Synchrony Financial SYF CEO Margaret Keane on Q4 2019 Results

Welcome to the Synchrony Financial fourth-quarter 2019 earnings conference call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Gregg Ketron, Director of Investor Relations. Gregg, you may begin.

Thanks operator. Good morning everyone and welcome to our quarterly earnings conference call. Thanks for joining us. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Now it's my pleasure to turn the call over to Margaret. Thanks.

Greg, good morning everyone and thanks for joining us today. 2019 marked another year of significant transformation for Synchrony across all of our sales platforms. We renewed more than 50 existing partnerships while also signing 30 new business deals. We expanded our Care Credit card network and our auto and home networks. We significantly enhanced the digital experience for cardholders and substantially grew our direct-to-consumer deposit platforms. During our five years as a public company, we have made significant investments in people and technology, and that has propelled the company forward and enabled the development of innovative offerings for our partners and enhanced our capabilities and user experiences for our cardholders. In the fourth quarter, earnings were $731 million, or $1.15 per diluted share, which included the remaining reduction in reserve related to the sale of the Walmart consumer portfolio in October. The reduction totaled $38 million, or $28 million after tax, and provided an EPS benefit of 5 cents in the quarter. As outlined in slide 3 of the presentation, loan receivables were down 6%. However, on a core basis, which excludes Walmart and the Yamaha portfolio that we moved to loans held for sale in the fourth quarter, loan receivables were up 5%. On a core basis, the loan receivable growth drove 5% growth in interest and fees. Purchase volume was up 7% and average active accounts increased 3%. The efficiency ratio was 34.8%, including a restructuring charge of $21 million for employee costs, which had a 60 basis point impact on the efficiency ratio this quarter. As we continue to drive cost efficiency for the company, we grew deposits $1.1 billion, or 2%, over last year, and much of this growth has come through direct deposits, which grew 10%. Our direct deposit platform remains an important funding source for our growth, and we continue to invest in our bank to help attract new deposits and retain existing customers. While organic growth continues to present the largest opportunity for us, and we have demonstrated our ability to not only grow our existing programs but also launch new programs with fast-growing partners in new markets. In our retail card sales platform, we announced a new partnership with Verizon, where we will be the exclusive issuer of Verizon's co-branded consumer card. Together we are launching the first credit card designed specifically for Verizon customers. We are thrilled to be working with Verizon as they continue to bring innovation to their customers, and this is a great growth opportunity for us as we continue to diversify our portfolio. The new Verizon credit card is expected to launch during the first half of this year. We established new payments solution relationships with more: Furniture for Less, Grand Home Furnishings, Travis Industries, and Leisure Pro, and renewed key relationships with Rooms to Go, By Mac's Alliance, CF Moto, and Continental Tires. We remain focused on growing our network to create broader acceptance and utility for our cards, and we have had many recent successes on that front. In our Care Credit network, in the fourth quarter, Care Credit established a new relationship with Kaiser Permanente. We have been focused on adding health systems to our Care Credit network, and with the addition of Kaiser Permanente, we now have five health systems under contract. During the quarter, we also renewed a key Care Credit relationship with a global market leader in hearing health. We continue to remain highly focused on digital innovation, accelerating our data analytics capabilities, and creating frictionless customer experiences, which are key to the success of our programs and winning new partnerships. Driving digital sales penetration is key to our success. In retail card, digital sales penetration was 39% in the fourth quarter. We are happy to report that we have reached a new high on digital applications, which were 52% of our total applications in the fourth quarter. The mobile channel alone grew over 40% compared to the same quarter last year. Excluding Walmart, our capital allocation strategy drives strong growth at attractive risk-adjusted returns while maintaining our strong balance sheet and the ability to return capital to shareholders. During the quarter, we repurchased $1.4 billion of Synchrony Financial common stock and paid $141 million in dividends. We concluded 2019 having made significant advances in our capabilities and winning key partnerships that will generate long-term value for the company. We have a clear vision for our future and what we need to do to get there.

Later in the call, Brian Doubles will outline our strategic priorities as we move into 2020. I will take a moment to highlight our platform results on slide 4. In retail card, loans were down 12% but increased 4% on a core basis, with solid growth driven by our digital partners. Other metrics were down driven by the sale of the Walmart portfolio. We are excited about our new partnership with Verizon, in addition to the other partnerships we announced in 2019, and look forward to launching these new programs this year. Payment solutions delivered a strong quarter with broad-based growth across the sales platform, with particular strengths in home furnishings and home specialty that resulted in loan receivable growth of 4%, or 7% on a core basis. Interest and fees on loans increased 4%, primarily driven by the loan receivables growth. Purchase volume was up 6%, and average active accounts increased 3%. We signed a number of new programs and renewed key partnerships this quarter. We continued to drive growth organically through our partnerships and card networks. These networks, along with other initiatives such as driving higher card-for-use, which now stands at approximately 31% of purchase volume excluding oil and gas, have helped to drive solid results and position the Payment Solutions platform for future growth. Care Credit also delivered another strong quarter. Receivables growth of 8% was led by our dental and veterinary specialties. Interest and fees on loans increased 9%, primarily driven by the loan receivables growth. Purchase volume was up 12%, and average active accounts increased 5%. We continue to expand our network and the utility of our card, most recently through our partnership with Kaiser Permanente, which helped to drive the reuse rate to 54% of purchase volume in the fourth quarter. Throughout the year, we drove strong growth across our sales platforms. We extended and expanded relationships, signed exciting new partnerships, launched new programs, increased the utility of our cards and networks, and grew our Payment Solutions platform to over $20 billion and our Care Credit network to over $10 billion in receivables. Our efforts and achievements provide a strong foundation for the future. With that, I'll turn the call over to Brian Wenzel to review our financial performance for the quarter and year and our outlook for 2020. Thanks, Margaret.

Thanks, Brian. I'll close with a recap of our strategic priorities, which are focused on driving long-term value creation while diversifying for the future. A top priority as always is the growth of our core partnerships. Opportunities to grow will continue to be evaluated through the lens of the risk-adjusted returns they produce. To strengthen our relationships, we will seek to continue to deliver innovative new products and capabilities that add value to cardholders and the programs, and drive card usage and brand loyalty. We will also continue to launch new programs where we believe the partnership can deliver the opportunity for growth at attractive risk-adjusted returns. We will also seek to diversify through targeted strategies in payment solutions, care credit, and our Synchrony branded products. This will help us to achieve a more diverse revenue base through the acceleration of growth in small programs and new products. We will focus on growing payment solutions through enhanced point-of-sale capabilities and innovative product offerings. In care credit, we will continue to work on broader acceptance and further expansion of the network, with an emphasis on health systems like our recently announced partnership with Kaiser Permanente. This is an area where we see significant opportunity. We will also continue to invest in our Synchrony branded products, the auto and home networks, and the Synchrony MasterCard. Lastly, we will leverage our recent acquisitions to develop and grow new revenue sources in e-gifting and Peps. Technology and data analytics remain a key focus as we strive to provide best-in-class customer experiences. We believe this customer-first approach will be an increasingly important growth driver. We will continue the expansion of advanced data analytics, leveraging customer-level performance dynamics, and further develop capabilities to deliver frictionless customer experiences. We are also focused on alternative data and machine learning to further drive innovation, advanced underwriting, and authentication. These investments are critical to driving growth in our existing programs, as well as securing renewals and winning new programs like Venmo and Verizon. It remains a key priority to operate our business with a strong balance sheet and financial profile. We have proven our ability to do this, and it will remain a top priority for us in the future. We expect to maintain strong capital and liquidity to support our operations, business growth, credit ratings, and regulatory targets. Finally, we will continue to utilize our strong capital position to support growth, launch new programs, invest in products and capabilities, and return capital to shareholders through dividends and share repurchases.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. Our first question comes from Ryan Nash with Goldman Sachs.

Hey, good morning everyone.

Good morning, Ryan.

Do it. So I wanted to start off with a question on net interest margin. So it had been running in the call it 15.75 to 16 percent range since you went public and deployed all your liquidity. Now, just to think about the moving pieces: you're saying 15 for the first quarter, which means you need to be 15 and a half plus for the rest of the year to reach the middle of the guide. So I know it's hard to forecast very far out given all the moving pieces, but should we think about 15.50 plus as a more normal margin range once we get beyond this liquidity impact? And then second, are there any other levers on the funding side you could have to drive this back closer to that historical range? Thanks.

Okay, got it. And maybe just to squeeze in a question on cost: so I thought I heard you say that you achieved all of the Walmart cost savings in the run rate. I just wanted to double-check if that was the case and maybe just help us understand the moving pieces on the expense growth going forward. I know Brian Doubles talked about some of them, but Margaret, maybe you could expand on what are some of the big strategic investments that you're making and would you view this as a year of accelerating cost growth and we could potentially get back to something lower beyond this year. Thanks.

Yeah, and I think Ryan, on investments, it's really a couple of things. So first is really the investment we're making in Venmo and Verizon. Both of these programs are going to be fully digitized in-app experiences, and so we've added a number of agile teams to really develop a number of APIs to really deliver for those partners. We have the launch fund; we have people that we need to add, so those are really a big part of the strategic initiative in terms of those two programs. More broadly, we're continuing to invest in a couple of key areas. We talked a little bit about CareCredit. We're adding resources and technology enhancements there, particularly as we go into health systems, which we believe is a really great investment and one where we'll get a great return over time. And just broadly, I would say from a technology perspective, we continue on this journey really driving digitization and frictionless customer experiences. I'd say the other area we're very focused on is really what I would call the customer journey. So I think we've done a really good job on the front end, meaning how you apply and buy using your mobile capabilities, but we're really looking at how do we get more efficiency out of our back office in terms of using digitization to really excel that experience for the customer. So it is a bit of investment. I think the biggest kind of add to the year is really though the Verizon and Venmo investment, where we're making and in our mind, you know, those are two great opportunities for us for future growth, and we think that that investment is really going to be the right investment to make for the company.

Got it. Thanks for the color.

Thank you.

Our next question comes from Moshe Orenbuch with Credit Suisse.

Great, hoping that... and I kind of hate to ask a question like this, it's kind of precise, but you know, you did $4.03 billion of net interest income in the fourth quarter. Usually you have a little bit of a seasonal decline in Q1 and then start growing. Given that you do expect the margin to be higher and assets to grow and Walmart was almost entirely out of Q4, is it reasonable that other than normal seasonal impacts that we should expect to see growth in NII from the Q4 level?

All right, yeah, it's also in fact—yes, it is about $2... A second question, just on the expenses. You talked about the charge and then that was in Q4 and then some investments. Maybe just, because you did say that you're going to have an improvement over time, kind of back on the efficiency side. Maybe just can you talk a little bit about the approach that you're taking to those investments, how you would see them paying back out over what period of time, and how we should think about them?

Okay, thanks so much.

Thank you.

Our next question is from Sanjay Sakhrani with KBW.

Thanks. Good morning and appreciate all the CECL commentary. Thank you. So, when we think about the loan growth expectations that we have in 2020 and the growth that we saw this year, correct me if I'm wrong, but it seems like the core portfolios are growing mid-single digits, which is lower than what we've seen in the past. Can you guys talk about sort of how that will migrate over time, because you do have a set of more higher growth merchants now in the portfolio? And then maybe how it would migrate higher over the next several years would be the question there.

Okay, and I guess a sub to sort of data point: the preferred stock issuance, what drove that? Was it just diversifying funding sources? And then the charge-off rate relative to this year's guidance: if we were to take out Walmart in 2019, do we have the metric around that, like what that charge-off rate would have been? Thanks.

And your second question was on just...

That's yeah, the charge-off rate. Like, what would the equivalent of that charge-off rate ex-Walmart for 2019 be?

Okay, thank you.

Thank you.

Our next question is from Don Fandetti with Wells Fargo.

Good morning. Um, can you talk a little bit more about the interplay of CECL and the RSA? I mean, just on the surface, the increasing provision seems like a pretty sizable amount, but I guess there's an offset. Just talk more about that. I know you touched on it earlier.

Okay, thank you. And then just quickly on underwriting: are you making any changes to your underwriting right now? Are you sort of in a steady state? Are you seeing any competitors loosen up just given this sort of better economic outlook?

Yeah, we have not loosened up. What I would say is we've been pretty consistent in our underwriting. Obviously we're always making slight changes. I think one of the things we've talked about in the past is we've done a lot of investing in how we're creating our models and the data that we're using, both externally and internally. And so I think we're much more strategic in how we look at underwriting, and that's really helped us continue to see the good performance we're seeing in delinquencies and charge-offs. So we're being pretty consistent. I think this is the time where you want to just continue to be very consistent and as possible as you think about where we are in the cycle.

Thank you.

Thank you.

We have our next question from Ryan Carey with Bank of America.

Morning guys. Finally most the discussion around loan growth acceleration in 2020 is real from the new program launches like Venmo and Verizon because their benefit from PayPal is the conversion is now behind you and there's been discussion about moving at more of an integration phase, or is this more likely to benefit longer, more likely to take a little bit longer term to ramp?

No, I think look, I think PayPal that fast-growing portfolio for us is performing the way we saw it would perform. I think what we talked about last year was getting the portfolio converted, which happened in June. It was a fairly big and sophisticated conversion. What we're really focused on now with the PayPal team is really looking at how we accelerate growth. I think Venmo's a little different in the sense that it's a startup, so it'll take us a little longer to get that growth going. But I'd say overall we're pretty pleased about the growth that we're seeing. It's the kind of growth we want to see. And I think as we add some of these new, more digitally driven partners, that will continue to play into our portfolio. I do want to make one point: that despite maybe some of the retailers struggling a little more, one of the things I think we're definitely winning on is on the mobile side, and we're definitely seeing growth in mobile. And I think as we went through holiday, that was a big part of our win with our partners. Our partners are continuing to depend on us to really deliver capability to them to really drive growth digitally. So I think that's something that we're going to continue to focus on as well.

Okay, okay. It's fun to ask one on the GPR card. I think you'd set a number of direct mailings in the quarter. I'm just curious about the resulting adoption and uptake and how that compared to your expectations. Do you expect to accelerate direct marketing on the GPR card for next year?

Yeah, so look, we continue to see really good trends on the card. I'd say generally better than our expectations on both of the campaigns that we've done. We're seeing good activation, good usage, nice retention of the balances. But as I said last quarter, we're being very disciplined around profitability and returns. So in the short term, we've got modest growth expectations. We're being very thoughtful. Look, we realize it's a very competitive market, and we're trying to target profitable accounts. So we really like the space, we like what we're seeing so far, but we're going to be disciplined on how we approach this.

Great, thank you.

Thank you.

We have our next question from Betsy Graseck with Morgan Stanley.

Hey, good morning. I wanted to dig in a little bit on the RSA and just make sure I understand. I know you gave the range for the full year, 4.3 to 4.5, but then you talked about how beginning there will be lower and then end of the year will be higher. Is that within the range that you're identifying, or is this range the average for the full year and the quarterlies could be beyond the range? Thanks.

Okay, so we could see the quarterlies be either side of that or within, you're not really telling.

Okay, and then separately, just on Verizon, interesting new partner. Maybe Margaret, you could speak a little bit to the set of services and products that you're going to be offering them, what was attractive to them as to why they picked you, and then could you speak a little bit more to what kind of market opportunity you think is out there, given what Verizon represents?

Yeah, so first, we're going to be doing that co-brand card. It will be branded Verizon. We're working very closely with them to really make sure this is a state-of-the-art, digitally driven card. We're pretty excited about some of the things we're working on. We're not going to communicate the value prop and things like that, because that's going to happen when we do the launch. Look, they have about 119 million retail phone connections, so this is a pretty big opportunity for us, and we're excited about the partnership. They're highly engaged. I'd say we won the deal because of some of the investments we've been making. I think we turned the corner on the question mark in my mind of, 'Are we digitally savvy?' And I think based on the winners, the programs we won this year, I think we're winning because of these investments that we've made and the investments that we're going to continue to make. So they're excited.

Verizon, 119 million customers? Oh, so you're talking about phone connections actually, not phone lines? Go poke our buddy, caps its turret.

Thanks, thanks Betsy.

Our next question is from Rick Schoen with JP Morgan.

Hey guys, thanks for taking my questions this morning. Margaret, Brian, you both referenced the data analytics and machine learning that you're investing in and also commented that you've already started to strategically apply those insights. I'm curious what you're seeing right now in terms of consumer behavior. There's a lot of talk about bifurcation amongst consumers, and given the breadth of your portfolio, I am wondering what you guys are seeing and how you are applying that strategically.

I'm not sure what you mean by bifurcation.

Meaning good customers and bad customers from a credit perspective?

Well, no, more economically, that there's such a divergence in the economy, and I'm curious if you are seeing greater or lesser opportunity particularly in the middle and lower income brackets.

Great, okay. That detail's very helpful. Thank you guys very much.

Thanks Rick.

And we have our next question from Bill Koch II with Nomura.

Thanks. Good morning up, Margaret and Brian Doubles. I wanted to ask you a question about whether you could give us a sense of your interest level in Synchrony's exposure to potentially merchants' receivables and essentially making loans to merchants backed by their sales. Is there any potential growth opportunity there that you see for Synchrony? Is it something you haven't given much thought to but would consider? Any color you can give us on that would be great.

Yeah, that's not a space that I would say we are considering. I think we have laid out our strategy as mainly focused on what we know, and I think we're going to stick to the things we really know and grow that way. Look, we're a consumer lender; that's what we're good at. We're going to stick to our knitting there, and we see a ton of great growth opportunities in our existing business which we outlined. So I think, 'Never say never,' but it's not on the strategic map right now. I think we've got a ton of great growth opportunity in all three of our platforms. We like what we're seeing in the direct consumer space, so we're going full throttle in those areas, and we'll revisit at some point in the future, but right now a lot of growth opportunity in the core.

Understood. And so then, perhaps sticking with the consumer, is there any interest level in perhaps taking a look at international consumer at some point? Or again, is the growth opportunity enough in the US that you see that that's probably not something that you would consider near term? Again, any color you can give on that would be helpful as well.

Yeah, look, it's something we've considered. We've talked about it at leadership tune with the board. Again, I think we see enough opportunity right now in our current market and in the US that we don't feel the need to go international, but you know, 'Never say never.' The business does work in certain markets overseas; we've seen that. We'll continue to assess it, but nothing in the short term.

Understood. Thank you for taking the questions.

But that's a we have time for one more question.

Thank you, sir. Our final question comes from John Hecht with Jefferies. John, your line is open.

Sorry guys, thanks for taking my questions. I guess the final question here is you have maybe talked about the pipeline of different opportunities. And then from a broad perspective, it seems like the more recent partner wins have been more technologically based with Verizon, PayPal, Venmo, and so forth. Is there any changing dynamics with who you're going after, and is there any changing dynamics with respect to the competitive environment?

Yeah, I'll start with the second part. I think the competitive environment is pretty consistent. I don't think anyone's doing anything too crazy out there, so I think we feel pretty good about where we're placed in the competitive environment. Look, we still want to win core retail deals, so this you know, and if you look at our Payment Solutions business, a lot of what we won was the core of that business. I think these opportunities that have come along are, I think, somewhat unique in terms of them coming to the marketplace. There's just not a lot of big retail deals that are out there right now in terms of existing portfolios. We continue to see a number of small or midsize deals that we have on our pipeline. I would say all three platforms have a pretty good pipeline of opportunity, and we're very focused on that. So I think you'll see us down the road you'll see more retail deals. It's not like we're walking away from that space. I just think this is what was in the market, and the opportunity for us to in some cases differentiate our portfolio a little bit.

Great, thanks very much.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.