Synchrony Financial — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Synchrony is a consumer finance company focused on private-label and co-branded credit cards, promotional financing, installment loans, and FDIC-insured deposits. It operates through Retail Card, Payment Solutions, and CareCredit and reports one business segment.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Interest income | $14.78 billion | $13.23 billion |
| Net interest income | $13.53 billion | $12.09 billion |
| Net interest income after retailer shares and loan-loss provision | $6.64 billion | $6.40 billion |
| Net earnings | $2.25 billion | $2.21 billion |
| Diluted earnings per share | $2.71 | $2.65 |
| Net interest margin | 16.10% | 15.85% |
| Cash from operating activities | $6.82 billion | $6.18 billion |
| Cash used for investing activities | $13.32 billion | $10.80 billion |
- Loan receivables grew 11.8% to $76.34 billion. Purchase volume rose 10.4% to $125.47 billion; active accounts totaled 71.9 million at year-end.
- Provision for loan losses increased 35.0% to $3.99 billion. The allowance rose to $4.34 billion, or 5.69% of receivables, from $3.50 billion, or 5.12%.
- Over-30-day delinquencies increased to 4.32% from 4.06%; the annual net charge-off rate increased to 4.57% from 4.36%.
- Deposits increased 20.0% to $52.06 billion, including $37.9 billion in direct deposits and $14.2 billion in brokered deposits. Deposits represented 72% of funding sources.
- Year-end cash and equivalents were $9.32 billion; total borrowings were $20.15 billion, down from $24.28 billion. Total assets were $90.21 billion and equity was $14.20 billion.
- The company reported a 2.7% return on assets, down from 2.9%, and a 16.5% return on equity, down from 19.0%.
- Fourth-quarter net earnings were $576 million, versus $547 million a year earlier; interest income was $3.95 billion and net interest income was $3.63 billion. The filing text does not provide a clear fourth-quarter loan-loss provision or margin figure.
Material changes and drivers
- Net earnings increased 1.7%, as higher net interest income from receivables growth was largely offset by higher credit-loss provision and operating costs, and lower other income.
- Retailer share payments rose 6.0% to $2.90 billion. Other income fell to $344 million from $392 million, as higher interchange revenue was more than offset by increased loyalty-program costs and lower other income.
- Other expense increased 4.7% to $3.42 billion, principally reflecting business growth and higher employee and information-processing costs. Prior-year EMV card reissue costs did not recur.
- Direct deposits grew 27.6%; brokered deposits declined. Synchrony prepaid the remaining $4.1 billion Bank Term Loan and repurchased $476 million of stock. It declared and paid $214 million in dividends, or $0.26 per share.
- The company’s CET1 ratio was 17.2% under Basel III transition rules and an estimated 17.0% fully phased-in; the Bank’s CET1 ratio was 15.4%. Both were reported above applicable well-capitalized thresholds.
Outlook, commentary, and risks
- Management expected receivables and interest income to grow in the near-to-medium term, supported by purchase volume, account growth, and partner engagement. It anticipated relatively stable yields and no significant near-term customer or merchant pricing changes other than benchmark-rate effects.
- Management expected modest increases in delinquencies, net charge-offs, and allowance coverage to continue in 2017; it did not anticipate significant underwriting changes. It also expected retailer-share payments, loyalty costs, and interchange revenue to grow, with loyalty costs expected to rise faster than interchange revenue.
- Key exposure is partner concentration: the five largest Retail Card programs generated 54% of interest and fees on loans and represented 50% of receivables. The company depends on partner promotion, partner sales, and renewals.
- Funding and liquidity depend on deposits, securitization markets, and unsecured borrowing. At year-end, the company reported $13.6 billion of liquid assets, $6.7 billion of undrawn committed facilities subject to conditions, and more than $25 billion of unencumbered Bank assets.
- Other material risks include consumer-credit deterioration, interest-rate and funding-cost mismatch, early amortization or disruption of securitizations, cybersecurity and third-party service-provider failures, regulatory limits on capital distributions, and changes in consumer-finance rules. A 100-basis-point immediate rate increase was estimated to increase 12-month net interest income by approximately $113 million, subject to model assumptions.
- The CFPB had issued two consent orders involving CareCredit and debt-cancellation sales practices. A CFPB enforcement office NORA letter in 2016 concerned credit-bureau reporting for sold accounts. The filing also describes TCPA litigation and other proceedings; management estimated reasonably possible losses for estimable legal and regulatory matters were immaterial, while noting outcomes could vary and estimates were not maximum exposure.
- Expected accounting change: the CECL credit-loss standard, effective for the company in fiscal years beginning after December 15, 2019, was expected to increase the allowance; the amount was not yet determined.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether higher delinquencies and forecast credit losses persist, and how they affect charge-offs, provision expense, and allowance adequacy.
- Trends in the largest partner programs, renewal terms, partner sales, and any changes to retailer-share economics.
- The durability and cost of deposit growth, access to securitization and other funding, and compliance with liquidity and capital requirements.
- Whether loyalty-program expenses continue to outpace interchange revenue and pressure earnings.
- Developments in CFPB and other regulatory matters, TCPA litigation, and implementation costs or effects of CECL.
- Cash-flow interpretation: operating cash flow was $6.82 billion, but investing activities used $13.32 billion, largely reflecting loan-receivables growth; assess funding needs alongside these figures.