Synchrony Financial — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022 unless otherwise noted. Synchrony is a U.S.-focused consumer finance company offering credit cards, installment loans, and FDIC-insured deposits through Synchrony Bank. It operates as one business segment.
Financial and operating performance
Dollar amounts are in billions unless otherwise stated.
- Earnings: Net earnings were $601 million, down 35.5% from $932 million; diluted EPS was $1.35 versus $1.77. Earnings before tax were $790 million versus $1.233 billion.
- Interest income and margin: Interest income rose 19.0% to $4.786 billion, while interest expense increased to $735 million from $233 million. Net interest income grew 6.9% to $4.051 billion; net interest margin declined to 15.22% from 15.80%.
- Credit costs: Provision for credit losses increased to $1.290 billion from $521 million. Net charge-offs were $1.006 billion, and the net charge-off rate rose to 4.49% from 2.73%. The allowance was $9.517 billion, or 10.44% of period-end receivables, versus 10.96% a year earlier.
- Portfolio and activity: Period-end loan receivables were $91.129 billion, up 15.5% year over year and down 1.5% from year-end. Purchase volume increased 2.6% to $41.557 billion; average active accounts were 69.5 million versus 70.1 million. Over-30-day delinquencies rose to 3.81% from 2.78% a year earlier.
- Other earnings items: Retailer share arrangements declined 16.9% to $917 million. Other income fell to $65 million from $108 million; other expense rose 7.7% to $1.119 billion. The effective tax rate was 23.9%, compared with 24.4%.
- Cash flow: Operating activities provided $1.886 billion, investing activities provided $692 million, and financing activities provided $2.912 billion. Cash and equivalents, including restricted amounts, ended at $15.920 billion.
- Funding and liquidity: Deposits were $74.425 billion, up from $71.735 billion at year-end, and represented 83% of funding sources. Total borrowings were $14.934 billion. Liquid assets were $18.7 billion; additional reported capacity included $2.5 billion under securitization programs, $0.5 billion under a revolving facility, and more than $25 billion of unencumbered Bank assets.
- Capital and shareholder returns: Company common equity Tier 1 was 12.5% and total risk-based capital was 15.4%; both the Company and Bank met well-capitalized requirements. Synchrony repurchased $400 million of common stock and paid $100 million in common dividends and $11 million in preferred dividends. Remaining repurchase authorization was $300 million.
Material changes versus comparable periods
- Profitability weakened substantially as credit-loss provision and funding costs rose, despite growth in interest income and net interest income.
- Credit performance deteriorated year over year: delinquencies and charge-off rates increased. Management cited lower customer payment rates, a reserve build, and possible economic effects from industry credit contraction.
- Average interest-bearing funding costs increased to 3.43% from 1.24%, reflecting higher benchmark rates and funding liabilities. Deposit growth supported funding, but deposit rates also increased.
- Loan receivables and purchase volume grew year over year, with activity growth across the principal sales platforms. Prior-year comparisons were affected by the 2022 sales of the Gap and BP portfolios, particularly in Corp, Other.
- Effective January 1, 2023, adoption of ASU 2022-02 reduced the allowance by $294 million and increased retained earnings by $222 million, net of tax.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical earnings or credit guidance. Management says payment rates have moderated from elevated levels and expects delinquencies and charge-offs to continue moving toward historical averages; estimates reflect uncertain macroeconomic conditions and potential credit contraction.
- Seasonality typically reduces receivables in the first half of the year and affects delinquency, charge-off, and allowance measures. Management also noted that lower customer payment rates partly offset seasonal receivables declines.
- Key risks include consumer credit deterioration, CECL estimate uncertainty, funding costs and deposit retention, interest-rate mismatches, partner concentration and performance, capital and liquidity requirements, cybersecurity and operational disruptions, and regulatory or legal matters. The filing states there were no material changes to the risk factors in the 2022 Form 10-K.
- A securities-litigation settlement for $34 million was agreed on April 3, 2023 and preliminarily approved by the court on April 12, after quarter-end. Management estimated reasonably possible losses for legal and regulatory matters it could estimate as immaterial, but noted outcomes may differ.
- Synchrony reported more than $100 billion in average consolidated assets based on a four-quarter average and anticipates becoming subject to enhanced prudential standards after applicable transition periods.
- The filing reports no material off-balance-sheet arrangements, no default under credit facilities, and compliance with unsecured-note covenants. Disclosure controls were effective as of March 31, 2023.
Important facts for investors to verify
- Whether subsequent delinquency, charge-off, and payment-rate trends confirm management’s expectation of normalization or indicate further credit deterioration.
- How credit-loss provisions and allowance coverage evolve, including the assumptions in the CECL forecast and the impact of the 2023 accounting-standard adoption.
- Whether net interest income can withstand higher deposit and borrowing costs, changing benchmark rates, and potential margin compression.
- Deposit composition, pricing, uninsured balances (estimated at $5.3 billion), and continued access to securitization and other funding markets.
- Progress and final approval/payment terms of the $34 million securities-litigation settlement, and any material developments in other proceedings.
- The timing and consequences of enhanced prudential standards, and any resulting effect on capital distributions, growth, or operating costs.