Synchrony Financial (SYF) — Q3 2015 Earnings Call Transcript

Thanks, Operator. Good morning, everyone. And welcome to our third quarter earnings conference call. Thanks for joining us this morning. 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 want 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 the 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. Margaret Keane, President and Chief Executive Officer; and Brian Doubles, Executive Vice President and Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions. Now it’s my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone, and thanks for joining us today. As most of you probably know by now, we received approval from the Federal Reserve Board to become a standalone savings and loan holding company, following the completion of GE's proposed exchange offer. This approval represents a major step forward in Synchrony Financial's journey to become a fully independent company. We are very pleased that we have reached this point. I want to thank everyone for all the hard work that has gone into this process, including my team, our employees and the help GE provided to us. We also want to thank the Federal Reserve and our regulators for working with us through this process. The next step in the process is the exchange offer, where GE will exchange its shares of Synchrony Financial common stock for shares of GE common stock. At this point, we are very limited in what information we can provide around that approval and the exchange offer other than what has been made public. As a result, we will not be able to discuss any details around these issues on the call today. I will begin our discussion today on slide three, third quarter net earnings totaled $574 million or $0.69 per share. Overall, strong momentum continued across our business platforms driving significant receivables, deposits and revenue growth this quarter. Growth remained robust with purchase volume up 12%, loan receivables growth of 12% and platform revenue growth of 9%. We continue to offer attractive programs that resonate with customers, such as our Amazon Prime card where cardholders receive 5% back, our Sam's Club 531 cash back credit card program, 5% discount on purchases every day and reward programs with BP and Chevron, in addition to our ongoing promotional event. Our partners work with us as we continually search for innovative ways to drive program growth. Asset quality improved with a 3 basis points decline in our net charge-off rate and a 24 basis points improvement in 30-plus delinquencies. Expenses were in line with our expectations, impacted by investments we made just for growth, separation-related costs and the completion of the EMV card rollout for active Dual Card holders. Deposit growth continued at a very strong pace, with deposits increasing $8 billion or 24% over the third quarter of last year. Deposits now comprise 63% of our funding, moving further into our target range of 60% to 70%. Our ongoing efforts to provide increasing value to our depositors with new features and enhancements are yielding notable results. Our balance sheet remained strong with a common equity Tier 1 ratio of 17.5%, calculated on a transitional basis, and liquid assets totaling $15 billion or 19% of total assets at quarter end. Key business highlights during the quarter included the extension of key existing contracts, including PayPal, one of our top 10 partners, the signing of two new partners, the extension of our CareCredit network and further advancement of our technology platform to enhance the engagement experience with our customers. We are pleased to announce a long-term expansion with PayPal to provide Dual Cards to consumers. Our program with PayPal dates back to 2004 and these programs enable digital and mobile payments to online and offline merchants for qualifying cardholders. We're excited to expand our decade-long relationship with PayPal, who is at the forefront of digital payment. We are also pleased to have renewed our partnership with Sleepy’s, the third-largest mattress retailer in the United States, further enhancing the number of top retailers where we provide financing in the bedding space. Regarding new partners, we have signed a multiyear agreement with Citgo, a leading U.S. refiner and marketer, to provide a private label credit card program for new and existing customers. We expect to launch the program in the first quarter of 2016, and Citgo cardholders will be able to earn rewards and save on fuel purchases at any of the nearly 5,500 locally-owned and operated Citgo locations in the U.S. In addition, we are pleased to announce a new partnership with The Container Store, the nation's leading retailer of storage and organization products. This is a multiyear agreement to offer a private label credit card program, and the card will be available in the retailer's stores and online. The program is scheduled to launch in the spring of 2016. Additionally, we expanded our CareCredit network through a new agreement with Rite Aid, one of the nation's leading drugstore chains. Rite Aid will accept our CareCredit card for in-store purchases and health services in their nearly 4,600 stores nationwide. We also added a new multiyear agreement with Premier Dental Holding, one of the nation's largest dental providers. We're very excited about this new and extended partnership and our ability to add significant value to these relationships. Driving organic growth continues to be a key source of future opportunity, and we continue to pursue initiatives to help card usage and deepen penetration across all of our partnerships. As we have noted in the past, the online and mobile channels are increasingly important channels for our business. As reflected in our 2015 digital study, a comprehensive mobile strategy is essential to the ability of retailers to effectively engage with our customers. In our national survey, we found that 45% of shoppers are now shopping with a mobile device, and this is up 4 percentage points from last year. Additionally, one-third are purchasing products after viewing them on social media, and one-third indicate that tax offers will drive an incremental shopping visit. Given these trends, we have been active in capitalizing on this evolving environment. Our digital strategies have helped drive an increase in online and mobile purchase volume, which is up 21% from last year, and nearly a third of our credit applications are now done through digital channels. The adoption of our digital card also continues at a healthy pace. We continue to progress in our leading mobile wallet strategy, and we are very pleased to be among the first issuers to offer private label cardholders the ability to add their cards to Samsung Pay, which launched in late September. We have currently enabled the use of over 12 million active accounts across our CareCredit and payment solutions platform, and we intend to build on this. As many of you know, we have Dual Cards enabled and will be one of the first issuers with the capacity to offer private label credit cards through Apple Pay. Through our innovation and strategic partnerships, we are helping to shape the future of how private label cards function in the mobile world and provide value to our merchants and their customers. We have developed a mobile platform that can be rapidly integrated across retailers and wallets. The speed at which we've been able to develop the capability for our cards to be in mobile wallets while maintaining the benefits for both our cardholders and partners speaks to our commitment to being at the forefront of this evolving payment landscape and our ability to capitalize on our leadership position. Moving to slide four which highlights the performance of our key growth metrics this quarter. Loan receivables growth remained strong at 12%, primarily driven by purchase volume growth of 12% and average active account growth of 4%. The addition of the BP program last quarter also contributed to the growth rate. Platform revenue was up 9% over the third quarter of last year. Many of our partners had positive growth in purchase volume, and we continue to drive incremental growth through strong value propositions and promotional financing offers. On the next slide, I'll discuss the performance within each of our sales platforms before turning over to Brian to review the financial results in more detail. We continue to drive strong performance across all three of our sales platforms in the third quarter. Retail card had a very strong performance this quarter generating purchase volume of 12% and receivables growth of 13%. The addition of BP last quarter also contributed to the growth rate. Platform revenue growth was 10%. In addition to our new agreement with Citgo, we continue to expand our brand distribution with the launch of the Athleta credit program, one of the brand names under Gap. In addition to adding new partners that are a good strategic fit, renewing and extending our programs is a key priority in this business. Within the long-term extension of our program with PayPal, we now have nearly 92% of our retail card receivables that are under contract through 2019 and beyond. The strong position we maintain in this space and the collaborative partnerships we have developed provide a solid foundation for further growth. Payment solutions delivered another strong quarter. Purchase volume growth was 13%, and loan receivables growth totaled 12%, driving platform revenue growth of 8%. Average active accounts increased 8% over the last year. The majority of our industries have positive growth in both purchase volumes and receivables, with particular strength in home furnishing and automotive products. We exhibited significant success in finding multiple new partners this quarter, including The Container Store, and our pipeline remains strong. We also launched a new program this quarter, most notably with Guitar Center, which included a portfolio conversion from another issuer and now gives us a preeminent position as a key financing partner in the music retail market. As noted, we extended our long-term relationship with BP. As a result of this, coupled with the announcement of Mattress Firm this summer, we now have programs with each of the top four bedding retailers in the U.S. CareCredit had a solid quarter and entered into important new agreements. Purchase volume was up 13%, and average active accounts increased 5%, helping to drive receivables growth of 5% and platform revenue growth of 3% over the same quarter of last year. Receivable growth this quarter was led by dental and veterinary specialties. Regarding the new agreement, the agreement with Rite Aid will extend the facility of our CareCredit card to nearly 4,600 Rite Aid stores nationwide, and the agreement with Premier Dental Holdings, which has nearly 200 clinics with nearly 1 million consumers in the western part of the U.S., will result in the origination and acceptance of the CareCredit card in their offices. Plans are in place to launch the CareCredit native application in the fourth quarter, which will feature the CareCredit digital card and be available to cardholders via the Apple and Google Play app stores. In summary, each platform delivered solid growth and continues to make progress in the signing of new partnerships and the extension of existing programs while continuing to drive organic growth. I'll now turn the call over to Brian to provide a review of our financial performance for the quarter.

Thanks, Margaret. I’ll start on slide six of the presentation. In the third quarter, the business earned $574 million net income, which translates to $0.69 per diluted share for the quarter. We continued to deliver strong growth this quarter with purchase volume up 12%, receivables up 12%, and platform revenue up 9%. Overall, we're pleased with the growth we have generated across the business. We continue to see evidence that the value proposition of our cards is resonating with consumers. Purchase volume per active account was up 8% compared to last year, and the average balance per account increased as well. We also closed the BP portfolio acquisition last quarter, so that helped improve our growth rate year-over-year. Net interest income was up 8% in the quarter. This includes the impact of higher interest expense driven by the funding that was issued to increase liquidity in the third quarter last year. Interest income was up 9%, which is in line with our average receivables growth. RSAs were up $30 million or 4% compared to last year. RSAs as a percentage of average receivables were 4.6% for the quarter, which was slightly lower than the 4.8% we reported in the third quarter last year. The lower RSA percentage compared to last year is due to programs we exited last year, where we paid a higher RSA percentage of average receivables, as well as higher loyalty costs that are directly shared through the RSA with our retailers. For the year, we would expect RSAs as a percentage of receivables to be in the 4.5% range, consistent with the prior two years. The provision increased $27 million or 4% compared to last year. The increase was driven primarily by receivables growth, partly offset by the improvement in asset quality. Improvement in asset quality is reflected in lower 30-plus delinquencies, which improved 24 basis points versus last year to 4.02%, and in the net charge-off rate, which fell to 4.02%, 3 basis points below last year. Our allowance for loan losses as a percent of receivables was down 15 basis points compared to the third quarter last year to 5.31%. However, measured against the last four quarters of net charge-offs, the reserve coverage remained at 1.27 times, virtually the same coverage level as the prior three quarters. Overall, our reserve coverage metrics were fairly stable. Other income decreased $12 million versus last year, primarily driven by higher loyalty and rewards costs, partially offset by an increase in interchange revenue. More specifically, interchange was up $34 million, driven by continued growth in out-of-store spending on our dual card. This was offset by loyalty expense that was up $38 million, primarily driven by new value propositions. As a reminder, the interchange and loyalty expenses run back to our RSAs, so there is a partial offset on each of these items. Debt cancellation fees of $61 million were down $7 million from last year due to the fact that we only offer the product now through our online channel. Other expenses increased $115 million versus the third quarter of last year. In addition to the infrastructure build, the majority of the increase was driven by three items. First, we continued to make investments to support ongoing growth across all of our platforms. Second, we had expenses associated with the rollout of EMV cards for active Dual Card holders. The rollout was completed this quarter ahead of the October liability shift dates. Lastly, we continued to make strategic investments in our deposit platform and our digital and mobile capabilities. The efficiency ratio for the quarter was 34.2% and 33.3% year to date, which is in line with our annual guidance of below 34%. I will cover the expense trends in more detail later. Overall, we had strong topline growth that drove a solid quarter, generating an ROA of 2.9%. I will move to slide seven and go through our net interest income and margin trends. As I noted on the prior slide, net interest income growth was strong at 8%. Interest and fees on loan receivables were up 8%, partially offset by higher interest expense driven by growth and the additional liquidity we're carrying on the balance sheet compared to last year. The net interest margin declined to 15.97%, which was fairly consistent with prior quarters and better than the outlook we provided back in January. As you look at the net interest margin compared to last year, there are a few dynamics worth highlighting. The majority of the variance, 77 basis points was driven by the build in our liquidity portfolio. We increased liquid assets on the balance sheet to $15.3 billion, which is up $1.2 billion versus last year. We have the cash invested in short-term treasuries and deposits at the Fed, which results in a lower yield than the rest of our earning assets. The yield on our receivables is down 33 basis points compared to last year. This was a result of slightly higher payment rates and the impact of portfolio mix, given the strong growth in promotional balances on our payment solutions platform. Lastly, on interest expense, the overall rate increased to 1.8%, up 9 basis points compared to last year. This was in line with our expectations given the changes in our funding profile. I will walk you through a breakdown by funding source. First, the cost of our deposits was relatively stable at 1.6%, the same level as the third quarter last year. Our deposit base increased nearly $8 billion, or 24% year-over-year. We are pleased with the progress we’ve made growing our direct deposit platform. Deposits are now 63% of our funding, which is in line with the target we set between 60% and 70%. Securitization funding costs were relatively flat at 1.6%. Our other debt costs increased 53 basis points to 2.9%, due to the higher mix of bank term loans and unsecured bonds compared to last year. While the third quarter margin was a little above the range we set out back in January, this was primarily driven by the benefit of using some excess liquidity to pay down the bank term loans. As we look out to the fourth quarter, we typically see some seasonality in margins and expect them to decline slightly due to the seasonal build-up in receivables. Overall, we continue to be pleased with our margin performance, which has exceeded our guidance for the year. Next, I will cover our key credit trends on slide eight. As I noted earlier, we continued to see stable to improving trends in asset quality. 30-plus delinquencies were 4.02%, down 24 basis points versus last year. 90-plus delinquencies were 1.73%, down 12 basis points. We continue to believe these improvements are driven at least in part by lower gas prices and generally a healthier consumer given the continued improvement in employment trends compared to last year. The net charge-off rate also improved to 4.02%, down 3 basis points versus last year. And lastly, the allowance for loan losses as a percent of receivables was 5.31%, which was down 15 basis points from the prior year. If you measure the reserve coverage against the last 12 months charge-offs, we’re currently at 1.27 times coverage, which equates to roughly 15 months of loss coverage in our reserve. And as I noted earlier, this is very consistent with prior quarters. Looking to the fourth quarter, we typically see an uptick in net charge-offs and a decline in the allowance for loan losses as a percent of receivables due to holiday spending and the seasonal build on receivables. So, overall, we continue to feel good about the performance of our portfolio and the underlying economic trends we are seeing. Moving to slide 9, I'll cover our expenses for the quarter. Overall, expenses continued to be in line, and we're delivering on our efficiency ratio guidance of below 34% for the year. Year-to-date through the third quarter, we are at 33.3%. Expenses came at $843 million for the quarter compared to last year, largely driven by separation-related costs and growth of the business. As I mentioned earlier, we also had approximately $20 million in expenses related to the EMV card rollout this quarter. Looking at the individual expense categories, employee costs were up $29 million as we've added employees over the past year in key areas to support the infrastructure build for separation, as well as growth of new business. Professional fees were up $13 million due to both separation-related costs and growth. Marketing and business development costs were flat, as we had increases driven by investments in the growth of our retail programs, as well as marketing associated with our direct deposit products. These increases were offset by lower spending on brand advertising. Information processing was up $30 million, driven by higher IT investments and the increase in transactions and purchase lines compared to last year. Others increased $43 million versus the prior year, primarily driven by growth in the infrastructure build. As we noted last quarter, the costs associated with the infrastructure build are now largely reflected in our run rate, and total expenses remain in line with our expectations. We expect to finish the year within our efficiency ratio guidance of below 34% for the year. Moving to slide 10, I'll cover our funding sources, capital and liquidity position. Looking at our funding profile first. One of the primary drivers of our funding strategy has been the growth of our deposit base. We continued to view this as a stable, attractive source of funding for the business. Over the last year, we've grown our deposits by nearly $8 billion, primarily through our direct deposit program. This puts deposits at 63% of our funding, which is in line with our target of being 60% to 70% deposit funded. As we now move further within our target range, we expect to continue to drive growth in our direct deposit program by continuing to offer attractive rates and great customer service, as well as building out our digital and mobile capabilities. We are also looking at additional ways to increase the stickiness of the deposit base, including the rollout of new products later next year, such as checking and online bill pay. Funding through our securitization facilities has been fairly stable in the $14 billion to $15 billion range, which is approximately 21% of our funding. We did issue $600 million in securitization bonds in September with three and five-year maturities. This is consistent with our approach to maintain this source of funding at between 15% to 20% of our total funding. We also issued $1 billion in ten-year fixed-rate senior unsecured notes in July. As we’ve said in the past, our strategy is to continue to reduce our reliance on the bank term loan facility, as this is a more expensive source of funding for the business compared to deposits and other lower cost funding sources. We have continued to pay this down during the quarter, making a $500 million prepayment in August. Since the IPO, we have paid down the bank term loan facility from $8.2 billion last year to $4.7 billion today, and expect to continue to pay this down in future quarters. Overall, we feel very good about our access to a diverse set of funding sources. We will continue to focus on growing our direct deposit platform and using the proceeds from future unsecured bonds to further prepay the bank term loan facility. Turning to capital and liquidity. We ended the quarter at 17.5% CET1 under the Basel III transition rules and 16.6% CET1 under the fully phased-in Basel III rules. Total liquidity increased to $21.9 billion and includes $15.3 billion in cash and short-term treasuries and an additional $6.6 billion in undrawn securitization capacity. This gives us total available liquidity equal to 28% of our total assets. We expect to be subject to the modified LCR approach, and these liquidity levels put us well above the required LCR levels. Overall, we are executing on the strategy that we outlined previously. We’ve built a very strong balance sheet with diversified funding sources and strong capital and liquidity levels. And with that, I will turn it back over to Margaret.

Thanks, Brian. I will close the summary of the quarter on slide 11 and then move again with the Q&A portion of the call. During the quarter, we exhibited broad-based growth across several key areas, making progress on several fronts and continuing the momentum that we have generated over the last several quarters. We continue to win and renew important partnerships as well as opportunities to expand our network and the utility of our cards, and our pipeline of additional opportunities remains strong. Our digital wallet strategy continues to deliver meaningful partnerships with attractive opportunities. Our innovation and adaptability enabled us to be among the first private label issuers to make our cards and their functionality available through Samsung Pay. We are pleased with the ongoing success of our fast-growing deposit platform. And finally, with the Fed's approval to become a standalone savings and loan holding company, we look ahead to the next step in this process, the proposed exchange offer. Again, I want to acknowledge all of the hard work that has gone into this process. We are proud of having achieved this important step in our progress towards separation. As I noted earlier, we are restricted in what we can say today, but please stay tuned on this front as additional details on the exchange offer become available. I will now turn the call back to Greg to open up the Q&A.

Thanks, Margaret. That concludes our comments on the quarter. Operator, we are now ready to begin the Q&A session.

Thank you. Good morning. Congrats on getting the approval from the Fed. Just reading through that 17-page order, I didn’t notice any language around CCAR, and I understand you’re approved as a savings and loan holding company. Does that mean that CCAR doesn’t apply to you guys? And if yes, what exactly is the process of getting to return capital to shareholders? And also maybe taking liquidity down from the levels that you have it? Thanks.

Sure. Good morning, Sanjay. It’s Margaret. So I will hand it over to Brian, but I just wanted to reiterate how important this milestone was for us and getting the separation from GE really is the biggest part of the milestone. Brian is really going to take you through a little bit of learning around CCAR and where we’re going to go forward on that.

Yes. So Sanjay, you’re absolutely right, there is nothing in the order that specifically subjects us to the CCAR process. And we’ve discussed in the past because we’re a savings and loan holding company and not a bank holding company, we’re not technically subject to the CCAR process. So that’s where we stand as of today. With all that said, it’s still our expectation that we’re going to file a capital plan with the Fed. And it’s going to be based on the Fed’s CCAR assumptions. So it’s very likely that even though we’re not part of the public process, we are going to follow a very similar process to the upper banks in terms of using the same assumptions, following the same timeline, and we think that gives us probably the best chance of success in 2016. So that it’s going to look similar, but you’re not going to see it as part of the formal public process.

Okay. Is this related to liquidity concerns? As a follow-up, does this mean you would implement your own model based on CCAR’s assumptions?

That’s our indication... exactly, so we would... We would grab those assumptions when they’re published in February. We will run those through our models. We’d formulate a capital plan. We’d submit that to the Fed. It’s just one part of the public process, that’s our expectation as we say here today.

Okay. Great.

So that’s capital. You asked about liquidity as well. I think the liquidity is going to be consistent with what we said in the past. I think we feel like we’ve got more than adequate liquidity today. I think we’ve got a couple of opportunities to optimize the amount of liquidity that we’re holding. We’ve also got an opportunity to look at different ways to invest that excess cash. You’ve seen us do that a little bit all year where we run our internal models, we look at rating agency considerations, regulatory considerations. We look at our maturities coverage. And to the extent that we feel we have some excess liquidity, you’ve seen us use that to prepay the bank term loan. You’re going to continue to see us do that. That’s part of the reason obviously why our net interest margin has trended better than the guidance we provided back in January. But I wouldn’t expect going forward to see a step change in how we manage liquidity. The regulatory considerations are just one piece of the puzzle. We add up all the other considerations, our internal models, and that’s where we used to size the amount of liquidity we have. So I think there is some opportunity there, but it’s going to be more around the margin, it’s not going to be a step change from what we’re doing today.

Great. Thank you.

Hey, good morning, everyone. And congrats on getting approval.

Thanks, Ryan.

I guess for starters, your loan growth is coming well above the 6% to 8% that your outlook had called for. I was wondering maybe can you give us a breakdown of how much of the growth is coming from actually improved penetration rates versus portfolio wins? And as you look forward, clearly the PayPal renewal is a big win for you, but how should we think about your ability to sustain loan growth at or near the current rates?

Yes, Ryan, most of the loan growth year-to-date has been organic, core organic growth, and that’s really tendership, that’s the value propositions that we've launched at Sam's Club and Amazon. And the only portfolio acquisition we’ve done which impacted the results of our year-to-date is BT, which we closed in the second quarter, and obviously, it continues to impact our results in the third quarter when you look year-over-year. So I think the fundamentals are very strong. As you pointed out, we are ahead of where we thought we would be back in January. We still have the holiday season that’s going to largely determine where we end up for the year, forecast somewhere between 3% and 4% similar to what we thought last year. So we’re optimistic. And when you break down the components of the growth, the underlying trends are positive too. So we are seeing purchase volume for active accounts was up 8%. When you look at the average balance per active account, that was up 5%. So when you break down the different components, the fundamentals are strong as well. I will turn it over to Margaret to talk about PayPal.

Yes. So we’re really excited about the PayPal extension. As I have said in the past, we’ve had a really good partnership, a long-term partnership with PayPal since 2004. And I think they were working through their strategy, we’re working through our strategy. We continue to have a really good dialogue through that process. And as a result of some good thinking on both sides, we’ve come together and we will be extending our partnership. So it’s a win for them, a win for us, and we feel pretty excited about being able to keep them.

Got it. And maybe if I could just ask one question on the margin. When I think about how it’s trended over the past year or so, it’s obviously come down, but clearly better than expectations had been. And when you think about it, you’ve had call the 30 basis points direct from yields and 70 from the big liquidity belt. But when I think about the comments that you made, Brian, on the ability to optimize some by investing some of the cash, if we were to assume that yields do continue to come down in the loan book, is there enough deployment for you to do such that you can largely offset a lot of the core pressure on the margin and we can maybe see a margin level that’s similar to the performance that you’ve had thus far in 2015 as we look forward?

Yeah, Ryan, here is the couple of things. Let me just start with one, one of your premises is that loan yield will continue to come down. I think one other thing that we’ve seen year-to-date is the loan yields that have come down primarily driven by higher payment rates, which we’re obviously getting a benefit when we look at 30 plus, 90 plus and charge-off performance year-to-date. So to the extent that loss performance kind of levels out from here, then we would expect loan yield to level off as well and we might not see that deterioration. So I think that’s just one kind of starting point. We’ve also when you look at loan yield, part of that is also driven by just a really strong growth in payment solutions, and we’re putting that volume on as largely promotional financing, so it’s coming on at the lower yield initially. And then as those accounts start to revolve, we expect a little bit of lift there in the yield. On liquidity, I think, there is nothing that we see that is going to result in margins coming down significantly from where they are today. They have performed better year-to-date because we’ve been able to use what we view as access to pay down the more expensive performance of financing. We’re going to continue to do that. We still got a big chunk to go on the bank term loan. So I think we still have some opportunity there. And then I think we’ve got a little bit of opportunity on how that cash is invested. So you’re going to see us continue to optimize that in terms of more specific outlook. So we’re going to give you some guidance on the January call for 2016 and we can be a little more specific then.

Great. Thanks for taking my question.

Yeah. Thanks. Just a follow-up question on the CCAR process, since you will be opting into that kind of voluntarily not going to the public process, will that impact, asking all in terms of capital returns? Could we expect something potentially in excess of what peers might be asking for?

Yeah. Mark, I just will be careful that we’re not opting into CCAR. What we’re doing is we’re filing a capital plan using the CCAR assumptions. And the reason we’re doing that is pretty straightforward. The Fed has the process. They measure all the other banks on, and we think that our best chance to success is to be measured kind of on the same basis, and so that’s why we’re doing it. But I wouldn't view it as opting in; we just think that we’re trying to take what we feel is the path here to give us the best chance to success, and I think following the Fed framework and the process that they have allows us to do that. We’re not going to be specific around our capital ask the first time out. What I would tell you, though, is that it's more important for us to get a dividend approved, a buyback program approved than it is to go on our first time and swing for the fences. So, we’re going to be fairly prudent and I also first time out. And again, we want to have a successful first outing here as opposed to trying to go for something greater than our peers right out of the gate.

Okay. But is something comparable to your peers given particularly your even stronger capital position, does that feel reasonable and conservative to you?

Mark, I'm not able to provide more details at this moment. We will have the assumptions ready in February, and we need to run them and review everything with our Board. We also have to follow our internal governance processes before we submit anything to the Fed. There is a significant amount of work to complete before we actually submit, so it would be premature to give any indication at this point.

Okay, that's helpful. Just one more follow-up on PayPal: I believe you were expecting it to go away, so when will it be renewed? Am I correct in understanding that you anticipated a 2% to 3% challenge to loan growth and that this issue not being resolved could significantly impact your loan growth in 2016?

Yeah. That’s right.

Yeah. PayPal was disclosed as $1.5 billion receivable that was expected to go away towards the end of 2016.

Okay. Great. Thank you.

Thanks for your insights. You mentioned two significant wins, likely taken from other issuers, specifically Citgo and Guitar Center. Could you elaborate on the competitive landscape and how you managed to achieve these wins? Additionally, what other opportunities are you exploring?

We feel very positive about our pipeline and the activities within it. We have previously mentioned our commitment to all three platforms. The competitive landscape is present, but we don't believe it's more intense in the private label segment compared to larger co-brand deals. We consider competition to be focused in appropriate areas. Our success stems from our capabilities and the investments we've made in mobile, analytics, and data, which are essential in securing these partnerships. Additionally, having a more concentrated approach across the three platforms has been beneficial. Interestingly, since our separation, we have been attracting attention, which is a new experience for us. We believe we are in an excellent position. As mentioned earlier, we do not need to secure every deal since our growth primarily comes from organic sources. This allows us to be selective about the partnerships we pursue. Ultimately, the key for us is to establish partnerships where we can add value, and when our partners recognize that value, it strengthens our long-term relationships. Overall, we are optimistic about the pipeline moving forward.

Just a follow-up, one of your large partners, Sam's did announce they were going to be taking another card brand, and can you talk a little bit about how you can kind of defend against that?

It’s not uncommon for merchants to accept additional networks. In fact, Sam’s has already been accepting Amex on their online platform. For us, this presents an opportunity because if customers begin using their Amex cards, we can promote our own card to them. Our credit card functions as the membership card at Sam’s, making it convenient for customers to use while shopping. Additionally, we offer an excellent value proposition with our Sam’s MasterCard. While we prefer not to see competitors entering, we approach these situations thoughtfully. We have a strong partnership with Sam’s and are well-integrated with them, which could provide a chance for us to cross-sell.

Great. Thanks, Margaret.

Hi. Good morning. I have a question about the implications from the separation on potentially, expenses and kind of what you can do to drive efficiency gains now that you separate from GE and possibly not being part of the CCAR process and having greater transparency and kind of what you need to do on the quality aspects. Is there any opportunity there?

Yeah. David, I wouldn’t think about a significant opportunity there just related to separation. As we’ve said in the past, the infrastructure build costs are now in the run rate. So when you look at the expenses, when you look at just sequential bill from the second quarter to the third quarter, it was relatively modest, just driven by growth in EMV and we always see a seasonal increase in the third quarter. But the infrastructure build cost and everything that we’ve built to prepare for separation is reflected in the run rate. And just based on the earlier comments I made, even though we are not technically subject to CCAR, the expectations are going to be similar. They are not going to be exactly the same, but they are going to be similar. And so I think it will be premature to talk about any kind of expense benefit that we expect from this, because we are holding ourselves to the same standards that the Fed is holding others to. So we are going to go through a couple rounds here on filing a capital plan and doing liquidity access with the outgoes, and maybe there is a longer-term opportunity, but nothing we see in the near term.

Okay. That's helpful. And separately, the renewal with PayPal is obviously a big positive. Can you talk about the implications on maybe the RSA and kind of on marketing expenses and have the upfront impact from that renewal as they are coming, similar economics or worse can you expect? And maybe renewals in general, what would you expect there going forward?

All the renewals we've completed privately, except for PayPal, are included in our run rate, allowing for general comments on renewals. Regarding PayPal specifically, we can't share details about the pricing and economics. However, as Margaret mentioned, we are very enthusiastic about extending our relationship with PayPal. We have successfully achieved that, and the returns are quite appealing for us. We plan to continue expanding these programs, ensuring they are beneficial for us, PayPal, and PayPal customers. Additionally, as part of this new relationship, we will upgrade a significant number of accounts to Dual Cards, which we believe will help stimulate growth in the future. We have made several changes to the program, all aimed at enhancing its growth, and we will pursue this while ensuring the returns remain attractive for us.

Great. Thank you.

Yes. Sort of building on the same question, Brian, on the Amazon Prime deal. Can you talk a little bit about how that’s progressing? And then secondarily, clearly there have been some mixed economic data points from your numbers, it looks like things were pretty steady. Can you talk about if you’ve seen any sort of ups and downs in credit or spend trends?

Maybe I’ll start with where the consumer spending and where we see the trends and then turn it over to Brian to some of the other points you asked. I think what we’re seeing is that the trend continues to indicate the consumer is getting stronger. Brian will talk a little bit about the credit. We see that getting a little bit better. I think gas prices and unemployment are certainly helping the consumer. I think the consumer is still cautious and they are definitely looking for deals and promotions. So I think our value propositions are really playing very favorably to the consumer. The one area that I’ve mentioned before that continues to be performing well are things related to the home. So things like furniture trends are pretty strong. So we feel pretty good about where the consumer is right now. And I think a combination of our marketing, the data analytics, and the building out of our mobile capability is really helping us drive some of those volumes.

Yes. So the other question you had was around the Amazon. And I think similar to what we’ve said earlier, we’re really excited about the 5% value prop for Prime customers. We’re measuring that every day, we’re looking at the new account flow, we’re looking at the purchase volume. Any time you can make a significant change to a value proposition like we did in Amazon, you want to do that in a way where you’re kind of soft launching it. You are doing a lot of testing control. So you make sure that it’s delivering the economic performance that we expect and it’s a good customer experience for the Amazon cardholders. And so far, it’s performing very much in line with our expectations, and we are optimistic that we can do some more marketing around that offer here in the near term.

Okay. Thank you.

Thanks, guys. And somebody down really asked my question but I’ll pursue it a little bit more deeply. Obviously, the Amazon value proposition is very compelling. It’s a new program that strikes me as a program that could have a high degree of seasonality given the nature of your partner. Can you just talk about what should we be thinking about in Q4 in terms of potential impact on volume, but more importantly in terms of RSA and provision expense?

Why don’t I start off? First of all, I think one of the positives of Amazon 5% for Prime customers is it's really encouraging everyday spend. So I think that’s really what the customer, Amazon is really trying to do. They are trying to get that Prime customer to not only buy big-ticket items and things like that but to grow seasonal and other things. So the 5% really encourages you to go there to that site versus somewhere else. So, we think that’s really great. Our business is a seasonal business, so obviously, holiday is a big opportunity for us. We’re heading into that. We think that Amazon 5% is going to be just a fantastic offering, and we hope to see some broader offering of that as we go into the holiday season. So, I think overall this is a great offering and one that as Brian said, we are really watching because I think as we get into the holiday season, the key for us is really making sure that the consumer is getting everything they need and things are working in the right way, and that’s why we’ve really been soft for both on our site and the Amazon folks on their site to ensure the experience for the customer is very, very good. I don’t know, Brian...

Yeah. I mean, in terms of more specific fourth-quarter impact, it's really hard to estimate at this point because obviously, we've got to determine and work out with Amazon to a significant extent and how broad we are going to go with the marketing in the fourth quarter, what the adoption rate is going to look like, what the spend is going to look like, and this is very fluid. As I mentioned earlier, we are monitoring this thing almost hourly with Amazon. Our teams sit with them and they look at the spending patterns, the types of purchases, the repeat purchases. And then from our perspective, from a credit perspective, we are also looking at the population of transactors versus revolvers and the credit mix and through the door population. So there are just a number of factors that we are looking at, and I can tell you so far, it is performing in line with our expectations, but it's a little too early to give any kind of specific forecast.

Okay. Fair enough. Second question, you mentioned in the third quarter, $20 million of EMV reissue expense. Can you just help us understand where we are in that process? I’m assuming, you are most of the way through that, but could you just let us know what fourth quarter will look like?

We are 100% complete with our active Dual Cards being rolled out for EMV.

Great. Thank you, guys.

Hi. Thanks for taking my questions. Margaret, I think in your opening comments you had discussed that a third of the applications are now coming mobile and online. I guess with Apple Pay, I was wondering how that helps your business processes. Does it improve the credit quality? Does it improve the data or the speed? If you could talk in that direction, that will be helpful.

I think it comes down to two main factors. First, the speed is excellent. Second, we are constantly exploring ways to create a seamless process. For example, when you apply for the Amazon card online, it automatically becomes your preferred card in the wallet. We're focused on ensuring that you receive a quick response, get your card promptly, and make it your card of choice. This approach enhances our positioning. Additionally, our research indicates that customers want to make larger purchases, and by offering online discounts based on ongoing promotions, we can enable customers to apply and buy directly while browsing those items. This presents a significant opportunity for us. Another major focus is understanding changes in shopping behavior, particularly as mobile and online channels become increasingly important. It's about making the application process seamless while aligning marketing offers so customers realize they can afford bigger items or larger baskets with a specific card, thanks to the available credit. This is the overall strategy we're currently pursuing.

And I also want to ask about currency with MCX, they’ve seemed to be finally making some progress? There have been a couple of trades that have tracked their introductions in the market just this month? I was wondering if you could give us an update as to where you stand with them, I know that you have partnerships in place, but some sort of visibility would be helpful.

Yeah. We, obviously, we have Samsung and Wal-Mart, who are a big part of our currency. We continue to build out the currency capability, and we will launch as soon as they are ready to launch in the Wal-Mart and Samsung organization and some of our other partners as soon as they are ready. So, I think, they are working through some of the functionality and doing some more testing. So I think in the near-term you will hear something about that being out in the marketplace.

Great. Appreciate the update.

Hi. Good morning.

Good morning.

Good morning.

Question on the CareCredit platform, some competitors, some marketplace lenders have been suggesting that they're interested in competing in that space and I just want to get the opportunity to understand how you feel your penetration has been going, how your progress has been against goals you set out and whether or not you’ve seen any incremental competition coming from these new lenders or not?

Yeah. I will start-off with, we have an incredible platform with CareCredit, and we have enormous penetration in the industry that we are in. So, I think, when you start with that, one of the things that I think is unique in CareCredit, unless you see the dental space as an example. It’s not like you can go on sign-up at Wal-Mart and get a whole bunch of volume, you literally have to go dental office to dental office to dental office across the United States. So to gain traction and build-out that platform from a start-up is extraordinarily hard. So we are not really seeing that competition really have any impact on us at this point. Many of the competitors also are doing more of an installment type lending versus revolving lending, and I think one of the unique things that we’ve really been able to build out. First of all, we have incredible brand-name. Our brand, we do market testing is, we see extraordinary rollout of customers who use that product. We are getting 50% of our transactions now repeat purchases. So I went into like that and I use it in the dental office or things like that. I think our example today of partnering with Rite Aid, where we are really looking at how do we increase the utility of the card because the customers who have that card have a great affinity to it. So we are not really seeing these guys. I know they are out there. We obviously we keep an eye on all our competition, but I think given our experience in the space, we have this business for 25 years, we are now there for 25 years. So I think, we are well ahead of those guys and I think it will take a little time for them even to really have any type of impact on us if they even do.

Okay.

And I think, Betsy, you can look at this in the purchase volume trends have also been pretty strong year-to-date. In the first quarter, purchase volume was 5.6%; second quarter was 8.5%; and this quarter was 12.5%, so we are very encouraged by the trend we are seeing around purchase volume as well.

Right. I mean, it’s a little bit more expensive channel to run than the other two platforms, is that accurate statement?

Well, I think you need infrastructure behind both these platform and payment solution...

... because you are dealing with thousands of merchants and you need a merchant process behind the same in sourcing to work in the right way. So it’s a bigger build-out I would say, and we have been out this for a really long time.

Okay. And then just second thing, one of your major retail partners Wal-Mart obviously this week had an Analyst Day with highlight a little bit of lower expectation for spend trajectory, and I wonder if you could comment about that and impact on your business?

We have observed similar trends. Historically, we have consistently outperformed retailers in organic growth with our card programs, often by two to three times. Our collaborations with Samsung and Wal-Mart remain robust, and our performance has been strong. When retailers face difficult times, our partnerships become even more valuable, and our unique business model proves its worth. Our focus is on finding ways to assist Wal-Mart further, emphasizing how our card programs can drive their sales growth. We are monitoring the situation closely but are not concerned about our performance. We maintain strong relationships with our partners and have a dedicated team focused entirely on Wal-Mart and Samsung, whose primary goal is to enhance sales for our partners. Although they may encounter challenges, we will support them throughout the process.

Thanks.

All right, Vanessa. We have time for one more question.

Good morning. Thanks for taking my questions. Most of my questions have been asked. I thought I would just ask one about the penetration rates. You highlight ongoing organic growth as the primary source of growth. It appears that’s really the result of improving penetration of your partners. Are you seeing any changes in the case of penetration, or should we just assume some consistency there?

It varies by partners. We have some partners with very high penetration and others with single-digit penetration. Our marketing approach is definitely helping us in several ways. We've focused on the repeat purchase concept in CareCredit and Payment Solutions, which means we are marketing more to encourage customers to use the card again. This is significant because four or five years ago, larger purchases were typically considered one-time transactions. Now, our ability to encourage card reuse is crucial for those platforms. On the Retail Card platform, in addition to the strong value proposition we've established, including offerings from Sam's and Amazon, our mobile and online initiatives are also contributing to our growth. While the industry is experiencing about 14% growth in online sales year-over-year, we are growing at 21%. This has a positive impact. Our research shows that customers who shop both in physical locations and online have a closer relationship with us, leading to more shopping trips and larger purchases. The more we can integrate the brick-and-mortar and online experiences for consumers, the better our opportunity to enhance penetration.

Okay, that’s very helpful. Thanks. My second question is about your new program ramps. Regarding your BP, Guitar Center, and Citgo, are these fully ramped up, or are they still in the ramp stage? Have they reached their normal run rates at this point to help us assess how these might improve in the near term?

BP is clearly on track as of the second quarter, which is boosting our growth rate. We noticed this in both the second and third quarters. Guitar Center is currently in a challenging position, so you will see some improvement there, but I can't specify the exact impact of either one, though they are smaller compared to BP. Please keep that in mind.

Okay. Thanks everyone for joining us on the conference call this morning and your interest in Synchrony Financial. The investor relations team will be available to answer any further questions you may have and have a great day.