Synchrony Financial — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Synchrony provides consumer credit and deposit products, primarily through retail, payment-solutions and CareCredit partner programs. The quarter includes the initial economic effects of COVID-19 and adoption of CECL.
Financial performance and condition
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Interest income | $4.407 billion | Down 7.9% from Q1 2019 |
| Net interest income | $3.890 billion | Down 8.0%; net interest margin 15.15%, versus 16.08% |
| Provision for credit losses | $1.677 billion | Up $818 million, or 95.2% |
| Net earnings | $286 million; diluted EPS $0.45 | Down 74.2%; Q1 2019 earnings were $1.107 billion and diluted EPS was $1.56 |
| Purchase volume | $32.042 billion | Down 1.4%; late-quarter volume fell approximately 26% year over year during the final two weeks |
| Loan receivables | $82.469 billion at March 31 | Up 2.6% year over year; down from $87.215 billion at December 31, 2019 |
| Credit measures | 30+ day delinquencies 4.24%; net charge-off rate 5.36% | Down from 4.92% and 6.06%, respectively, in Q1 2019 |
| Allowance for credit losses | $9.175 billion; coverage ratio 11.13% | Allowance was $5.942 billion at March 31, 2019; Q1 2020 reflects CECL adoption and COVID-related estimates |
| Deposits and borrowings | Deposits $64.615 billion; borrowings $17.248 billion | Deposits were 79% of total funding sources; deposits declined 0.8% from year-end |
| Cash flows | Operating $1.537 billion; investing $3.887 billion; financing use $4.287 billion | Operating cash flow was $2.289 billion in Q1 2019 |
Other expense declined 3.9% to $1.002 billion, while the efficiency ratio rose to 32.7% from 31.0%. Average assets were $100.722 billion and average equity $12.592 billion. Return on assets was 1.1%, versus 4.3%; return on equity was 9.1%, versus 30.4%.
Material changes and unusual items
- Synchrony adopted CECL on January 1, 2020, recording a $3.021 billion initial increase to the allowance for credit losses and a $2.276 billion reduction to retained earnings after related tax effects. Q1 provision included $101 million attributable to ongoing CECL implementation compared with prior guidance.
- The earnings comparison was materially affected by the 2019 Walmart consumer portfolio sale, including a $522 million prior-year reserve release. The sale also reduced current-period loan interest income. Synchrony completed the Yamaha portfolio sale in January 2020.
- The company repurchased approximately $984 million of common stock and paid $135 million in common dividends during the quarter. It suspended the remaining $366 million of authorized repurchases in response to COVID-19.
- Cash and equivalents were $13.704 billion. The company reported $19.2 billion of liquid assets, $5.1 billion of undrawn securitization capacity, $0.5 billion under an unsecured revolver, and more than $25 billion of unencumbered Bank assets available as potential liquidity.
- Company and Bank capital ratios remained above applicable well-capitalized thresholds. The company elected regulatory-capital relief for CECL, delaying much of its regulatory capital impact for two years, followed by a three-year phase-in beginning in 2022.
Outlook, commentary and risks
Management stated that the 2020 expectations and guidance given on January 24, 2020 could no longer be relied upon because the duration and magnitude of COVID-19 effects were unknown. It expected weaker purchase volume and slower loan and interest-income growth, temporary interest, fee or minimum-payment relief for affected customers, and higher delinquencies, net charge-offs, allowance and provision if unemployment and economic conditions deteriorated. Government stimulus and customer revolving balances could partially offset some effects.
Key risks include the uncertain course of COVID-19 and consumer credit performance; partner concentration and partner financial health; funding costs, liquidity and access to securitization or capital markets; interest-rate and margin changes; and operational, cyber, regulatory and litigation risks. No early-amortization event had occurred in the securitization trusts, and the company reported compliance with its debt covenants. Management considered reasonably possible losses in legal and regulatory matters that it could estimate to be immaterial, while noting outcomes could vary.
Most important facts for investors to verify
- How actual purchase volume, receivables growth and interest income compare with management’s COVID-19 expectations as restrictions and economic conditions evolve.
- Whether the $9.175 billion credit-loss allowance adequately reflects CECL forecasts, unemployment, payment relief and subsequent delinquency and charge-off trends.
- Deposit stability, funding costs, available liquidity and securitization excess spreads under stressed conditions.
- The effect of the Walmart portfolio sale and prior-year reserve release when assessing underlying year-over-year earnings trends.
- Capital levels and distributions, including the CECL regulatory-capital transition and the status of suspended share repurchases.