Synchrony Financial — Q3 2020 Form 10-Q
Business context and reporting period. Synchrony is a U.S.-focused consumer finance company offering credit cards, promotional financing, installment loans and deposit products through retail, Payment Solutions and CareCredit platforms. This filing covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless otherwise stated.
Financial performance and condition
| Metric | Q3 2020 | Nine months 2020 |
|---|---|---|
| Net earnings | $313 million, down 70.4% | $647 million, down 78.5% |
| Diluted EPS | $0.52, versus $1.60 | $1.04, versus $4.40 |
| Net interest income | $3.46 billion, down 21.2% | $10.74 billion, down 15.9% |
| Provision for credit losses | $1.21 billion, up 18.7% | $4.56 billion, up 48.2% |
| Net interest margin | 13.80%, versus 16.29% | 14.17%, versus 16.04% |
| Net charge-off rate | 4.42%, versus 5.35% | 5.05%, versus 5.80% |
For the quarter, interest income was $3.84 billion and interest expense was $380 million. Earnings before tax were $412 million; the effective tax rate was 24.0%. Other income rose to $131 million, while other expense was nearly flat at $1.07 billion.
- Credit and revenue activity: Period-end loan receivables were $78.5 billion, down 5.6% year over year and 10.0% from December 31, 2019. Q3 purchase volume was $36.0 billion, down from $38.4 billion; average active accounts were 64.3 million versus 76.7 million.
- Credit quality and reserves: Loans more than 30 days past due were 2.67% of receivables, versus 4.47% a year earlier. The allowance was $10.15 billion, or 12.92% of receivables, compared with $5.61 billion and 6.74% a year earlier.
- Cash flow: Nine-month cash provided by operating activities was $5.40 billion, versus $6.65 billion. Investing activities provided $2.76 billion, versus using $942 million; financing activities used $7.18 billion, versus $4.37 billion. Cash and equivalents, including restricted cash, ended the period at $13.63 billion. The filing provides nine-month, not standalone Q3, cash flow figures.
- Funding, debt and liquidity: Deposits were $63.5 billion, about 80% of funding sources, down 2.5% from year-end 2019. Total borrowings were $15.8 billion, versus $19.9 billion at year-end; senior unsecured notes were $8.0 billion. Liquid assets were $21.4 billion. Additional disclosed capacity included $4.9 billion under securitization facilities, $0.5 billion under an unsecured revolver and more than $25 billion in unencumbered Bank assets.
- Capital: Synchrony Financial’s common equity Tier 1 ratio was 15.8%, versus 14.1% at year-end 2019; Synchrony Bank’s was 16.6%, versus 14.3%. Both were reported as well-capitalized. These ratios reflect the regulatory transition treatment for CECL.
Material changes versus the prior comparable period
- Lower loan yields and receivables, COVID-19-related declines in activity and the 2019 Walmart consumer portfolio sale reduced interest and fee income. The sale accounted for about 11% of the year-over-year decline in interest and fees on loans for the nine-month period.
- Lower benchmark rates and reduced borrowings cut interest expense, partly offsetting reduced interest income.
- CECL adoption on January 1, 2020 increased the allowance by $3.0 billion and reduced retained earnings by $2.3 billion after related tax effects. CECL contributed $650 million to nine-month provision expense compared with prior guidance.
- The Walmart portfolio sale also affected comparisons in retailer-share arrangements, expenses and prior-year reserves. The Yamaha portfolio sale was completed in January 2020.
- Q3 included an $89 million pretax restructuring charge: $45 million of noncash lease and other asset impairments and $44 million of employee-related costs. Management did not expect further material charges under the plan.
Outlook, commentary and risks
- Management said January 2020 guidance could no longer be relied upon because the duration and magnitude of COVID-19 effects were uncertain. It expected pressure on interest-income growth and anticipated delinquencies and net charge-offs could rise through the remainder of 2020 and into 2021.
- Synchrony had provided temporary payment deferrals and interest or fee waivers. About 2.0 million accounts, representing $3.8 billion in balances at enrollment, entered payment-forbearance programs; approximately 0.1 million accounts and $227 million remained in them at September 30. Management reported higher delinquency incidence after program exit than among accounts not enrolled. Interest and fee waivers reduced income by $84 million in the first nine months.
- The company suspended common-stock repurchases in response to COVID-19. It had repurchased approximately $1.0 billion of shares in Q1 and paid $392 million in common dividends during the first nine months. Future dividends remain at the Board’s discretion.
- Key uncertainties include pandemic severity and duration, unemployment and consumer spending, credit-loss estimates, deposit growth and funding costs, partner and retailer concentration, interest-rate changes, securitization access, cyber and operational disruptions, regulation and litigation. Senior unsecured ratings had negative outlooks from S&P and Fitch.
- The CFPB issued a September 2020 Notice of Opportunity to Respond and Advise concerning its review of deferred-interest promotion marketing and servicing. The filing also describes pending litigation and regulatory matters; management estimated reasonably possible losses it could estimate to be immaterial, while noting outcomes remain uncertain.
Important facts for investors to verify
- How post-forbearance payment performance, unemployment and the economic outlook affect delinquencies, charge-offs and the $10.15 billion CECL allowance.
- Whether purchase volume, loan balances and interest income stabilize, including the continuing effects of the Walmart and Yamaha portfolio dispositions.
- Whether the reduced net interest margin and earnings remain under pressure, and how lower funding costs compare with lower asset yields.
- Deposit stability, liquidity availability, debt maturities and access to securitization and unsecured funding markets.
- Progress and costs of the restructuring plan, the outcome of the CFPB matter and other litigation, and any changes to dividends or share repurchases.