Synchrony Financial — Q1 2016 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2016, Synchrony Financial operated as a stand-alone savings and loan holding company following its November 2015 separation from GE. It provides consumer credit and deposit products, primarily in the United States, through Retail Card, Payment Solutions and CareCredit. The unaudited results are not necessarily indicative of full-year performance.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net earnings | $582 million | $552 million; up 5.4% |
| Diluted EPS | $0.70 | $0.66 |
| Interest income | $3.520 billion | $3.150 billion; up 11.7% |
| Net interest income | $3.209 billion | $2.875 billion; up 11.6% |
| Net interest income after retailer share and loan-loss provision | $1.636 billion | $1.528 billion |
| Provision for loan losses | $903 million | $687 million; up 31.4% |
| Other income / other expense | $92 million / $800 million | $101 million / $746 million |
| Net interest margin | 15.76% | 15.79% |
| Return on assets / return on equity | 2.8% / 18.1% | 3.0% / 20.8% |
| Operating cash flow | $1.500 billion | $1.665 billion |
Purchase volume was $27.0 billion, up 16.6%, and average active accounts increased 7.4% to 66.1 million. Period-end loan receivables were $65.8 billion, up 13.0% year over year but down 3.6% from December 31, 2015, primarily reflecting normal seasonality. Platform revenue, a company-defined non-GAAP measure, was $2.920 billion versus $2.581 billion. Retail Card revenue was $2.032 billion, Payment Solutions $454 million and CareCredit $434 million.
Asset quality: the net charge-off rate increased to 4.70% from 4.53% a year earlier; 30-plus-day delinquencies were 3.85% versus 3.79%, while 90-plus-day delinquencies were 1.84% versus 1.81%. Past-due balances declined from year-end to $2.5 billion. The allowance was $3.620 billion, or 5.50% of receivables, compared with $3.497 billion and 5.12% at year-end; management attributed the increase in coverage partly to seasonal patterns.
Balance sheet, funding and liquidity
At March 31, 2016, total assets were $81.656 billion, deposits $44.977 billion, borrowings $20.476 billion and equity $13.204 billion. Cash and equivalents were $12.500 billion. Direct deposits were $32.5 billion and brokered deposits $12.5 billion. The company reported $14.9 billion of liquid assets, $7.3 billion of undrawn committed securitization capacity and more than $25 billion of unencumbered Bank assets available as potential liquidity sources. These facilities are subject to conditions.
Financing cash flow was negative $2.526 billion, including $2.651 billion of third-party debt repayments and $1.292 billion of net deposit growth. Investing cash flow was positive $1.201 billion, including a $1.558 billion net decrease in loan receivables. Cash increased $175 million during the quarter. The company prepaid $2.7 billion of its Bank Term Loan during the quarter and repaid the remaining $1.5 billion on April 5, 2016, after quarter-end. Company and Bank capital ratios exceeded applicable well-capitalized thresholds; Company CET1 was 18.1% under transition rules and estimated at 17.5% fully phased-in.
Changes, outlook, risks and unusual items
- Earnings growth reflected higher net interest income from portfolio growth, partly offset by the larger loan-loss provision and higher operating expenses. Other expense rose 7.2%, including increased employee, marketing and information-processing costs; loyalty program costs also increased.
- Management described asset quality as relatively stable and cited general improvement in the U.S. economy. No quantified earnings or financial guidance was provided in the filing. The company continued investing in direct banking and announced or extended several partner programs.
- Key risks include consumer credit deterioration, funding costs and access, interest-rate exposure, partner concentration and program economics, securitization early-amortization triggers, regulatory scrutiny, cyber and third-party service risks, and limits on Bank distributions. No early-amortization event had occurred at quarter-end. A 100-basis-point immediate increase in rates was estimated to raise next-12-month net interest income by approximately $156 million.
- Legal and regulatory matters include CFPB-related requirements and investigations concerning credit reporting, as well as TCPA class actions. Previously required CareCredit and debt-cancellation customer payments and remediation were completed in 2015. Management estimated reasonably possible losses for matters it could estimate as immaterial, while noting outcomes could differ and affect a particular period.
- The company adopted a debt-issuance-cost presentation standard in January 2016, reclassifying certain costs as deductions from related liabilities. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether portfolio growth can continue to outpace credit losses, particularly given higher provision expense and charge-offs.
- How seasonality affects delinquency, allowance coverage and receivables in subsequent quarters.
- Whether deposit growth, funding costs and the completed Bank Term Loan repayment preserve liquidity and margins.
- The economics of retailer share arrangements, promotional financing, loyalty costs and partner concentration.
- Developments in CFPB, credit-reporting and TCPA matters, including any costs beyond amounts accrued or estimated.