[SYF stock] Synchrony Financial Q4 2020 Earnings Call (1/29/21)

Thanks Brian, and good morning everyone. Before I begin, I want to congratulate Margaret and Brian on their new roles and thank them for what they have done for Synchrony and for me personally. I speak for everyone in the company when I say we look forward to working closely with them in the next chapter for Synchrony as we begin 2021. We're encouraged by the developments being made to fight the pandemic and continue to be inspired by those on the front lines. For our part, we remain dedicated to keeping our employees safe and helping our partners, customers, and communities during this difficult period. Guided by our values and principles and with a partner-centric focus, we are working to help our constituents navigate this environment with an eye towards the future and the opportunities ahead of us as we begin to overcome the pandemic. During the fourth quarter, the pandemic continued to impact our growth in several areas, as noted on slide seven. However, our business mix, which includes a significant digital component and certain industries benefiting from staying at home such as home-related products and services, veterinary services, and electronics and appliances, have helped balance against some of the effects of the economic downturn. Purchase volume was essentially flat, down 1% versus last year, and in line with our expectations for the quarter, despite some pressure from new shutdowns and restrictions as the pandemic progressed during the quarter. The continued pressure caused our average active accounts to be down 10%, and a decrease in loan receivables was 6%. Payment rates continue to be elevated relative to normalized levels. Interest and fees on loans were down 11% from last year, consistent with the core decrease we experienced last quarter. Dual and co-branded cards account for 38% of our purchase volume in the fourth quarter and declined 4% from the prior year. On a loan receivable basis, they account for 24% of the portfolio and declined 10% from the prior year. While we're seeing positive trending in our growth metrics as we entered the quarter, the acceleration of the pandemic, resulting regional shutdowns, and diminished effects of the CARES Act stimulus slowed that early momentum. While our sales are stable, we are encouraged by recent developments, including the recently enacted stimulus, the proposed stimulus for the new administration, and the national rollout of a vaccine. We believe these factors will have a positive impact and should provide momentum as we progress through 2021. I will provide a more comprehensive view on 2021 shortly. RSAs increased $18 million, or 2%, from last year. RSA as a percentage of average receivables was 5.2% for the quarter. This was elevated from the historical average primarily due to the significant improvement in net charge-offs and the elimination of Walmart, which operated at a lower than company average RSA percentage. The improvement in net charge-offs resulted in decreasing the provision for credit losses of $354 million, or 32%, from last year. This was partially offset by a reserve build in the fourth quarter of $119 million. Other income decreased $22 million, mainly due to higher loyalty costs. Other expense decreased $79 million, or 7%, from last year, due to lower purchase volume and average active accounts, coupled with lower employee costs as we have begun to implement our strategic plan to reduce operating expenses. Moving to our platform results on slide eight, our sales platforms continue to be impacted in varying degrees due to COVID-19, and their trajectories through this period have been different based on factors such as business and partner mix, digital concentration, provider access, and availability of hardline goods. In Retail Card, loan receivables were down 8%, with the COVID-19 impact being partially offset by strong growth in digital programs. That resiliency is evident in the growth in purchase volume, which was up 1% over last year. Other performance metrics were down due to the impact from COVID-19. We're excited about the launch of our new value prop with Sam's Club. They are an important and valued partner, and we're excited about the changes in this program for Sam's Club members. The continued strength of Power Sports and Home Specialty and Payment Solutions helped offset some of the impact from COVID-19. Loan receivables declined 2%, average active accounts and interest and fees on loans were down 9%, which was driven primarily by lower yield on loan receivables. Purchase volume decreased 7% this quarter. We signed several new programs and renewed several key partnerships with Square. We continue to drive growth organically through our partnerships and networks, and added over 2,800 new merchants during the quarter. We also continue to drive higher cart reuse, which now stands at approximately 34% of purchase volume, excluding oil and gas. Our efforts and successes are expanding an already solid base for growth as we exit the pandemic. Although CareCredit was impacted the most by COVID-19 earlier this year, we began to see some improvement as the year progressed as providers continued to increase elective and planned services from the trough in the second quarter. That said, rising infection rates and increasing stay-at-home restrictions did slow some of this progress. Loan receivables declined 7%, with interest and fees on loans decreasing 4%, primarily driven by lower merchant discount revenue as a result of the decline in purchase volume, which was down 6%. Average active accounts decreased 10%. As Margaret noted earlier, we're excited about our partner activity within this platform, including the acquisition of Allegro Credit, our Aspen Dental renewal and expansion, and our new partnership with Community Veterinary Partners. During the quarter, we also continued to grow our CareCredit network and enhance utility of our card. The expansion of our network and acceptance strategy has helped to drive reuse rate to 59% of purchase volume in the fourth quarter. We are proud of these achievements and particularly excited about the opportunities we see to drive future growth in this platform as the impact of the pandemic subsides. I'll move to slide nine and cover our net interest income and margin trends. Net interest income decreased 9% from last year, primarily driven by an 11% decrease in interest and fees on loan receivables due to the impact of COVID-19. The interest margin was 14.64%, compared to last year's margin of 15.01%, largely driven by the impact of COVID-19 on loan receivables, an increase in liquidity, and lower benchmark rates. Specifically, the mix of loan receivables as a percent of total earning assets declined approximately 30 basis points from 80.2% to 79.9%, driven by higher liquidity held during the quarter. This accounted for 5 basis points of the net interest margin decline. The loan receivables yield of 19.93% was down 94 basis points versus last year and was a driver of a 75 basis point reduction in our net interest margin. The liquidity yield declined as a result of lower benchmark rates and accounted for a 30 basis point reduction on net interest margin. These impacts were partially offset by an 89 basis point decrease in the total interest-bearing liabilities cost to 1.69%, primarily due to lower benchmark rates and higher proportion of deposit funding, providing a 73 basis point increase in our net interest margin. Next, I'll cover our key credit trends on slide 10. In terms of specific dynamics in the quarter, starting with delinquency trends: the 30-plus delinquency rate was 3.07% compared to 4.44% last year. The 90-plus delinquency rate was 1.40% compared to 2.15% last year. Higher payment trends have helped drive the improvement in delinquency rates. Focusing on net charge-off trends, the net charge-off rate was 3.16% compared to 5.15% last year. The reduction in the net charge-off rate was primarily driven by improving delinquency trends as customer payment behavior improved throughout 2020. The allowance for credit losses as a percent of loan receivables was 12.54%, with the increase to last year being primarily driven by the adoption of CECL in 2020 and the impact from COVID-19. Moving to slide 11, I will cover expenses for the quarter. Overall expenses were $1 billion for the quarter, down $79 million, or 7%, from last year. The decrease was driven by lower purchase volume and average active accounts, as well as a reduction in employee costs and operational losses. The efficiency ratio for the fourth quarter was 37.1% compared to 34.8% last year. The ratio was negatively impacted by lower revenue that resulted from lower receivables and lower interest and fee yield, which was partially offset by the reduction in employee costs and operational losses. Moving to slide 12, given the reduction in our loan receivables and the strength of our deposit platform, we continue to carry a higher level of liquidity. While we believe it's prudent to maintain a higher liquidity level during this uncertain, volatile period, we are actively managing our funding profile to mitigate excess liquidity where appropriate. As a result of this strategy, there is a shift in the mix of our funding during the quarter. Our deposits declined $2.3 billion from last year. Our securitized and unsecured funding sources were down $2.6 billion and $1.5 billion, respectively. This resulted in deposits being 80% of our funding compared to 77% last year, with securitized and unsecured funding each comprising 10% of our funding sources at quarter end. Total liquidity, including undrawn credit facilities, was $23.7 billion, which equated to 24.7% of total assets, up from 22% last year. Before I provide details on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the joint federal banking agencies in March, which had two primary benefits: first, it delays the effects of the CECL transition adjustment for an incremental two years, and second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 15.9% CET1 under the CECL transition rules, 180 basis points above last year's level of 14.1%. The Tier 1 capital ratio was 16.8% under CECL transition rules, compared to 15.0% last year. The total capital ratio increased 180 basis points as well, to 18.1%, and the Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 27.0% compared to 21.4% last year, reflecting the increase in reserves as a result of implementing CECL. During the quarter, we paid a common stock dividend of 22 cents per share. For the full year, we returned approximately $1.5 billion to shareholders in the form of share repurchases and common stock dividends. As we finish 2020 and enter 2021, we have continued to assess the capital and liquidity strength of the company and the stability of our business at this point in the pandemic. With this backdrop, the board has authorized $1.6 billion in share repurchases for 2021, beginning in the first quarter. Repurchases are subject to our capital plan and regulatory restrictions, as well as overall market conditions, including any potential deterioration from the ongoing pandemic. Next, on slide 13, we are providing a framework on key drivers for 2021. It goes without saying, but the current environment will have periods of uncertainty and volatility until the pandemic is under control and the resulting impact of the economic environment is more fully known. While our visibility is limited, we're providing this framework about how we are thinking about the year might unfold based on our best assessment as of today. These views assume that in the first half of the year, there is continuing pressure from the pandemic and a slow economic recovery. In the second half, we assume the pandemic is largely under control and economic recovery accelerates. First quarter purchase volumes are expected to be consistent with the trends that developed at the end of 2020. Second quarter comparisons will obviously reflect the economic trough experienced in second quarter '20. The second half of the year, we anticipate improving growth trends as the pandemic impact moderates and macroeconomic growth accelerates. Regarding loan receivable growth, in the first half we expect continued higher payment rates from the stimulus actions to impact loan growth. In the second half of the year, we believe payment rates will slow as stimulus abates and we return to more normalized payment behavior patterns, combined with the expected increase in purchase volume from an improving macroeconomic environment. These drivers will contribute to accelerating asset growth. For net interest margin, overall we expect continued improvement as we enter 2021. Regarding the improvement in the first half, we anticipate that higher payment rates will contribute to continued excess liquidity, impacting asset mix. In the second half, excess liquidity is reduced through asset growth and slowing payment rates, which drive normalized interest and fee yields, leading to increasing NIM. With respect to our view on credit for the year, delinquencies are expected to increase, with peak delinquencies occurring in the third quarter of 2021, and result in sequential quarter increases in net charge-offs. We would expect reserves to be largely driven by asset growth and the impacts from any changes in the credit macroeconomic scenario. We anticipate a reserve release during 2021 as the credit macroeconomic environment develops. RSAs will remain elevated in the first half, primarily reflecting the strong program performance including revenue and net charge-offs. In the second half, we expect lower RSAs, generally reflecting the higher net charge-offs partially offset by higher revenue. As we outlined previously, we've implemented cost reductions across the organization. We believe this will result in expense reductions of approximately $210 million during the year. Partially offsetting these cost reductions will be expense increases relating to growth, in addition to the anticipated increase in delinquent accounts. We will continue to closely monitor how the pandemic develops and its impact to the macroeconomic environment and adjust as the landscape unfolds. As we enter 2021, we remain optimistic in the strength and the strategic position of our business to meet the challenges and exit the pandemic period in a stronger position than when we entered. We will continue to make investments in our people, products, technology, and platforms to drive long-term value and continue to ensure the safety of our employees while meeting the needs of our partners, merchants, providers, and cardholders. I will now turn the call over to the operator to begin the Q&A portion of our call.

Yeah, great, thanks, thanks Ryan. Um, you know, obviously the elevation that we've seen as we enter into 2021 was really driven by credit, which is 200 basis points better on net charge-offs, slightly offset by some of the interest expense in them, but clearly elevated. So I think as you slide into 2021, what you're going to see is as we continue to expect NIM to rise, there will be a benefit that will flow back through the RSA to the retailers, pushing it upward. But then as credit normalizes, that will deflate it. So our expectation is it remains a little bit elevated. We would not expect that type of elevation at the end of the year as we exit out of 2021, and I think as you get into 2022 and beyond, it should be back into the normal type range that we've operated in pre-pandemic.

You know, in some cases a revolving product is going to make more sense. In some cases an installment product is a better fit. You know, if you think about bigger ticket products, that steers more towards longer term installment. That can be on a revolving product or closed end. And then smaller ticket, you know, the trend that we've seen recently is that tends to steer more shorter term and more shorter term installment. And so again, it comes back to really what the partner wants at the end of the day. Now you make a really good point. Obviously merchant discount pricing plays into this. You know, the shorter you go and if you're not charging interest on the account, then obviously you charge a higher merchant discount. And so again, it comes down to what the partner wants and what the consumer wants at the end of the day. Look, I feel great about the product set that we have. The one thing that I would not underestimate though is the product is really just one piece of the equation. You know, what we've been working on and what's really important is how do you embed the product in the shopping journey. And so that, you know, the way that we integrate is more important than ever. So it really comes down to features and capabilities even more than the products. You know, at the end of the day, these products are not that complex. It's really about how do we integrate, how do we embed the financing offer throughout the shopping journey.

Yeah, thanks a lot, Ryan.

Yeah, thanks Sanjay. So stimulus clearly has benefited. We've seen that throughout 2020 most certainly. We saw an influx of payments right when the most recent stimulus package hit. So payment rates actually elevated back, you know, higher in the early part of January. So clearly stimulus is affecting, and you do see it wear off now. What's interesting, more interesting about this latest stimulus is it's not surgical as much. It's going to a broad-based population. So the effectiveness as we continue to move on even with further stimulus, you know, our portfolio shifted. We used to be 27% subprime, now we're 23% subprime. So the effects of that will not hold. So we do assume that when the stimulus burns off here, most certainly from the one in December, but if there's another stimulus that does get enacted in the first quarter, that will burn off and you'll see payment rates elevate back and then you'll see delinquencies come back into the portfolio. Well, certainly we're expecting, um, given the high level of unemployment, that delinquencies will build pretty quickly here as we move out, but again, we haven't seen that to date on the credit metrics that you've seen. So, um, you know, there is a chance though that with the future stimulus and if you get the pandemic under control with the vaccine, that you may flatten the ultimate loss curve here and have a bridge, which is what we would hope for.

Yeah, thanks Moshe. So, you know, it's important to note that the announcement that we made, the board authorized, is slightly different than we historically done. This is for a calendar year. You know, obviously the Fed has put some restrictions in for the first quarter, but, um, you know, we're going to go through our process. We've been going through a quarterly process from a governance perspective, looking at loss stresses, looking at the way our balance sheet will perform. And I think if you go back a quarter, you know, we weren't sure we'd be in this position to start the year. We were thinking more back half of the year. But I think as we talk with the board, we recognize the strength and the capital liquidity of the company, we recognize the stability of the company as we progress through the back half of 2020. As we look into 2021, you know, we again, it's uncertain, there's going to be volatility, but we're optimistic that the pandemic comes under control in the first half and that the macroeconomic piece picks up. So we thought it was prudent to start. Um, you know, we'll go through a process and submit our formal capital plan to the Fed at the end of March, beginning of April, and then we'll circle back with what that amount is that we think is a prudent amount right given this is a transitional year relative to the visibility and uncertainty. So, um, you know, obviously we haven't changed our long-term view with regard to capital, where we want to get to. It's just really the pace. And so we're comfortable that this is a good place to start, and we can always revisit as we move through the year.

Yeah, so the one thing I'd add on to Margaret's comment is, when you think about the capabilities, um, we already have a CareCredit dual card that operates there. And most certainly, you know, while we're a big business, the ability for us to really take the tools, technology, talent that exists in that manages the co-brand relationships inside the retail card will most certainly partner with those folks, combining the healthcare knowledge that we have in other platforms. So in the payment solution platform, we do have some limited RSA, so you would see some RSA here. But again, you know, that's a $10 billion platform for us, so I wouldn't consider it to be material, most certainly in the early part here. So, but you will see some develop over time there.

Yeah, great question. You know, when we think about the capital priorities of the company, the first priority for us is the organic growth that we have. So when you think about some of the longer standing existing programs, whether it's Amazon, PayPal, TJX, Sam's, Lowe's, there's lots of opportunity to continue our penetration march there. These newer programs, Verizon, Venmo, Walgreens, will most certainly, you know, we'd like to deploy capital into that. So that's our first priority, is grow that piece. But we will have capital beyond that, that ability to grow the book. If you think about the capital generation of the business, you think about the resiliency and the return, you think about the resiliency of the RSA, we will have excess capital. Then our next priority is to maintain our dividend and provide that back to shareholders. And then beyond that, we believe there will be access that will be deployed, you know, first in share purchase. To the extent that we find an acquisition that makes sense, whether it be a portfolio or businesses, you know, we'll look to do that. I think that was demonstrated this quarter by the acquisition of Allegro. So, you know, if the right opportunity comes along that fits with our long-term strategy and is at the right return for us, we certainly are looking at those opportunities. Should they come forward, and that's the key point. We still in this part of the cycle, I'm not sure valuations have checked up enough where we would do something large, but to the extent that they do and the opportunity exists, we would gladly deploy that capital for long-term value creation.

Yeah, yeah, thanks Bill. So, um, you know, we've continued even during the pandemic, different than a lot of our peers, we did not slow down any of the investments, whether it was in technology or in resources we've allocated towards these growth initiatives. We re-prioritized certain things inside of that that were greater short-term opportunities, so we've maintained that. So for us, we're going to continue to invest. I mean, you know, 2020 was a big year for us when you think about the investment to stand up a Venmo and a Verizon, and again we're looking forward to a full Venmo launch here in 2021. So we've invested quite a bit. Walgreens comes right behind this. We continue to drive core productivity in which we're continuing the investment. And again, the way we're positioning the company for the longer term, Bill, is to look at, you know, if I'm taking out 2025, what is an above average ROA? And we're going to drive that efficiency ratio back down into a range where it has been more historically, but really delivers that ROA given the revenue mix and loss content that we see in that portfolio mix. That being said, we are going to find ways in order to either increase the margins of the portfolios or to drive incremental costs out to maintain and perhaps expand that investment in technology. That is something that we want to do when we feel we need to do for the medium and long term.

Yeah, so let me unpack that. The first piece, you know, in all our modeling as we move through '20 and really '21, we've always modeled in the transition adjustment relative to CECL. And most certainly that would come out of, you know, we view the capital generation in those years as we move out, which is roughly around, I think, 60 basis points, uh, you know, assuming that the rules stay intact. We are continuing, to be honest with you, engage in dialogues with our stakeholders about a form of permanent capital relief because we obviously believe that when you look at our Tier 1 plus reserves at 27%, that is very high, you know, where we are, and that we believe that there should be credit whether it sits in Tier 2 or in Tier 1 relative to CECL. So that's always been factored as part of our plans and shouldn't really impact it. With regard to your second part of your question, the improvement in a macroeconomic scenario most certainly, um, we're not tied to the $1.6 billion. That's where we view it today. You know, we're going to go through our capital planning process here in the first quarter and get our capital plan approved by the board in March, submitted in April, and then hopefully we'll come back to you in the second quarter with a fuller perspective. But there is a scenario where clearly we can return potentially more capital. I think right now $1.6 billion is, we're sitting January 29th in a transition in a year that is a little bit uncertain, is not a bad place to start the year at. So we're going to continue to monitor the same way. A quarter out we thought we weren't going to do anything until the back half of this year, so we'll continue to evaluate it, Bill.

Yeah, thanks John. So the simple answer is no. I mean, Walmart clearly, if you strip that out, will push the RSA higher because it's operated at a lower RSA level than the company average. Absent that, there's nothing fundamental. I think what's challenging people, and I can appreciate it from an outside-in perspective, is CECL has dramatically impacted the profitability of the company and it's very difficult. You know, we've lagged CECL, but when you don't see delinquency formation at a retail partner, it's difficult to go to them and say, 'Okay, even though I haven't seen delinquencies, they're going to come at some point, you know, here's $100, $200 million dollars.' So that is unfortunately pushing the RSA higher here. And then when you look at credit really outperforming, you know, the loss in them, you know, we have a higher RSA. I think when you look at it over time, if you look at '20 and '21 combined together, it's going to go back down to the average. And most certainly as we exit the pandemic, there's nothing structurally that this should operate at a different level, ex the Walmart impact.

Yeah, the only thing, I mean, John, we have $81 billion in assets, so I think to try to move metrics materially, this would have to be incredibly large. I mean, obviously you see growth rates are much smaller competitors, but at $81 billion, it shouldn't have a material effect relative to most certainly a short and medium term with the way our P&L is constructed. I think the best way to think about it is these are going to be really attractive avenues for growth for us longer term. You know, this whole product strategy, we do a lot more of this business than I think people realize. I think we obviously were well known for revolving credit, but we do a lot of installment. It's something we're very comfortable underwriting, very comfortable pricing, and like I said, we're seeing a little bit better growth there than the other products that we have. So I think that's exciting at the end of the day. Again, it comes down to partner and customer choice, and we're in a position to be able to provide whatever that solution is for our partners that they want.