Synchrony Financial — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Synchrony is a U.S.-focused consumer finance company operating through Retail Card, Payment Solutions and CareCredit; it also gathers FDIC-insured deposits through Synchrony Bank. The company became independent of GE in November 2015.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | $3.796 billion | $3.392 billion | $10.831 billion | $9.719 billion |
| Net interest income | $3.481 billion | $3.103 billion | $9.902 billion | $8.885 billion |
| Provision for loan losses | $986 million | $702 million | $2.910 billion | $2.129 billion |
| Net earnings | $604 million | $574 million | $1.675 billion | $1.667 billion |
| Diluted EPS | $0.73 | $0.69 | $2.01 | $2.00 |
- Q3 earnings rose 5.2%; nine-month earnings were nearly flat. Higher net interest income was substantially offset by increased loan-loss provision and other expenses, and lower nine-month other income.
- Net interest margin was 16.27% for Q3 and 15.94% for the nine months, up from 15.97% and 15.81%, respectively. Q3 return on assets was 2.8% and return on equity 17.4%; both were lower year over year for the nine-month period (2.7% and 16.7%, versus 3.0% and 19.7%).
- At September 30, loan receivables were $70.644 billion, up 11.2% year over year. Purchase volume was $31.615 billion in Q3 and $90.099 billion year to date; average active accounts were 66.6 million and 66.2 million, respectively.
- Credit indicators weakened: over-30-day delinquencies were 4.26%, versus 4.02% a year earlier; Q3 net charge-offs were 4.38%, versus 4.02%, and nine-month net charge-offs were 4.51%, versus 4.37%. The allowance was $4.115 billion, or 5.82% of receivables, compared with 5.31% a year earlier.
- At quarter-end, total assets were $87.159 billion, deposits $49.815 billion, total borrowings $20.167 billion and equity $13.981 billion. Deposits were 71% of total funding sources; direct deposits reached $36.2 billion. The company repaid the remaining $4.1 billion Bank Term Loan during the nine months.
- Liquidity included $16.4 billion of liquid assets, $7.1 billion of undrawn committed facilities and more than $25 billion of unencumbered Bank assets. Company and Bank capital ratios exceeded applicable well-capitalized requirements; Company CET1 was 18.2% under transition rules and an estimated 17.9% fully phased-in.
- Nine-month operating cash flow was $4.787 billion, investing cash flow was negative $5.151 billion and financing cash flow was $1.627 billion. Cash and equivalents increased $1.263 billion to $13.588 billion.
Material changes and notable items
- Loan growth drove higher interest income, while loan-loss provision rose 40.5% in Q3 and 36.7% year to date, reflecting receivables growth and a higher reserve build.
- Retailer share payments increased 4.7% in Q3 and 4.3% year to date. Other income was flat in Q3 and down 15.1% year to date, including the absence of a prior-year $20 million loan-portfolio sale gain and higher loyalty costs.
- Other expense increased 1.9% in Q3 and 4.3% year to date. Employee and technology costs rose; lower marketing and other costs, including nonrecurrence of prior-year EMV re-issue costs, partly offset the increase.
- Deposits increased 14.9% from December 2015, primarily reflecting 21.9% growth in direct deposits, partly offset by lower brokered deposits. The company began a $952 million share repurchase authorization and paid its first $0.13-per-share quarterly dividend; Q3 repurchases were $238 million.
- New and extended partner programs included agreements across all three platforms; the Google Store program launched in October 2016. The filing does not provide quantified earnings guidance.
Outlook, risks and contingencies
- Management reported that delinquency trends and broader consumer and portfolio factors increased its forecast of net charge-offs over the next 12 months, prompting higher allowance coverage. It expects to maintain capital and liquidity above regulatory minimums while supporting growth.
- Key risks include consumer-credit deterioration, partner concentration and retention, funding costs and deposit growth, interest-rate mismatches, securitization access and early-amortization triggers, regulatory oversight, cyber and vendor risks, and limits on dividends or repurchases. A 100-basis-point immediate rate increase was estimated to raise next-12-month net interest income by approximately $178 million.
- No securitization early-amortization event had occurred. The company reported no significant off-balance-sheet arrangements and was compliant with debt covenants.
- Legal and regulatory matters include a CFPB NORA concerning credit-bureau reporting and a proposed settlement of a TCPA class action. Management estimated reasonably possible losses it could estimate to be immaterial, while cautioning that outcomes could affect results or reputation. Earlier CFPB-related customer refunds and remediation were completed.
- The filing identifies allowance for loan losses, impairment, income taxes and fair value as critical accounting estimates. It also reports adoption of a debt-issuance-cost presentation standard and ongoing evaluation of new revenue and credit-loss accounting standards.
Important facts for investors to verify
- Whether delinquency, charge-off and reserve trends continue to worsen, and whether the 5.82% allowance remains adequate for forecast losses.
- Whether deposit growth remains sufficient and cost-effective, particularly as direct banking investments expand and interest rates change.
- Partner-program performance, renewal terms and retailer-share costs, given reliance on partner channels and the potential effect of partner concentration.
- Available liquidity and securitization capacity under stress, including early-amortization triggers and the terms of undrawn facilities.
- Regulatory and litigation developments, and any restrictions affecting capital distributions, dividends or the share repurchase program.