro Credit in February 2021. It also reorganized teams in June to align activities with partners and consumer expectations.
- The filing reports no material change in risk factors from the 2020 Form 10-K. It describes a proposed settlement of up to $8.5 million in a bankruptcy-related class action, subject to court approval, and a securities lawsuit in which most claims were dismissed but one claim remained after appeal.
Outlook, risks and contingencies
The filing provides no specific earnings or credit-loss guidance. Management said economic conditions remained uncertain, including the future effects of COVID-19. Key risks include a reversal in payment and credit trends, CECL reserve estimation uncertainty, interest-rate and margin changes, funding costs and deposit growth, partner concentration and retention, securitization access, regulation, litigation, cybersecurity and operational disruption. A modeled immediate parallel 100-basis-point rate decrease was estimated to reduce net interest income by $66 million over the next 12 months; a 100-basis-point increase was estimated to add $22 million. The company reported compliance with debt covenants and no securitization early-amortization events.
Important facts for investors to verify
- How much of the earnings surge reflects sustainable credit performance versus reserve releases and unusually low provision expense.
- The Gap portfolio sale’s closing conditions, final sale price and gain, and the effect on future receivables and earnings.
- Whether elevated customer payment rates and low delinquencies persist as stimulus effects fade and seasonal credit trends develop.
- The adequacy of the $8.616 billion allowance under updated economic forecasts, and the impact of CECL capital transition rules as phase-in begins in 2022.
- Liquidity and capital capacity after substantial share repurchases, including any regulatory limits on dividends or buybacks.