Synchrony Financial — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. Synchrony is a consumer-finance company operating through Retail Card, Payment Solutions and CareCredit, primarily via Synchrony Bank. It reported $149.4 billion in purchase volume and $87.2 billion in loan receivables at year-end.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total interest income | $19.09 billion | $17.99 billion |
| Net interest income | $16.80 billion | $16.12 billion |
| Net earnings | $3.75 billion | $2.79 billion |
| Diluted earnings per share | $5.56 | $3.74 |
| Operating cash flow | $8.99 billion | $9.34 billion |
| Net interest margin | 15.78% | 15.97% |
| Net charge-off rate | 5.65% | 5.63% |
| 30+ day delinquency rate at year-end | 4.44% | 4.76% |
| Allowance for loan losses at year-end | $5.60 billion | $6.43 billion |
Year-end total assets were $104.8 billion, deposits $65.2 billion, borrowings $19.9 billion and equity $15.1 billion. Cash and equivalents were $12.1 billion. Deposits supplied 77% of total funding. Reported cash flows were $8.99 billion provided by operations, $261 million used in investing and $6.46 billion used in financing.
Changes versus the prior year
- Net earnings rose 34.3%, but included an $857 million reduction in loan-loss reserves associated with the Walmart portfolio sale; the sale-related reserve reduction totaled $1.13 billion for the year.
- Net interest income increased 4.2%, supported by higher average loan balances, while interest expense rose 22.5% as funding costs and deposit balances increased. Cost of funds rose to 2.66% from 2.30%.
- Loan receivables fell 6.4% to $87.2 billion, mainly after the October sale of $8.2 billion in Walmart-related receivables. Excluding that sale, remaining receivables grew 5.2%.
- Retailer-share payments increased 24.5% to $3.86 billion, reflecting growth and improved performance in relevant partner programs. Other expense rose 3.7% to $4.25 billion.
- The company repurchased $3.6 billion of common stock and paid $581 million in common dividends. It issued $750 million of perpetual preferred stock.
- Fourth-quarter net earnings were $731 million versus $783 million in Q4 2018; net interest income was $4.03 billion versus $4.33 billion.
Outlook, risks and unusual items
- Management expected 2020 net charge-offs to decrease slightly from 2019, primarily reflecting the Walmart portfolio sale, and expected near-term credit trends in the ongoing portfolio to remain relatively stable.
- Management anticipated higher 2020 loan-loss provision expense, in part because 2019 included Walmart-related reserve releases and because of the adoption of CECL on January 1, 2020. It estimated CECL would increase the allowance by about $3.0 billion, or 54%, and reduce retained earnings by approximately $2.3 billion. The estimated CET1 impact was about 60 basis points, phased in through 2023.
- Management expected excess liquidity from the Walmart sale proceeds to be deployed in the first half of 2020; holding it temporarily was expected to reduce net interest margin. It expected ongoing-program retailer-share payments to rise, substantially offset by the Walmart sale’s effect.
- Liquidity included $17.3 billion of liquid assets, $5.6 billion of undrawn securitization capacity and $0.5 billion under an unsecured revolver. The company also reported more than $25 billion of unencumbered Bank assets. No securitization early-amortization event had occurred.
- Capital ratios remained above regulatory minimums: company CET1 was 14.1%; the Bank’s was 14.3%. Future dividends and buybacks remain subject to regulatory review and capital, liquidity and other conditions.
- Key risks include U.S. consumer-credit and economic exposure, funding-cost and interest-rate sensitivity, dependence on partners and large Retail Card programs, credit-loss estimation, competition, cybersecurity and third-party service-provider risks, and regulation. The five largest ongoing Retail Card programs represented 47% of interest and fees on loans, excluding Walmart.
- The filing discusses a CFPB information demand concerning deferred-interest marketing and servicing, consumer and securities-related litigation, and regulatory matters. Management said estimated reasonably possible losses it could quantify were immaterial, but noted outcomes could still affect results or reputation. The filing also identifies contingent indemnification exposure to GE under the tax-sharing agreement.
Important facts for investors to verify
- How much of the earnings increase reflected recurring operating performance versus Walmart-related reserve releases, and how the portfolio sale affects future revenue and credit metrics.
- The actual CECL allowance, retained-earnings and capital effects after adoption, compared with management’s estimates.
- Credit performance in the remaining portfolio, including charge-offs, delinquencies, allowance adequacy and customer FICO mix.
- Partner concentration, renewal terms and performance—particularly Lowe’s, PayPal, Gap, JCPenney and Sam’s Club—and the impact of new and extended agreements.
- Deposit growth, funding costs, securitization access and liquidity, including upcoming debt and deposit maturities.
- Developments in CFPB, litigation and other regulatory matters, and any implications for deferred-interest products or capital returns.