Synchrony Financial — 2024 Q1

Yes. Thanks for the question, Ryan. So again, I think we have been somewhat clear that we believe charge-offs when you look at the delinquency trend as we entered into 2024 that charge-offs will peak in the first half of the year and decline. I think you see that, well, certainly in the end in the first quarter. I think when you see the results in April when we put out our 8-K, you will see delinquencies down on both a 30-plus and 90-plus basis relative to what we just reported here today. So I think when you start looking at that, you look at the seasoning of the credit actions that we took really in the second and third quarter of last year. We feel good that the charge-off rate will decline in the back half of the year.

Yes, Ryan, as I look the RSA trend, the first quarter was it that clearly, when you look at year-over-year on the higher net charge-offs, which was a substantial amount of the decrease in the RSA partially offset -- about 1/3 of it offset by really NII growth. And the NII was a little bit suppressed because you had the last full impact on your interest-bearing liabilities. If I take a step back for a second and think about the core business, Ryan, I believe we're at a point where we have peaked on assuming no rate increases and peaked on our interest-bearing liability costs as I talked about the net charge-off rate peaking in the first half, you should see an upward bias than in the RSA as we step through the remaining quarters of the year, the other variable will be volume. So even if you looked on a linked quarter basis, volume being down and being down a little bit year-over-year for some of the RSA clients will play a factor, but it should trend upwards as we step through, given the peaking nature of the interest-bearing liability costs and charge-offs.

Yes, Sanjay, maybe I'll start on this and then pass it to Brian. I mean, look, I think generally, we're pretty pleased with the growth that we're seeing in the business. I think the consumer is still in good shape. Obviously, the job market is very strong, that's helping. But you are seeing a lot of that spend being driven by the higher end consumer -- the higher income consumer. And that's actually not a bad thing. I think they're benefiting obviously job market, house prices are up, stock prices are up. On the lower end, that's where you're seeing some of the slowdown. And from a credit perspective, that's not the worst thing. I think we see people being prudent. I think they're managing to a budget, they're managing to their cash flows. They're not overextending. So I think there's a positive read-through from a credit perspective on that. I don't know, Brian, if you want to add anything.

The first thing, Sanjay, I want to remind people, we're comping off of what I'd say is a really strong quarter last year. So when you look at a 2% up, that is very strong. It's a record for our company for the first quarter. Brian highlighted some of the differences, I think you're plus 8% on the higher [freight cost], down a little bit year-over-year in lower [freight cost]. We are seeing most certainly the consumer step back in certain bigger ticket areas, right, either going down in transaction values, which I think you see reflected in the home and auto purchase line being down and really in lifestyle. But what you see strengths in those pockets.

Yes, Sanjay. So we're not surprised this was the second question, we thought it might be the first. Obviously, we are waiting on the outcome of litigation that is uncertain but we're executing our plan. We said from the beginning that we weren't going to wait for the outcome on litigation, just given the uncertainty. So we began the implementation of our changes in December. We're already over 60% done with those. We've got to send out the changes in terms, et cetera. The vast majority of those will be done in the next 2 months. So look, we're executing the plan. In terms of timing, our base case was October 1 that assumed an injunction. With that said, it will be extremely operationally challenging to get this implemented in May, but we're preparing for that as well as a scenario.

Yes. Thanks, Terry. I'll take this and see if Brian has a follow-on. I think what you should expect to see is beginning an impact in a little bit in the second quarter, more in the third quarter with regard to the mitigants and then it continues to build from there. I've gotten the question in the past, and we really hadn't talked very much about it. When you think about how the APR phases in for the consumer. So when the APR becomes effective, which again, think about that as 60 days after notice, you'll begin to feel the effects of that, I'd say 50% in the first 12 months if you roll that out, 75% in 24 months. So you begin to fill that out. Now some of the other fees that come in and some of the other policy changes, they are more immediate when it comes in through there.

Terry, to be honest with you, we have excess liquidity this quarter. I go back and attribute that really to the strength of our deposit franchise. I think when you just look at the core retail deposits were up $3.4 billion from the end of last year. And then you put the seasonal nature of the cash that kind of comes in, it served us well as we purchased Ally for $2 billion, but we also got $600 million coming in from the sale of the Pets Best franchise. So I'd say liquidity is kind of peaking. So I think if you think about margin and the effects on margins, you step through, net interest margin is probably at its low point for the year in the first quarter, given all that excess liquidity.

Great, great. Thanks for the question, John. So when I think about year-over-year net interest margin, right, it's down 67 basis points. The biggest driver of that if I do net funding costs, so think about your interest-bearing liability costs offset by your income coming off the investment portfolio, that's about 88 points of decline that came off of that. There's another 19 basis points decline of having a higher -- at a higher liquidity portfolio year-over-year. That's been offset by the interest of fee yield, which is plus 40. Again, as we think about how that develops for the year, the asset -- the ALR kind of mix will neutralize back out. We believe we peaked on interest-bearing liability costs from here.

Yes. So just to be clear, John, we put out the 8-K on March 5 that had the EPS guidance, we have not pulled that guidance. We just didn't reiterate it because it's only 45 days ago, so we did put it on the page this morning. If I think about that core business, what I'd say, Brian and I would probably tell you is that we're ahead of what we thought we're going to be. I think interest-bearing liability costs are up or were better than our expectations. Charge-offs generally in line with our expectations. And then when you start to think about some of the things I've highlighted about. Number one, your interest-bearing liabilities cost peaking; number two, charge-offs peaking in the second half. And I mentioned on this call that you're going to see a sequential decline in delinquencies. That's in line. I think when you then think about the reserve rate being lower than [ 10.26% ], I think that sets up and is consistent with the guidance we provided out in March 5. But again, it's only 45 days or so ago.

Yes. Maybe I'll try to simplify this, Jeff, but thanks for the question. Everything is seasonally adjusted. So we built our plan. It has a seasonal overlays, which have been muted for last couple of years, given the normalization to happen as we move back to the pre-pandemic levels of delinquency. I would think about it in this way in just free and fairly simple. First half losses will be higher than second half losses and I think if you just kind of rolled most certainly our 30-plus and 90-plus out, you can kind of see how that will play through if you believe that you're going to get a band here in April, further than in dollars. You can see how it flows out. So I just think about it in half to simplify versus trying to get to an exact date when it peaks.

Yes, I'll take the first part of that. So operationally, it's very challenging from a number of different angles. And obviously, it's for the issuer, but also the vendors that the issuers rely on. I think it's important to note, too, that this is across the industry. It's not specific to us. Everybody has got the same challenges. If any event we do have to implement this on May 14. I think we were prepared to make the systematic changes and things like that. The real challenges come around terms changes and updating collateral and things like that. So that's where a lot of the operational complexity sits. And I'll turn it over to Brian.

Yes. So to try to provide a dimension, really more a framework for how you think about it, Jeff. Our base case assumption as we walked in was in October implementation day, we thought that's going to be the case. There are a lot of scenarios between here and when the courts will take action on the pending litigation and the injunction. So it's difficult to speculate on any particular scenario because it's just so uncertain. I think everyone would have thought something different, at least everyone on this call would have had a different opinion. That being said, if you want to think about a framework for 1 second.

And then just on your last question on consumer behavior and impact. I'd say we haven't seen anything yet that's different than our expectations. I'd say it's largely in line. But the only caution I would have is it's very early. There's a bleed in period for a lot of these terms changes. But so far, what we're seeing from the consumer side is generally in line with what we expected.

Well, let me just start with that's based off on October implementation date. And the way to think about it is you begin to have some of the PPPC changes happen in the second and third quarters, partially offset by RSA, then you come into the fourth quarter, you would have the detriment from the late fee going away, but a higher RSA offset in that quarter. Obviously, that all shifts if you went to an earlier implementation date. So that range would change materially in a situation where you had a potential implementation day prior to October. Again, I think if that does happen, we'll come back and provide greater clarity on the impact on the late fees as well as impact on the changes that we're doing.

Yes. Obviously, we look at it and Brian and I have been very clear that the organization -- our goal is to be ROA neutral at the end of the impact of the late fee rule change. And we -- again, when we get better clarity with regard to the actual implementation date, we could talk a little bit about that timing. So the goal is to get back to ROA neutral. And that's the plan that we are rolling out and beginning to execute today. Understand there are a lot of assumptions with regard to consumer behavior that are in there and other things that can impact it. That being said, if you think about a more normalized environment, right? So I think 5.5% interest rates are not normalized.

Yes. Look, we're always on the lookout for potential acquisitions or new programs, Ally fit our business model perfectly. It's exactly the type of acquisition that we look for. It's in industries that we know really well. We understand the products, a great cultural fit, like it just -- it checked all the boxes. So we do -- we have excess capital today. We generate a lot of capital over the calendar year. And if we have the opportunity to do something opportunistic, we certainly have the financial resources to do it.

Yes. The only thing I'd add on to that, just to dimensionalize it for you, if you look at Page 12 of our earnings deck, we showed that the earnings power of this business does generate that capital, you look year-over-year, last 12 months, we generated 2.5% CET1 just from the net earnings of the business. So really positive effects that you can look at and lean into plus you have the excess capital that weigh between there and our target level of the CET1.

Yes. The only other point I'd make on this is we are very disciplined when it comes to accretive acquisitions that have a really good strategic fit. I mean, I think you've seen that discipline over the years. We haven't done really large-scale M&A. We've been very thoughtful about finding things that are relatively modest from a capital outlay perspective, but our businesses that we can grow really well. That's a great example of that, a perfect example of that, a leg row I think Ally is going to be a home run for us. So we are very disciplined in terms of what we look for.

Yes. Rick, thanks for the question. Well, certainly, we've had internal conversations about the effects of deterrents and it's really going to be how we model the -- any potential change in delinquency. And again, what you're looking at here are individuals who are making a choice not to pay, those who lost their job or had a health event, and roll in delinquency, you're not going to rehabilitate that this wasn't a deterrent for them. They're going to roll to loss or roll the settlement, et cetera. This is people who made an active decision to -- they prioritize one payment over another payment. We would have to model that out and then we'll certainly get our accounts comfortable with how it is. But again, we'll have to see because no one really did a lot of testing control at this level of deterrence. Most certainly, there's things done back in the CARD Act that demonstrated deterrence, but we'll have to see how it plays out, Rick.

Yes. Thanks for the question again, Rick. We haven't given quarterly guidance. Again, I'm just going to give you the framework. We applied seasonal patterns to how the loss rate works again. We believe we're more normalized and back to the prepandemic levels. And I think as you begin to see, you will see, again, in April, dollar declines in 30-plus and 90-plus, which have a flow-through effect both on the third quarter and the fourth quarter as they kind of come through. So we're not going to get into specific quarter guidance now. But again, the rates in the first half of the year will be higher than the rates in the second half of the year.

Yes. Thanks, Brian. So first, let me just be clear. We have submitted our capital plan to the Fed. We're part of the horizontals, we're part of the CCAR group, albeit we do not get a stress capital buffer until 2026. So the process remains somewhat the same as in prior years other than will engage a little bit differently with the Fed than we have in the past. But again, the stress capital buffer comes in 2026. When you specifically look at the capital plan that our Board just approved and management presented to them, there were scenarios or scenario in there around late fees and the impact of late fees that put it there.

We only see what's out there in terms of public changes in terms. But I would tell you, my expectation is that everybody is going to do a combination of the same things that we're doing. It's a pretty -- it's a relatively standard playbook. You might see some issuers do a couple of things differently. But I think on the whole, it's going to be the APR increases, different types of fees, et cetera, to offset this. And it's important that we do. Our goal from the beginning has been to protect our partners and continue to provide credit to the customers that we do today. And unfortunately, that's impossible to do without these offsets.

The only thing I'd add, Brian, I do think the one thing you will see, we probably have been a little bit more -- or surprise showed a little bit more sense of urgency and gotten out ahead of this based upon discussions with our partners. So that may pay a little bit, but I think Brian is right over the medium term here. That's where you're going to see the convergence.

I don't see it as a competitive threat today. I think in our space, in the vast majority of our business, I think you're going to see issuers do the same types of things that we're doing. I think it's going to be really important in terms of the economic sharing with the partners. I think we're obviously focused on providing credit to the customers that we do today. And fortunately, you need to do some of these things in order to protect that and protect our partners.

The one thing, John, you just took it up a level for a second. So if you had a theoretical case where someone who has a smaller business than ours decides to absorb some of that late fee, what you end up into is a suboptimal return profile. And inside a large institution-wide may be immaterial. The question would be, does it attract capital? And how long can you sustain that? And we've seen over history, businesses come out of flavor in certain larger institutions where this is a small part. This is what we do in the same way that we look inside our businesses, our platforms and allocate capital to some of our better performing, higher returning portions of the portfolio. That, I think, over time will have to happen to these institutions. So I'm not sure that that's a long-term viable strategy if someone wants to do that. But again, it's very theoretical your question.

Yes. Again, I'm going to just say it again, we put that guidance up 45 days ago. I didn't feel a need to -- or nor I think Brian feel the need to put it back on this page or two kind of update again, what I've said is the quarter and the points I raised about net interest margin, losses, reserves, positive on expenses, I think should be viewed favorably relative to that kind of base -- based BAU performance of the business. So we're very pleased on how we're exiting out of the first quarter and moving in on a core BAU basis.

Yes, we do. We track it by partner. We look at the penetration rate, sales on our card versus other products. I'll tell you, generally, we're very pleased that inside of the majority of our partner programs that we're gaining share. I think one of the things that helps us do that as we think about a multiproduct strategy, we see our partners engaging more on being able to offer a revolving product, maybe a secured card, buy now pay later. And I think that's helping us gain share. If you stick to a one product strategy, I think over time, that's a losing strategy and I think you will lose share, which is why we think the multiproduct strategy over time is a winning one. So we feel really good about our ability to continue to take share inside of our partner programs, but also just more generally and even some of the smaller to midsized space.

Well, I definitely think that's an underappreciated part of our business model. I think people tend to focus on the large partner programs, but we do -- we serve hundreds of thousands of providers and small- to medium-sized businesses. And sometimes that gets lost a little bit. So we're definitely leaning in more there. I'd say the -- we've shifted investment dollars into the health and wellness space, you see that paying off when you look at the health and wellness numbers, I think receivables were up 20%, like we're really reaping the benefits of those investments. So that's a very attractive space for us. The large partner space is still very attractive as well, but I think that part of the business always gets a lot of attention. We're trying to make sure that we talk enough about all the small- to medium-sized businesses and the hundreds of thousands of dentists and pet care specialists across the country that we serve.