Synchrony Financial (SYF) — Q3 2017 Earnings Call Transcript

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 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 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. During the call today, I will provide an overview of the quarter and then Brian will give details on our financial results. I’ll begin on slide three. For the third quarter net earnings totaled $555 million or $0.70 per diluted share. We continue to generate strong growth in several key areas of our business. Loan receivables were up 9%, which helped to drive strong net interest income growth of 11% during the quarter, consistent with our expectations. Organic growth helped to drive this performance and remains a top priority for our business. Additionally, purchase volume and average active accounts both increased 4% in the third quarter. These metrics are also highlighted on slide four of today’s presentation. Moving to credit quality, net charge-offs were 4.95% this quarter compared to 4.39% last year, with provision for loan losses increasing by 33% driven by credit normalization and growth. Brian will provide more details on credit later in the call. The efficiency ratio was 30.4% for the quarter versus 30.6% last year as we continue to generate positive operating leverage. Our deposit base comprises a significant portion of our funding, 73% in the third quarter. As such, we remain focused on continuing to generate deposit growth. In the third quarter, deposits were up nearly $5 billion over the prior year or 9% to $54 billion. Competitive rates and customer service should help us to drive further deposit growth, and we expect for that growth to generally trend in line with our receivables growth. Regarding capital and liquidity, our common equity Tier 1 ratio was 17.3% and liquid assets totaled $16 billion or 18% of total assets at quarter end. During the quarter, we paid a $0.15 dividend per share and repurchased $390 million of our common stock. Looking at the business highlights, we renewed several partnerships this quarter, including Yamaha, BrandsMart U.S.A., Nautilus, Mars Petcare, and Evine. We continue to seek new partnerships to augment our strong organic growth. During the quarter, we launched new programs with At Home, a big-box specialty retailer of home decor products and Zulily, an e-commerce retailer. Furthermore, with the launch of Zulily, our QVC cardholders now enjoy expanded card utility as they are also able to use their QVC cards to make Zulily purchases. We also launched a new value proposition at PayPal that offers cardholders 2% cash back on their online and in-store purchases wherever MasterCard is accepted, and to make the card convenient and simple to use, all accounts are automatically added to members’ PayPal Wallet and cash rewards are redeemed directly to PayPal balances. We recently announced the rollout of our new CareCredit Dual Card, the CareCredit Rewards MasterCard, which is being offered as an upgrade to select cardholders among our 10 million plus nationwide cardholder base. This new card combines the promotional credit capabilities of the standard CareCredit card with the added convenience of MasterCard acceptance. The CareCredit Rewards MasterCard remains focused on health, wellness, and personal care, while offering cardholders the ability to earn points for all purchases, including CareCredit network and general purchases. Turning to slide five, I’ll spend a few moments on our sales platform performance. We continued to deliver growth across all three of our sales platforms in the third quarter. In Retail Card, we grew loan receivables 9% over last year, reflecting broad-based growth across our partner programs. Purchase volume grew 4% and average active account growth was 3%. Interest and fees on loans increased 11%, primarily driven by the loan receivables growth. As mentioned earlier, we had another active quarter in our Retail Card sales platform with the renewal of our Evine partnership, the launch of our At Home and Zulily programs, and the rollout of our new value proposition at PayPal. We continue to leverage our strong Retail Card foundation and make investments to drive organic growth and attract profitable new programs. Payment Solutions also delivered a solid quarter. Broad-based growth across the sales platform with particular strength in home furnishings and automotive products resulted in loan receivables growth of 9%. Purchase volume grew 6%, excluding the impact from the loss of sales due to the HHGregg bankruptcy. Average active accounts were up 9%, and interest and fees on loans increased 11%, primarily driven by the loan receivables growth. We are pleased to have renewed several key Payment Solutions programs during the quarter, including Yamaha, BrandsMart U.S.A., and Nautilus, and we continue to enhance our Synchrony Car Care program, recently adding additional utility to nearly 3 million cardholders with the addition of Mavis Discount Tire to the Synchrony Car Care network. Payment Solutions reuse rates represented 26% of purchase volume in the third quarter. CareCredit also delivered another strong quarter. Receivables growth of 10% was led by our dental and veterinary specialties. Purchase volume and average active accounts were both up 9%. Interest and fees on loans also increased 9%, primarily driven by the loan receivables growth. We recently renewed our partnership with Mars Petcare, a global leader in pet care. We also entered the durable medical equipment market with a new multiyear partnership with several personal mobility companies. This new market aligns well with our objective of helping people pay for care when they need it. As I outlined earlier, we recently launched our new CareCredit Dual Card, further expanding the utility and convenience of the card. We will continue to seek ways to expand the utility of our CareCredit Card. Our network expansion and increased card utility have helped drive reuse, which represented 54% of purchase volume in the third quarter. Our sales platform delivered solid results and continue to develop, extend, and deepen relationships, while providing innovative value-added solutions for our partners and cardholders. I’ll now turn the call to Brian to provide the details on our results.

Thanks, Margaret. I’ll start on slide six of the presentation. In the second quarter Synchrony earned $555 million of net income, which translates to $0.70 per diluted share. We continued to deliver strong growth with loan receivables up 9% and interest and fees on loan receivables up 11% over last year. Overall, we’re pleased with the growth we generated across the business. Purchase volume grew 4% over last year. The slower growth compared to recent quarters was due to a few factors. The underwriting refinements we noted previously, the impact from the hurricanes during the quarter, and the HHGregg bankruptcy. Given some of these items are short-term in nature, we expect the impact to moderate in future quarters. We had another solid quarter in average active accounts growth, which increased 4% year-over-year driven by the strong value propositions and promotional offers on our cards that continue to resonate with consumers. The positive trends continued in average balances with growth and average balance per average active account up 6% compared to last year. Interest and fee income growth was driven primarily by the growth in receivables. RSAs increased 6%. While we share the strong top-line growth and positive operating leverage generated in the quarter, this was partly offset by higher incremental provision expenses. RSAs as a percentage of average receivables was 4.2% for the quarter, down from 4.3% last year and in line with our expectations. For the year we still think RSAs will run near 4%. The provision for loan loss increased 33% over last year driven by credit normalization and growth. The reserve build in the quarter was $360 million, which included the impact from areas affected by the recent hurricanes and a slight reduction in expected recovery sales going forward. Adjusting for those items, the reserve build was largely in line with the previous two quarters and the expectations we laid out earlier in the year. I will cover asset quality metrics in more detail when we review slide eight later. Other income was $8 million lower than the prior year. While interchange was up $10 million driven by continued growth in out-of-store spending on our Dual Card, this was offset by loyalty expenses that increased by $23 million, primarily driven by everyday value propositions. As a reminder, the interchange and loyalty expenses run back through the RSAs, so there is a partial offset on each of these items. As we noted last quarter, we expect loyalty program expenses as a percentage of interchange revenue to trend near 100% with some quarterly fluctuation. Other expenses increased $99 million or 12% versus last year. We continue to expect expenses going forward to be largely driven by growth, including strategic investments in our sales platforms, in our direct deposit program, as well as enhancements to our digital and mobile capabilities. Lastly, the efficiency ratio was 30.4% for the quarter, compared to 30.6% last year and year-to-date the ratio is 30.3%, around a 70 basis point improvement over the 31% ratio year-to-date last year. The business continues to generate a significant degree of positive operating leverage. I’ll move to slide seven and cover our net interest income and margin trends. Net interest income was up 11% driven by the continued strong loan receivables growth. The net interest margin was 16.74%, up 40 basis points over last year. While we generally see margin performance improvement in the third quarter due to a higher revolve rate, the margin performed better than expected driven by a few factors. First, we benefited from a slightly higher mix of receivables versus liquidity on average compared to last year, as we continue to optimize the amount of liquidity we’re holding and have deployed excess liquidity to support our strong receivables growth. The yield on receivables was up 14 basis points compared to the prior year. The revolve rate increased slightly compared to the prior year and we received a modest benefit from the increases in the prime rate over the past year. Funding costs increased 8 basis points driven by higher rates in our interest-bearing liabilities, primarily due to higher benchmark rates. Since the Fed started tightening, we have benefited as our yield on earning assets have outpaced the increase in funding cost, leading to the margin outperforming our expectations. Part of this benefit can be attributed to lower deposit rate betas than we were expecting through the first 100 basis points of tightening. We did see deposit rates move more in the last tightening, and we believe if rates continue to rise our deposit betas will increase to keep pace with future rate and deposit market increases. We also expect to see the normal seasonal decline in yield in the fourth quarter given the build in receivables during the holiday season. This has been as much as 50 basis points to 60 basis points historically. As a result, we expect the net interest margin to trend closer to 16.25% in the fourth quarter, still well above our original outlook. Next, I will cover our key credit trends on slide eight. As we have noted on our previous calls, credit began to normalize in mid-2016 and we have expected this normalization to occur over time driven by a number of factors, including portfolio and channel mix, account maturation and seasoning, and consumer and payment behaviors. As a result, we have needed to increase the level of reserve builds over the last quarters and as expected, this continued during the third quarter. But going forward, we believe the reserve builds needed will be lower as the pace of credit normalization slows, assuming the current economic trends continue. In terms of the specific dynamics in the quarter, I will start with the delinquency trends: 30-plus delinquencies were 4.8%, compared to 4.26% last year and 90-plus delinquencies were 2.2% versus 1.89% last year. Moving on to net charge-offs, the net charge-off rate was 4.95%, compared to 4.39% last year. The largest contributing factor to the increase in NCOs continues to be normalization. Given what we’ve seen so far, we continue to expect NCOs to be in the low 5% range for 2017, however maybe at the higher end of the range depending on the impact from the hurricanes. It’s important to note that we do see a fairly significant seasonal impact that typically results in higher NCO levels in the fourth quarter. The allowance for loan losses as a percentage of receivables was 6.97% and the reserve build from the second quarter was $360 million. As I noted earlier, this included the impact related to areas affected by the recent hurricanes and a slight reduction in expected recovery sales going forward. Adjusting for those items, the reserve build was largely in line with the previous two quarters and the expectations we laid out early in the year. Looking forward based on what we are seeing across the portfolio and assuming economic conditions are stable, our expectation continues to be a loss rate in the low-to-mid 5% range for 2018, with losses trending somewhat higher into the first half of ‘18, then starting to level off in the second half of the year. This is consistent with what we noted last quarter. Regarding loan loss reserve builds going forward, we expect the reserve builds will transition to be more growth driven, given our expectation that losses begin to level off in the second half of ‘18. We believe the reserve build in the fourth quarter will begin to reflect this and we expect the build to be in the $275 million range. I’d also like to provide an update on underwriting and vintage performance, which continues to trend in line with expectations. As you remember, we started making refinements to our underwriting in the second half of 2016 and we continue to see the positive impact of those changes. Additionally, we have continued to make incremental underwriting changes throughout the year and the early data suggests that the 2017 vintage is performing better than the second half of ‘16 and more in line with our 2015 vintage. In summary, while credit continues to normalize from here, we expect the pace of change and impact on our results will moderate as we move into 2018, assuming stable economic conditions. We continue to see very good opportunities for continued growth at attractive risk-adjusted returns.

Thanks, Brian. I’ll provide a quick wrap up and then we’ll open the call for Q&A. We remain focused on our strategic priorities, working daily to drive organic growth, deliver value to our partners, attract new profitable programs and make the investments necessary to develop innovative solutions that help our partners address the evolving retail landscape. When our partners win, we win. Our results this quarter, including the numerous renewals and program launches, demonstrate our commitment to our partners and cardholders, and the value they derive from our products and services. Returning capital to shareholders also remains a key focus and we are pleased to have increased our dividend payout this quarter and to repurchase $390 million of our common stock. And we are doing this as we continue to grow our business while maintaining strong returns and a solid balance sheet in the process. I’ll now turn the call back to Greg to open up to Q&A.

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I’d like to ask participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session.

Thank you. Good morning. Brian, I wanted to ask a question on, follow-up on your commentary around credit. The year-over-year increase in delinquency rates has been pretty flat since June at around 50 basis points. Is it reasonable given all of your commentary around your normalization and growth driven kind of all those dynamics to think of that 50 basis points as peak-ish or is there room for that to accelerate from here?

Yeah. Bill, I think really what you’re seeing is the delinquency related to both the second half of ‘15 vintage and the first half of ‘16 vintages maturing. They’re right at the point right now about 18 months out where they hit the peak delinquencies. And so if you think about the benefits from the underwriting changes that we made, those are just now starting to work their way through the portfolio. And so you’ll start to see those in the overall delinquency stats probably in the first half of 2018 about six months in advance of net charge-offs leveling off, which we think happens in the back half of 2018. So I’d say delinquencies are trending in line with our expectations and again, just really driven by the normal seasoning pattern in those second half of ‘15, first half of ‘16 vintages.

Okay. If I may follow up, I had a bigger picture question for you, Margaret. Some of the larger bank issuers who have been a bit more aggressive on pricing appear to be facing a little bit of, I guess, pressure to deliver better operating performance within their card segments and arguably that would seem to diminish their ability to more aggressively go after some of your partners perhaps by leading with pricing. Just curious, are you seeing any signs of dialing back competitive pressures? Just trying to get a sense overall in the context some of the renewal risk that investors are concerned about in terms of what you’re seeing.

Yeah. So I’d say we haven’t really seen a change in the competitive landscape. I think pricing is really one piece of the puzzle. The things that our partners really focus on is capabilities first, and then, obviously, once you get into that process then pricing becomes the end discussion. So we’re working hard to ensure and you see that in some of the things we talked about earlier around our investments and how we’re trying to really work to innovate what our partners really need. So I’d say no real change that we’re seeing right now and we’re just focused on keeping our head down, and really trying to deliver for our partners as we go through this large retail transformation that’s occurring.

Thank you for taking my question this morning. I want to discuss the implications of tighter underwriting. We understand the credit perspective, but I'm interested in how it affects the revolve rate. Given the lower contribution from interchange in your model, how should we view the potentially lower revolve rate in terms of the business's economics?

I appreciate the question, Rick. You'll notice the effects of the stricter underwriting in a few areas. There's been a slight drop in purchase volume, which we began observing last quarter and has continued into this quarter. This is where the immediate impact is felt. Looking ahead, I anticipate that we might start seeing a decrease in benefits from revolving balances in the fourth quarter. Although we expect to maintain a strong revolving rate in our portfolio—central to our business and earnings—this isn't a fundamental shift. Considering the significant margin improvements we experienced starting in the second half of last year and continuing into this year, I believe those will begin to diminish, and we might see some of that in the fourth quarter and more clearly in 2018.

Great. Very helpful. Thanks, Brian.

Thank you. I appreciate that you are demonstrating some operational leverage with the efficiency ratio improving. At this point, you are fully independent for two years and well into your bank development. I have a question regarding whether there are further opportunities to enhance your efficiency, as some of your peers have managed to keep expenses down and utilized expense days to offset the credit impact.

Yeah. Sure, Mark. Look, we’re very focused on productivity and I think so far year-to-date we’ve driven about 70 basis points on the efficiency ratio from 31% last year down to 30.3% so far year-to-date. So we are generating good operating leverage in the core business. We’re obviously using some of those productivity savings to increase the spend on our strategic investments. Certainly, revenue and margin have trended above expectations so far this year, so that’s helping us a bit. If you go back and you take a two-year look, the efficiency ratio in 2015 was 33.5% and we’ve driven that to just below 31% in two years. That feels like a fair amount of operating leverage for us to be generating while funding all of our strategic investments. So, what I would tell you that the huge focus of the management team, we’re always looking at ways to get more efficient in the areas that don’t directly impact our partners and our customers, cutting waste out of the business and then taking those savings, and obviously, showing some productivity, but also driving those savings back into strategic investments that are going to pay off two years, three years, four years, five years down the road.

Okay. Are you able to give us some sense of what we should expect maybe in 2018 in terms of strategic investments?

It’s going to be along the same lines as the stuff we invested in this year. We’re spending on digital, mobile. We’re spending a lot on analytics. All the things that are helping us really outperform what has been a fairly weak retail environment right now. These are the things, as Margaret talked about, it’s really important for us to help our retailers as we go through this transformation. So we need to be kind of investing ahead of the curve in order to sustain the type of growth that we’ve had.

Hi. Good morning. Brian, a quick question on portfolio acquisition appetite, where are you on that and last night on the PayPal call, they mentioned that they might sell their portfolio by year end. Is that something that you would be interested in?

So I’m going to take that one, if it’s okay. We showed this quarter that we’re interested in winning deals. We’re obviously very interested in winning deals. I can’t really comment on a particular portfolio that’s out in the marketplace. However, we’re really always open to attractive opportunities that meet our return hurdles, that are strategic for our business, that allow us the opportunity to continue to grow. So we’re continuing to work hard on our pipeline, looking at various opportunities across all three of our platforms and we’re going to continue to drive that through this year and into next year.

And Margaret on that same note, would you be willing to lend in international markets if one of your partners was interested in that?

I think the answer is that we would be interested. We need to determine how we would structure that since it becomes more complicated from a funding perspective when dealing outside the U.S. However, we are always in discussions about different opportunities and will continue to collaborate with our partners to develop something they feel strongly about.

Hey. Good morning, guys. Brian, you gave us updated guidance for the 4Q reserve build of $275 million. A lot of the big banks this quarter were willing to tease out for us what specifically in terms of reserve build was related to growth and what was related to higher charge-offs. So I was hoping maybe you could give us some color on that as you think about the 4Q reserve build. And two, as we start to see the headwinds from reserve building related to credit starting to subside over the next couple of quarters, what does this mean for the RSA over time? Thanks.

Sure, Ryan. The reserve build primarily consists of credit normalization and strong receivables growth. To break it down, approximately $20 million was related to hurricanes and recoveries, which we highlighted for you, while the remaining $340 million was split around 50-50 between growth and normalization. Adjusting for those specific items, the build aligns closely with the previous two quarters and matches the outlook we provided back in April. More importantly, based on the trends we're observing and the impact of the underwriting changes we've implemented, we believe the reserve will start to moderate in the fourth quarter and continue to trend that way as we move into 2018. We'll provide a more comprehensive outlook during our January call.

And then, I guess, just wasn’t made for the RSA as credits starts to normalize?

Yeah. As you think about the RSA, we trended well below our original expectation. If you remember back in January, we thought the RSA would be around 4.5%. We’re now seeing it somewhere in the 4% range, so there’s 50 basis points of an offset there versus our original expectations. You’ll start to see a little bit higher RSA starting in the fourth quarter. So with the reserve build trending down to the $275 million range versus where it’s been all year, the benefit of that lower build will obviously be shared with the retailers, so you’ll see a little bit of higher RSA in the fourth quarter. That brings us back to that kind of 4% level and then we would expect that trend to continue into 2018.

And just last follow up, Brian. On the 50-basis-point quarter-over-quarter NIM decline, obviously, there’s a lot of moving pieces within that. But could you just help us understand what’s baked in, in terms of expectation for higher funding costs and revolve rates? Obviously, the market’s expecting another rate hike until the end of the quarter. Would you expect to see the deposit pricing continue to increase even though we’re not going to see a rate hike until the back half of the quarter? Thanks.

Yeah. Yeah. Let me give you a couple pieces as we think about the fourth quarter. So, first, as you mentioned, the most significant impact is just normal seasonality. So when you get that big seasonal build in receivables, you typically see a decline in yield as you move from the third quarter to the fourth quarter. That spend is much as 50 basis points to 60 basis points if you go back historically and look at it. And then, I think, you’ll have a couple of smaller impacts. I do think we’ll see slightly higher deposit betas than we’ve seen so far in the rate cycle. I don’t think it’s anything dramatic, but it’s probably a little more competition than what we saw all year. We start to see a little bit of that in the latter half of the third quarter. I think that will continue into the fourth and into 2018. So far we’ve outperformed our expectations when it comes to deposit betas, I think we’ll just give a little bit of that back, so that’s in the forecast for the fourth quarter. We’ll also have a slight impact from some of the relief related to hurricane impacted areas. We think that will be pretty small but that’s included there as well. So I think you’ve got seasonality is the big driver and then you’ve got a couple of other small things that will work their way through in the fourth quarter.

Got it. Thanks for taking my questions.

Hi. Good morning.

Good morning.

Just wanted to follow up on the NIM related to the forward look here. I think you mentioned that the improvement waned a little bit, but does that because funding cost is going up or you’re not passing along as much of the rate hike in yields?

In the fourth quarter, the changes we are seeing can mainly be attributed to seasonality. Additionally, there are factors such as slightly increased deposit betas and the effects of the hurricanes. These are the specific dynamics we are observing for this quarter. Looking ahead to 2018, we anticipate that due to some underwriting changes we've implemented, the benefits we’ve been experiencing from higher revolving rates may decrease. Throughout the second half of last year and into this year, we have enjoyed considerable advantages from those higher rates, but we expect this to taper off as credit levels start to stabilize in the latter part of 2018. Consequently, we foresee a decline in revolving credit as we progress into 2018.

Got it. Okay. And then, just on this quarter and 3Q, I was wondering if there was any forbearance activity or delayed payments that you might have done for people in hurricane-related areas. I know a couple of peers mentioned that, so I was just wondering if that impacted NCOs as well this quarter?

Yeah. So, I’d say, I’ll start, I think one of the things that we have to make sure, particularly in the space that we’re in, because our customers, our customers and the retailers, we really have to be thoughtful about the impact on them, because our goal is always to make them feel like we’re caring about them, we’re listening to their needs. So we have taken a number of actions to ensure we’re addressing the customer needs and Brian could you just talk about the financial impact of that.

Yeah. Sure, Betsy. I’d say, overall, it’s a pretty modest impact on the business. Obviously, starting with purchase volume, obviously the areas impacted by the hurricanes that resulted in some lost sales relative to our forecast. Wasn’t that material, but obviously something we expected to see. I think over the longer term, we would expect to see an increase in certain spend categories as people start to rebuild. We’re obviously waiving certain fees and charges in the impacted areas. That had about a 10-basis-point impact on margins, so it’s pretty small. We’ll likely have another similar impact in the fourth quarter. And then just in terms of re-aging balances, because I know this has been a topic, we do waive minimum payments to give some customers additional time to pay, but we typically don’t move deeply delinquent accounts back to current, just given the odds of collecting on those accounts are very low to begin with. So there really wasn’t a benefit on net charge-offs due to hurricanes in the quarter for us, just based on our policies.

Okay. So no impact on net charge-offs for you?

No. Not in the quarter.

Yeah.

We do expect to see a slight increase in net charge-offs as we enter the fourth quarter, and we have accounted for that in the reserve build this quarter.

Got it. Okay. Thank you.

Thanks. Here’s the first question. I just wanted to clarify the RSA commentary Brian that you had. As we look out to next year, I mean, should we expect it to sort of migrate back to the mid-4%s or are you saying that the trendline is in the low 4%s?

Yeah. Sanjay, that’s probably more specific than we want to get on 2018 at this point. But what I’d tell you is we think it’s 4% for the year. It’s going to come up a bit in the fourth quarter and then we do expect the reserve builds to moderate, and if the reserve builds moderate, we would expect the RSAs to be higher than they were this year. So I’m not going to give you...

Got it. And then, I guess, Margaret, obviously, you guys have a couple of large renewals out in 2019 and the dialogue is ongoing there. But, I mean, maybe you could just give us some preliminary window sort of into the nature of the discussions and how comfortable you feel on the renewals there? And then just maybe broader question, it’s been about three years since you guys have gone public and the complexion of the business is pretty much the same in terms of the mix of business. I mean, I know the other segments have been growing quite nicely. I mean are there any other expansion opportunities, maybe going back to some of the international opportunities that were brought up before? Thanks.

Sure. On renewals, I want to emphasize that we are working on them every day. It involves collaborating with our retailers to ensure we are addressing their needs consistently. We do have some renewals on the horizon, and we are confident about maintaining those relationships. Our team is focused on ensuring effective communication is taking place, and we anticipate being able to share updates next year. Regarding expansion opportunities, we are always exploring options outside the U.S. The key factor is whether the growth potential is significant enough. We must consider funding and the regulatory landscape to avoid overextending ourselves. Currently, we are concentrating on smaller acquisitions that align strategically with our goals. For instance, acquiring GPShopper was beneficial in enhancing our mobile capabilities and assisting our partners in that area. As we move into 2018, you can expect more similar initiatives across our platforms.

Thank you.

Most of my questions have already been asked and answered, but I wanted to follow up on a couple of areas. One is regarding the reserve build. You mentioned it moderating. When considering that reserve level, what indicators do you need to see in order for it to move closer to just supporting growth? Is it related to delinquencies, like expecting improvements to start in early 2018, or do actual charge-offs need to improve?

It's a good question, Moshe. Picking an individual quarter for this to happen is somewhat challenging. The easiest way to think about it is that when credit remains flat in your 12-month outlook, your reserve build should primarily reflect growth. However, this is complicated by the need to account for new vintages and their seasoning, which adds a layer of normalization to your reserve. Therefore, a more reasonable expectation is to see a slight decline in reserve builds from the current trend. For instance, moving from a core reserve build of around $340 million to approximately $275 million in the next quarter suggests some improvement in the forward-looking view on losses. If that 12-month outlook continues to improve and stabilize, you would anticipate the reserve build trend to align accordingly. While I can't specify which quarter this will happen, our insights are influenced by delinquency trends, vintage seasoning, and what those factors imply for your 12-month forward view on losses.

Okay. To follow up on Sanjay’s question about renewals, could you discuss how you might encourage some of your major partners to renew early, potentially without going to RFP? Additionally, how did your experience in 2016, around the time of the IPO announcement, influence those renewals, what changes were necessary, and how can we apply those lessons moving forward?

Right. I would say our most challenging renewal period was just before the IPO when we made a concerted effort to renew all our contracts to ensure portfolio stability upon going public. Typically, retailers seek something new, whether it's a value proposition or innovation that matters to them, which allows us to initiate discussions about investments in certain areas in exchange for contract extensions. In some situations, retailers are obligated to go through a request for proposal process, but overall, we maintain strong relationships. Our partners likely need us now more than ever due to the ongoing transformation in retail. The strategic investments we are making are crucial. Providing a seamless digital experience for customers and utilizing real-time data are key initiatives to support our partners during this transformation. A significant advantage we have is the ability to track transactions regardless of where they occur—on mobile, online, or in-store—and understand customer shopping behavior. Our goal is to integrate the point-of-sale experience with big data to make it real-time, and we are actively working towards achieving that.

Great. Thanks.

Thanks guys very much and good morning.

Hey, John.

Hi, John.

I think most of my questions have been asked. I guess you guys have talked about a weak retail environment, and Margaret, you just talked about the digital component. I mean, could you give us maybe an update on some of your e-commerce factors, maybe penetration of total flow of volume or growth rates year-over-year in that regard?

So year-over-year our online sales were up about 16% and if you look at our Retail Card where we have good measures, our sales penetration is 24%. So we continue to feel really positive about our ability to grow that channel. And again, I think what we’re really trying to do is roll out and we’re in the midst of doing some of this, some enhanced capability to our partners to make that process from applying and servicing on your mobile phone much more seamless. I think many of you heard last year we had SyPi, which is a plug-in app that we do with our retails. We’re rolling that out as an example more effectively across all our big retailers. So we see this as a continued really important opportunity for us. And I think similar to what I said on the last question, when you integrate that with really the data, I think that’s really where we’ll have a real win and we’re working it to try to get that information to be real-time and that’s really what we’re focused on right now.

Okay. Turning to another growth area, you’re looking at the quarterly stats. CareCredit continues to show strong growth and I know you purchased a portfolio from a competitor last year. Can you provide us with an update on that, specifically the penetration rate with the medical partners involved and the opportunities available moving forward?

Yeah. I think what we’re trying to do here is really look at CareCredit. I think we have very high penetration in the verticals that we’ve been in for a while whether essential to that very high penetration of the partners. What we’re really looking at right now is and you’re seeing that in the growth is expanding into new verticals where we see an opportunity. When we do the verticals, one of the things we want to make sure, we never want to be in a position where if this is all not done where someone’s in surgery or something like that, we’re doing it outside, any of those types of areas. But one of the things I think you’re seeing is health care costs continue to go up. I think CareCredit is offering an opportunity to our customers to leverage and use some of our promotional financing to take care of some of their very important health care needs and wellness needs. So, I think, we’re really excited about how we’re going after these verticals and driving that growth. And then lastly, I’d say we’ve been in Rite Aid testing CareCredit as the utility card across some other areas and that’s an example where we’re seeing nice growth as well. So we’re continuing to look at what are the right areas to continue expanding in CareCredit. I will tell you that the customers love that product. We have very high brand recognition. It’s a great little platform for us and one that we’re going to continue to invest heavily and really drive growth.

Thanks very much. Appreciate the color.

Okay. Thanks everyone for joining us this morning and your interest in Synchrony Financial. The Investor Relations team will be available to answer any further questions you may have. We hope you have a great day.