Synchrony Financial — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Synchrony is a U.S.-focused consumer finance company operating through one segment and offering credit products through Retail Card, Payment Solutions and CareCredit.
Financial performance and condition
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net earnings | $1.385 billion | $3.747 billion | Down 63.0% |
| Diluted EPS | $2.27 | $5.56 | Down |
| Net interest income | $14.402 billion | $16.799 billion | Down 14.3% |
| Net interest margin | 14.29% | 15.78% | Down 149 basis points |
| Provision for credit losses | $5.310 billion | $4.180 billion | Up 27.0% |
| Other income | $405 million | $371 million | Up |
| Other expense | $4.055 billion | $4.245 billion | Down 4.5% |
| Loan receivables, year-end | $81.867 billion | $87.215 billion | Down 6.1% |
| Deposits, year-end | $62.782 billion | $65.154 billion | Down 3.6%; 80% of total funding sources |
| Total borrowings, year-end | $15.775 billion | $19.866 billion | Down |
| Operating cash flow | $7.487 billion | $8.990 billion | Down |
- Purchase volume was $139.1 billion, down from $149.4 billion. Average active accounts fell to 67.1 million from 75.7 million.
- Credit indicators improved during 2020: delinquencies over 30 days were 3.07% at year-end versus 4.44%; the net charge-off rate was 4.58% versus 5.65%.
- The allowance for credit losses was $10.265 billion, or 12.54% of receivables, compared with $5.602 billion and 6.42% in 2019. Adoption of CECL added $3.0 billion to reserves at January 1, 2020; management also cited COVID-19-related expected losses.
- Year-end liquidity included $18.3 billion of liquid assets, $4.9 billion of undrawn securitization capacity and $0.5 billion available on an unsecured revolving facility. The Bank also had more than $25 billion of unencumbered assets available to support liquidity.
- Common equity Tier 1 was 15.9% for Synchrony Financial and 16.5% for Synchrony Bank at year-end, including the elected CECL regulatory-capital transition treatment. Both met applicable well-capitalized requirements.
Material changes and notable items
- Results reflected COVID-19 effects on purchases, balances and interest income, as well as the prior-year Walmart portfolio sale. The Walmart sale also made 2019 comparisons favorable through a $857 million after-tax reserve reduction.
- Net interest income declined as lower average loan balances, lower benchmark rates and COVID-19-related customer relief reduced interest and fees; lower funding costs partly offset those impacts. Interest expense fell 27.3% to $1.665 billion.
- In 2020, Synchrony provided short-term minimum-payment deferrals to about 2.1 million customers covering $3.9 billion of receivables. Interest and late-fee waivers reduced income by $88 million. All enrolled accounts had exited these programs by year-end.
- The company recorded $87 million of restructuring charges, including $46 million for lease and other asset impairments and $41 million in employee-related costs. It said it did not expect further material charges from this plan.
- Cash returned to shareholders included $520 million of common dividends and approximately $1.0 billion of common-stock repurchases; repurchases were temporarily suspended during 2020. Preferred dividends were $42 million.
- The five largest Retail Card programs—Gap, JCPenney, Lowe’s, PayPal and Sam’s Club—generated 51% of interest and fees on loans and represented 47% of receivables. Lowe’s and PayPal each exceeded 10% of interest and fees on loans.
- KPMG issued unqualified opinions on the financial statements and internal controls. The allowance for credit losses was identified as a critical audit matter due to model complexity and significant estimation uncertainty.
Outlook, risks and contingencies
- Management expected loan receivables and interest income to increase in 2021 versus 2020, with slowing payment rates and higher purchase volume in the second half contributing to asset growth. It anticipated delinquencies and net charge-offs could rise in the second half of 2021 as customer payment behavior normalized, partly offset by government stimulus. These expectations were expressly uncertain and COVID-19-dependent.
- Management expected lower reserve builds in 2021 than in 2020, while cautioning that a longer or worse-than-expected downturn could require additional provisions. Retailer-share payments were expected to decline in absolute terms in 2021, primarily reflecting program performance, partly offset by program growth.
- Management expected excess liquidity to remain elevated through the first half of 2021 and be deployed as receivables grew, potentially supporting margin improvement in the second half. The Board authorized up to $1.6 billion of repurchases through year-end 2021, subject to capital plans, market conditions, regulatory restrictions and approvals.
- Key risks include an uncertain COVID-19 recovery and consumer credit performance; dependence on major partners and partner promotion; concentration in U.S. consumer credit; credit-loss estimation and CECL assumptions; funding access, deposit growth and credit ratings; securitization triggers; interest-rate and benchmark-transition risk; cybersecurity and third-party service providers; and regulatory, litigation and consumer-protection developments.
- Senior unsecured debt ratings had negative outlooks. No securitization early-amortization event had occurred at year-end. The filing described pending litigation and regulatory matters; management estimated reasonably possible losses that it could estimate were immaterial, while noting actual outcomes could be material in a particular period. The CFPB notified Synchrony in January 2021 that it did not then intend to recommend enforcement action over its deferred-interest inquiry.
Important facts for investors to verify
- How much of the 2021 recovery in purchase volume, receivables and interest income occurred, and whether the timing matched management’s expectations.
- Whether delinquency, charge-off and reserve trends normalized as stimulus and customer relief changed; assess CECL allowance assumptions against subsequent credit performance.
- Partner concentration, renewal terms and performance—especially for the five largest Retail Card programs—and the economics of newer programs.
- Liquidity and funding mix, deposit retention and costs, debt maturities, credit ratings, and securitization capacity and triggers.
- Regulatory and legal developments, capital-distribution restrictions, and the conditions attached to the announced 2021 repurchase authorization.