Synchrony Financial (SYF) — Q4 2018 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 wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. 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. I'll begin on slide three. We ended 2018 with a strong fourth quarter, which sets the foundation for 2019. We have a number of significant areas to cover today. So I'm going to spend my time covering our business highlights including the renewal and extensions of several key programs, as well as the direction we are going with the Walmart portfolio later this year. Brian will detail our financial results and our outlook for 2019, as well as the potential financial impact of the Walmart portfolio sale later in the call. A very significant and exciting development in the fourth quarter was our renewal with Sam's Club, a top five program for us. By extending our strategic partnership with Sam's Club, we will continue to provide enhanced financing options for Sam's Club members across the retailer's nearly 600 clubs. Sam's Club is a valued and longstanding partner and we are very much looking forward to continuing to deliver innovative products and capabilities and fantastic customer service to help grow membership and sales. Further, we have come to an agreement with Walmart and Capital One on the sale of the Walmart portfolio which will be acquired by Capital One. Brian will provide more details on this later in the call, but I will emphasize that in the coming months we are committed to a seamless transition of the program to Capital One. I'm happy to report that we also renewed several other key partnerships over the last few months. We are very pleased to renew and extend our relationships with Amazon under a long-term agreement building on our 11-year relationship with them. We continue to work with Amazon on enhancing the Amazon store card experience for account holders. We recently launched account management capabilities via voice command using Alexa, as well as a native app where you can check balances, look up account activity and rewards, and manage payments. We look forward to continuing our high level of engagement with Amazon well into the future. We also signed a new co-brand program with eBay, building on a relationship that began in 2004. We are excited about the launch of our new eBay MasterCard, which has attractive value propositions that reward cardholders with points each time they use their card on and off the eBay website with more points accumulating for purchases made through eBay. We are happy to offer this new program in partnership with one of the world's largest online marketplaces and believe we can help add significant value to eBay and its U.S. customers. We are excited to renew our relationships with Google. Through this partnership, we provide financing for Google store hardware products including Pixel and Google Home products. We look forward to continuing to work with Google and the future prospects of this program. During the quarter, we also extended and expanded our relationship with Qurate Retail Group, one of the largest e-commerce and mobile commerce companies in the United States. As part of the expanded partnership, we will provide private label credit card services to HSN starting in August of this year. We are very pleased with this program. We also extended our relationship with QVC, which we have had since 2005, and also with zulily, a relatively new and successful partnership. Our recent renewals and new program wins further demonstrate our strength in the online retail space, highlighting our e-commerce and digital capabilities. We are also happy to add a new retail card partnership with Harbor Freight, a discount tool and equipment retailer with 900 stores nationwide. In our Payment Solutions business, we renewed a key partnership with Mohawk, a leading global floor manufacturer. We also added a new relationship to our Payment Solutions business. We announced a strategic industry-first credit card partnership with Fanatics, the global leader in licensed sports merchandise. The long-term partnership will offer fans a new way to pay for merchandise in their account for their favorite team and players with a branded Fanatics credit card. In addition, cardholders will receive special offers for unique sports experiences and will be part of the Fanatics FanCash loyalty program. Together, we will leverage our deep expertise in data analytics to deliver personalized shopping experiences and enhanced loyalty for fans. During the quarter, we also significantly extended our CareCredit network and card utility with Walgreens' recent agreement to accept CareCredit in all 9,000 stores. With the program expected to launch in the first quarter of this year, cardholders will be able to use their CareCredit cards at Walgreens for all of their health and wellness needs, including prescriptions, deductibles, and co-pays. With this new relationship, CareCredit will be accepted at over 17,000 pharmacies nationwide for pharmacy, health, beauty, and personal care purchases. Also, in CareCredit, with the recent addition of a new executive partnership with the Medical Group Management Association and our successful peer review by the Health Care Financial Management Association, the CareCredit network has further positioned itself for continued rapid expansion into various new health care specialties in the health system space generally. It was not only a very productive quarter for us, but a very productive year. We accomplished a lot in 2018 including the renewal and extension of five of our largest ongoing programs: PayPal, Lowe's, JCPenney, Amazon, and Sam's Club. Across all of our platforms, we renewed more than 50 existing partnerships, but also signed more than 35 new business deals. We also expanded into 11 new CareCredit specialties. And earlier this year, we acquired Loop Commerce, a technology leader in digital and in-store gifting services, which brought into our product line and technology capabilities. Overall, it was also a breakout year for technology. Our investments over the past four years are increasingly contributing to our success. Data analytics, AI, the cloud, and others are now driving credit and customer service innovation and enhancing new digital and mobile customer experiences. Looking ahead, we continue to have a strong growth trajectory, and we will continue to pursue partnerships on economic terms that meet our risk-adjusted return threshold. I will now turn the call over to Brian to detail our financial results and our outlook for 2019.

Thanks, Margaret. I'll start on slide six of the presentation. This morning, we reported fourth quarter earnings of $783 million or $1.09 per diluted share. Loan receivables were up 14% and interest and fees on loan receivables were up 13% over last year, reflecting the addition of the PayPal Credit portfolio in the third quarter. We also continued to deliver solid organic growth. Overall, we're pleased with the growth we generated across the business as well as the risk-adjusted returns on this growth. The interest and fee income growth were driven primarily by the growth in receivables. Purchase volume grew 10% over last year and average active account growth was 8%. The positive trends continued in average balances, with growth in average balance per average active account, up 5% compared to last year. RSAs increased $76 million, or 10%, from last year in line with receivable growth. RSAs as a percentage of average receivables was 3.8% for the quarter compared to 3.9% last year. The provision for loan losses increased $98 million or 7% from last year, driven by the PayPal Credit reserve build, partially offset by moderating credit trends. The reserve build in the quarter was $204 million, in line with our expectation of $200 million to $250 million. I will cover the asset quality metrics in more detail later in the presentation. Other income was up $2 million, while interchange was up $14 million driven by continued growth in out-of-store spending on our dual card. This was offset by loyalty expense that increased by $15 million, primarily driven by everyday value propositions. As a reminder, the interchange and loyalty expense go back to the RSAs, so there is a partial offset on each of these items. We expect loyalty program expenses as a percent of interchange revenue to continue to trend near 100% with some quarterly fluctuation. Other expenses increased to $108 million or 11% versus last year, driven primarily by expenses related to the addition of the PayPal Credit program and business growth. The expense growth rate will continue to be impacted by the addition of the PayPal program until we are comparing against quarters with PayPal on the run rate. We will also continue to make strategic investments in our sales platforms and our direct deposit program, enhancements to our digital and mobile capabilities, and investments to automate and streamline the back office. So overall, the company generated strong performance for the fourth quarter, especially considering the reserve build related to adding the PayPal Credit portfolio. I'll move to slide seven and cover our net interest income and margin trend. Net interest income was up 11%, driven primarily by the addition of the PayPal portfolio and loan receivables growth. The net interest margin was 16.06% compared to last year's margin of 16.24%. The margin was mainly in line with our expectations. We benefited from a higher mix of receivables versus liquidity on average compared to last year, as we deployed excess liquidity to support the PayPal portfolio acquisition and receivables growth. Also impacting the margin was a decline in the loan receivables yield and an increase in interest bearing liability cost. The loan receivables yield was 21.2%, a decline of 23 basis points versus last year, mainly due to the impact of adding the PayPal portfolio. The increase in total interest bearing liabilities cost was up 52 basis points to 2.48% reflecting higher benchmark rates. We will cover our expectations for the margin going forward in our 2019 outlook later. Next, I'll cover our key credit trends on slide eight. In terms of specific dynamics in the quarter, I'll start with the delinquency trends. The 30 plus delinquency rate was 4.76% compared to 4.67% last year and the 90 plus delinquency rate was 2.29% versus 2.28% last year. The year-over-year trends in both the 30 plus and 90 plus delinquency rates were relatively stable for the third quarter in a row. If you exclude the impact of the PayPal Credit portfolio, the 30 plus delinquency rate improved by approximately 15 basis points and the 90 plus delinquency rate improved by approximately five basis points compared to the prior year, reflecting the impact of our underwriting refinements and a more modest impact from normalization. Moving on to net charge-offs. The net charge-off rate was 5.54% compared to 5.78% last year and in line with our expectations. While the net charge-off rate benefited from the purchase accounting impact from the addition of the PayPal Credit portfolio, the credit trends in the core portfolio also continued to improve. Excluding the PayPal Credit portfolio impact, the net charge-off rate was down by approximately 10 basis points compared to last year. The allowance for loan losses as a percent of receivables was 6.9% and the reserve build from the third quarter was $204 million. As I noted earlier, the reserve build was in line with our expectations due to the improving credit trends, resulting from the underwriting refinements we made. These underwriting refinements continued to drive changes to our purchase volume mix by FICO score. If you look at purchase volume by FICO stratification, excluding the impact of the PayPal Credit portfolio, we continued to grow at a fairly strong pace in accounts with a FICO score of 721 or higher, which increased 7% over the same quarter last year. While purchase volume for accounts with FICO scores of 660 and below declined 9%, reflecting some of the modest tightening we've been doing. These trends helped inform our view of loss expectations for this year and beyond. In summary, the core credit trends have leveled off and are showing improvement in line with our expectations and we expect the core trends to continue to show stability as we move forward assuming stable economic conditions. We continue to see good opportunities for continued growth at attractive risk-adjusted returns. Later I'll provide our outlook on credit expectations for the upcoming year. Moving to slide nine, I will cover our expenses for the quarter. Overall expenses came in at $1.1 billion, up 11% over last year and were primarily driven by the acquisition of the PayPal Credit program and growth. The efficiency ratio was 30.4% for the quarter versus 30.3% last year and in line with our expectations. The increase was primarily driven by the timing of strategic investments. Moving to slide 10, the key highlights are we have maintained our funding mix and strong capital and liquidity levels while on-boarding the PayPal portfolio. We also made progress here in deploying capital through growth and by executing the capital plan we announced last May, which increased our dividends and the size of our share repurchases through June of 2019. We are committed to maintaining a strong balance sheet with a robust capital and liquidity profile. Over the last year we've grown our deposits over $7.5 billion, primarily through our direct deposit program. This puts deposits at 73% of our funding, maintaining the level we have been operating at over the last year. 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 capabilities. Longer term, we continue to expect to grow deposits in line with our receivables growth. Overall, we are pleased with our ability to attract and retain our deposit customers. Turning to capital and liquidity, we ended the quarter at 14% CET1 under the fully phased-in Basel III rule. This compares to 15.8% on a fully phased-in basis last year, reflecting the impact of capital deployment through the acquisition of the PayPal Credit portfolio and continued execution of our capital plan. During the quarter, we continued to execute on the capital plan we announced last May, by paying a common stock dividend of $0.21 per share. After repurchasing nearly $1 billion of common stock during the third quarter, we did not repurchase stock during the fourth quarter as we are out of the market pending developments around Walmart and the number of significant renewals we announced. We've approximately $1 billion remaining in potential share repurchases of the $2.2 billion our Board authorized through the fourth quarters ending June 30, 2019. We will continue to execute the new share repurchase plans subject to market conditions and other factors, including any legal and regulatory restrictions and required approvals. Total liquidity including undrawn credit facilities was $19 billion, which equated to 18% of our total assets. This is down from 22% last year, reflecting the deployment of some of our liquidity to support the PayPal portfolio acquisition. Overall, we continue to execute on the strategy that we outlined previously. We are committed to maintaining a very strong balance sheet with diversified funding sources and strong capital and liquidity levels. And we expect to continue deploying capital through growth and further execution of our capital plan in the form of dividends and share repurchases. Next on slide 11, I'll quickly recap our 2018 performance compared to the outlook we provided last January. Starting with loan receivables, our growth of 14% was in line with our outlook range of 13% to 15% including the PayPal Credit portfolio. The growth continued to be driven by the strong value propositions on our cards and our marketing strategies with our partners delivering solid organic growth. Our continued investments in mobile, innovation, and data analytics capabilities are enhancing our ability to drive organic growth as well as win new programs. Moderately tempering some of the growth was the impact from the underwriting refinements we began to implement in the second half of 2016. Net interest margin was 15.97% for the year at the higher end of the 15.75% to 16% range we provided back in January. A more optimal asset and funding mix along with some benefits from a lower than expected deposit rate data were the major drivers of the performance. RSAs as a percent of average receivables came in lower than our outlook last January. RSAs came in at 3.7% versus the original outlook of 4.2% to 4.4%. The lower RSA percent was mainly driven by a modest reduction in yield given improving delinquency trends. The elimination of the RSA payment on Toys'R'Us and portfolio mix. This demonstrates the countercyclical nature of the RSAs. Our net charge-off rate of 5.63% was in line with our outlook of 5.5% to 5.8% range for the year. Net charge-offs continue to normalize from the very favorable levels in 2015 and 2016, and as expected, the trends stabilized in the second half of this year. We also saw reserve builds decline from over $1.2 billion in 2017 to near $850 million in 2018, as expected. The efficiency ratio for the year was 30.8%, also in line with our expectations. We continued to drive operating leverage to higher margins, revenue growth, and increased productivity. And lastly, we generated a return on assets of 2.8% versus expectations of around 2.5% due to the factors I just noted. Moving to our 2019 outlook on slide 12. Our macro assumptions for 2019 assume the FET continues to tighten this year and the unemployment rate is mainly stable. We are providing the 2019 outlook including the impact of the Walmart portfolio sale expected to occur later in the third quarter or early in the fourth quarter this year. I will also provide some details around other impacts the portfolio sale will have on the reserve and capital deployment. Our outlook for core receivables growth, excluding the impact of the Walmart portfolio sale, is in the 5% to 7% range. The growth rate takes into account strong growth we are seeing from e-commerce and digital and that the impact from the underwriting refinements is now reflected in the ongoing run rate. This also assumes economic trends continue. We expect to grow sales volume at 2 to 3 times broader retail sales and for e-commerce and digital to continue its strong growth. We believe our margin will continue to run in the 15.75% to 16% range this year with the normal seasonality we see quarter-to-quarter. While the 2019 margin, when compared to 2018, will benefit from the PayPal pre-funding impact not repeating in higher benchmark rates, this will be largely offset by a slightly lower revolve rate, as well as excess liquidity for a short period of time due to the Walmart portfolio sale. We expect that RSAs as a percentage of average receivables will trend closer to the 4% to 4.2% range for 2019. The single largest driver of the expected increase in the RSA outlook is the sale of the Walmart portfolio which operates at a lower RSA percentage than our overall rate. The outlook is more in line with our historical run rate and, aside from the Walmart portfolio sale impact, reflects continued strong performance of our programs. The good news here is that we're able to renew and extend five of our largest ongoing programs, beginning with PayPal, Lowe's, JCPenney, Amazon, and Sam's Club while maintaining the RSA as a percent of average receivables in line with the historical average for the company and at attractive risk-adjusted returns. In terms of credit, we expect net charge-offs for 2019 will be in the 5.7% to 5.9% range with a slight increase entirely driven by the impacts from the PayPal Credit portfolio, partially offset by the sale of the Walmart portfolio. Excluding the effects of PayPal and Walmart, the net charge-off rate is expected to be flat to 2018. Looking at seasonality in net charge-offs, we typically see the NCO rate trend higher in the first quarter compared to the fourth quarter due to the seasonal decline in receivables. While the increase has historically been in the 40 to 70 basis point range, we expect it may trend towards the higher end of this range given the decline purchase accounting benefit from the PayPal Credit portfolio. Regarding loan loss reserve builds going forward, we expect the reserve builds will continue to transition to more growth-driven builds and less from normalization. We will also see some impact due to the remaining reserve build on the PayPal Credit program. Our expectation is that reserve builds for the first quarter of 2019 will be similar to what we saw in the fourth quarter around $200 million. This would exclude any reserve impact from the sale of the Walmart portfolio which I will get to shortly. Moving to the efficiency ratio for 2019. We expect to continue to operate the business with an efficiency ratio of approximately 31% similar to 2018. We expect to continue to drive operating leverage in the core business. However, this will partly offset by continued spend on strategic investments we feel are important to the business. Regarding Walmart's impact on the efficiency ratio, we are executing cost actions that will offset the revenue impact from the portfolio of being sold. Our efficiency ratio continues to compare favorably to the industry, and we feel well-positioned to manage this going forward as we expect the business to continue to generate positive operating leverage over the long term. Finally, consistent with our track record, we expect to generate a return on assets of 2.5% or greater in 2019. Before I conclude, I wanted to provide some additional information on the impacts from the Walmart portfolio sale. Given we now have an agreement to sell the portfolio it will be moved to loans held for sale in the first quarter. Our future expected losses in the portfolio will be limited to the remaining time we have it and in the first quarter we will be releasing reserves in the range of approximately $500 million based on the expected sale date. This begins to free up part of the capital related to the Walmart portfolio that we communicated earlier. Beyond the first quarter, additional capital will be freed up from future reserve releases on the portfolio and ultimately the sale of the portfolio later this year. We expect the size of the portfolio will be approximately $9 billion at the time of the sale. The capital freed up will be deployed through share repurchases and/or higher returning alternatives. Overall, we continue to believe the combination of capital deployment and cost savings will result in the replacement of the EPS the program was generating. And with that I'll turn it back over to Margaret.

Thanks, Brian. I'll close with a recap of our strategic priorities, the continued focus of our assets to drive value to our partners, cardholders, and shareholders. A top priority remains to execute successfully across our three platforms, building upon our capabilities in marketing, analytics, loyalty, and digital and mobile technology. We still have a lot of room to grow organically and we will focus on driving that organic growth, but also evaluating potential new programs with appropriate risk-adjusted returns. We will continue to make investments to expand the utility of our cards and innovate with our partners to create attractive value propositions and drive card usage. We will continue to invest in next-generation data analytics and technology offerings. Digital and mobile technologies remain a key focus as these channels become increasingly popular. We will further develop frictionless customer experiences in a digitized environment through the use of customer journey analytics. We are also focused on leveraging alternative data and machine learning to further drive innovation, advanced underwriting, and authentication. Our banking platform remains an important funding source. And as such, we will continue to broaden our products and capabilities to help increase loyalty, diversify funding, and drive profitability. We will also continue to explore opportunities to expand and diversify the business in areas like healthcare finance, small business, and proprietary networks. It remains a key priority to operate our business with a strong balance sheet and financial profile. We have proven our ability to do this and it will remain a top priority for us in the future. We expect to maintain strong capital and liquidity to support our operation, business growth, credit rating, and regulatory targets. Finally, we will continue to utilize our strong capital position to support growth, which are capital through dividends and share purchases, M&A, and continued investments that support our business objectives and capabilities. We believe we are well-positioned for long-term growth and we look forward to driving results for our partners, cardholders, and shareholders in 2019.

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.

Great. Thanks and congratulations on a whole bunch of things that you announced. Maybe Margaret, you could just summarize, because I think there's been some debate over the last few months about the level of expertise from an e-commerce standpoint. And I've been impressed actually with the partners that you've renewed and the partners that you've added. And can you just talk about the contribution that that makes to your growth rate? And what it means for additional partnerships that you've been able to add?

Yeah. Thank you. Thank you, Moshe. I think that all of you know that we've been working really hard to continue to enhance our digital capabilities, and we've been focusing both on the digital side as well as analytics. And I think if you see some of the names and partners that we've been able to win over the last 12 months, you can see we're certainly winning in the digital space whether it’s Amazon, PayPal, eBay, LazMall, zulily. We're winning in this space. And I think if we look at our overall performance, our year-over-year mobile growth totaled 39% and 52% with PayPal in the fourth quarter. U.S. growth is about 16%. Our online sales for retail card penetration was 35%. And our apps, actual apps occurring digitally are up 45%, 49% with PayPal in the fourth quarter. And the last piece, I'd add is, we've talked about SyPi, which is really the whole plug-in that we do with our partners where you don't really meet their site through actually ending partners application. We have that out there with 21 brands and partners right now. We just hit over $1 billion in credit card payments in that application. So our view is we have a complete capability from applying and buying to a digital card, to getting your loyalty rewards, to then servicing your account within the apps. So our perspective is we certainly have the capability and continue to enhance that capability. Probably the biggest enhancement now is taking all that digital capability and enhancing it with data and customer journeys as we continue to make each experience frictionless.

Okay. Thanks. And a follow-up question, Brian, you talked about having $1 billion remaining and then the $500 million that is now available as of the reserve release. Could you talk a little bit about perhaps the cadence of how you would deploy that and whether it's buyback or other alternatives?

Yeah, sure, Moshe. So, look now that we have clarity around the portfolio being sold, we'll start to free up the capital that's allocated to the portfolio. As we said earlier, we still believe the transaction allows us to offset the EPS impact to Walmart. It's accretive relative to our renewal. And so I think in terms of timing, if I just take you through the year, we indicated that in the first quarter we’ll move the portfolio that held for sale and will only retain reserves for the period that we’re holding the assets. So you'll see a fairly significant reserve release in the first quarter. That should be around $500 million. And then you'll see subsequent reserve releases in the second quarter and third quarter, somewhere in the range of $200 million to $250 million in each quarter. And so that steps you through the reserve releases and what to expect there. And then, obviously, we expect to sell the assets late third quarter, early fourth quarter. And that's when we'll free up the additional capital that's allocated to the portfolio. So that gives you a sense of the cadence on the capital release in terms of the timing on deployments. We’re obviously in discussions with the regulators on our board on how to go about that and timing, and when we have more to share there. We'll obviously share it with all of you.

Got it. Thanks very much.

Thank you very much. I just need some clarification, Brian. You mentioned a $200 million reserve build in Q1, but separately, there's a release from Walmart. How should we view the Walmart portfolio at this point, considering it won't be held for sale from the core portfolio?

Yeah. I would take it in those two pieces, John. So I would take in the first quarter, we expect the reserve build for the core portfolio plus the remaining build related to PayPal. We're still working our way through that. We think that is a $200 million approximate build in the first quarter. And then you'll see approximately $500 million release in the first quarter related to Walmart. So you have those net $300 million release in the first quarter.

Okay, thanks. And then, you guys have really worked through a lot of the partnerships extended, brought out new partnerships. Margaret, I'm wondering, can you tell us has there been any changes in the structural components of the contracts? Or is it largely like it's been the last several years?

It's largely the same. I think if you look at the overall plan for 2019, you could see the RSA's and our overall return for the business remains the same. So, we're just really pleased about how the quarter ended and how we actually successfully want to renew throughout 2018. We had 50 renewals overall for the overall business and we're really confident. I think one of the things that we've continually said is we're going to renew deals that work for us and that are important to us and that we have high-level engagement from our partners where we feel we can really grow. And I think everyone that we've been able to renew and win are partners that fit that description.

Wonderful. Thanks very much guys.

Thanks.

Thanks. Good morning, and congrats on all these developments. I guess first question is with all these extensions and renewals, should we assume that any appreciable concentration has been pushed out five years now?

Sanjay, you're talking about the terms of the agreements?

Yeah. I'm just saying like as far as like any significant renewal you might have going forward in terms of the concentration? Is it fair to assume now we're four, five years away from anything significant?

Well, look, I think when you assume, obviously, these are all confidential agreements, but in each case for the large renewals, these are multi-year agreements, multi-year extensions from the last contractual date. And I think that gives you some indication that in all cases this gives us a fairly significant amount of time to get in there, drive growth, and drive penetration with these partners. So very good extensions in all cases, really attractive financial profile, good returns.

Okay, great. And then I guess a follow-up question for Margaret. I'm curious what you think led to a different outcome on Sam's Club versus Walmart? I know the product and the value props were different, but I mean did they feel just differently about the value you provided versus Walmart? Maybe you could just talk about that a little bit? Thanks.

Yeah. I think part of it is really the importance of the credit card program. I think to Sam's Club, it's a little different than the percentage penetration we had in Walmart. So I think from a member perspective, the card's a big part of Sam's Club sales. So I think that's an important element. I think the other is, and I've said this all along, it's really two separate teams. We have always had a decent relationship with Sam's Club. And I think we leveraged our capabilities and the things we're building to win that relationship. I think one of the things we've talked about throughout this process is how this isn't always easy, how important it is for us to continue to deliver for both Walmart and Sam's throughout this transition? And I think as we went through the holiday, we made sure we delivered great customer service to both parties and I think that's how you win in this space. It's really about how you deliver for the partner. And I think we've been able to come out of this in a really good way and we’re looking forward to really continuing our partnership with Sam and helping them grow their sales and extend their membership. I mean, that's what's really important here.

Right. Congrats again.

Thank you.

Thanks.

So Brian, just to clarify the Walmart portfolio, was there a gain on sale or was it more sort of at par? And then, I guess, essentially what you're saying is, you're sort of reiterating this $2.5 billion of freed-up capital, maybe adjusted a little bit by the portfolio size, but essentially no change there. You walk through the reserve, if you could kind of comment on that.

Yes, I can provide some insight. Regarding the first question, I can't give too many specifics on the terms, but I want to emphasize that our ability to replace the EPS didn’t depend on realizing a gain on the portfolio. The capital we released primarily came from our reserves and the capital attributed to the portfolio. With clarity on the portfolio sale and its timing, we still believe this transaction enables us to offset the EPS. Beyond that, I can’t provide too much detail. I have clarified the situation regarding the reserves; the portfolio was valued at approximately $9 billion at the time of sale, down from closer to $10 billion when we first announced it. We anticipate some reduction in value before the closing due to factors like scaling and marketing funds, but I think that’s to be expected.

The other clarification, I thought last quarter you had mentioned that you thought the loan yield might be down potentially 50 to 60 basis points quarter-over-quarter, but it looks like it was up. Can you talk about that?

Yes. So what we said that, net interest margin in total would be kind of in that 16% range for the second half of the year and it came in right in line with that. If you look at just the receivable yield, that was down 23 basis points compared to the prior year. And that was entirely driven by the PayPal portfolio. So if you exclude the effects of PayPal, the core yield would have been up approximately 10 basis points compared to the prior year, so pretty consistent.

Okay.

I think, any other noise quarter-to-quarter is probably just normal seasonality, Don.

Hey, guys. Thanks for taking my questions this morning. Brian, you'd made the comment that long-term the expectation is that the deposits will grow in line with receivables growth. I'm curious what the funding mix is going to look like this year. Will you pay down some debt, or will we actually just see a build in the investment securities until the proceeds are redeployed?

Yes, Rick. Look, I think in terms of our funding plans for 2018, I would expect them to be largely consistent with where we’ve trended over the last couple of years. Our target ranges are for deposits to be 70% to 75% of the funding, secured to be 15% to 20%, unsecured to be 10% to 15%. I don't see anything as I think about 2019 that really changes that profile in a material way. Now, obviously, we're opportunistic in terms of when to go a little bit heavier on one of those funding sources than others. But overall, I think that's the target range that we're pretty comfortable with. And you'll see that for most of 2019. The only other thing I would highlight is we're going to be very careful around how we manage liquidity in advance of the Walmart portfolio sales. So we will have to carry some excess liquidity after that sale happens, but we'll look to minimize that as best as we can and we’ll do that through all three of those funding sources.

Got it. And again, look obviously, the deposit funding is a very important part of the long-term strategy and I guess, I'm curious, how easy is it for you to turn on and off as you sort of approach this event leading to Q3 and then ramp it back up going forward?

Yes. It's actually fairly easy. And look that's good and bad. I mean, we're still fairly rate sensitive in the deposit book. And so if we lag the market significantly for a period of time then we'll be able to manage the deposit inflow and the maturities in a way that helps us minimize the excess liquidity that we carry after the Walmart portfolio transitions. So I think it's pretty manageable. You can negate it entirely, but it's certainly something we'll be focused on and it's pretty manageable from our perspective.

Great. Really appreciate the color. Thanks, guys.

Thanks.

Hi. Good morning.

Good morning.

Good morning.

I wondered if you could give us some color as to how the PayPal portfolio is going relative to expectations and as well as give some color around how you're thinking about the reserving for that? I know you gave us 1Q, but maybe can you give us a sense as to the forward look for the full year coming from them?

Sure. I'll start out. First, our partnership is really just fantastic. We have such a high level of engagement between us and PayPal. I think maybe some of you saw the announcements as we are working with PayPal to help deferred load in employees of the federal government, we did that in like 24 hours. And to get that kind of level of engagement in terms of how to service their customers and how to grow the program is just fantastic. So we're fully aligned. The program is operating the way we thought it would. And I think we're just really excited about the overall growth potential as we continue to look at areas of opportunity together for growth. Obviously, we have work to do you to kind of bring the full portfolio on, but we're very focused on delivering for that. And we're just overall really pleased with our partnership and I couldn't be happier about how the program is performing. Brian, on the reserves.

Yeah. So, Betsy, on the reserves, we ended the quarter with a $204 million build. We think the first quarter looks very similar in terms of the range and that includes both the reserve build for PayPal as well as the core reserve build. So, we're not going to break out PayPal anymore going forward, but what we'll do is step that out for you as we get through the year, kind of, one quarter at a time. So, we think the PayPal reserve build based on the purchase accounting, that's largely complete by the end of the second quarter, maybe a little bit addressed in the third quarter. But we think $200 million range for the first quarter, then in April we’ll give you a sense for what we think in the second quarter.

Got it. And then on the buybacks, is there any opportunity for you to accelerate that with the Walmart sale, I think the back book sale that you're doing, is there any kind of forward purchase that you can do? I'm just trying to think through, if that's feasible for you?

Yeah. Look, it's harder for us to be too specific in terms of timing versus relatively fresh agreement. We now have certainty around timing and other things and we’re in discussions with our board and our regulators about how and when we can deploy that capital. So, I can't be much more specific than that other than, our goal is to deploy it as it’s being freed up, assuming that more in line with all of our capital targets and the board and the regulators are comfortable. So, when we have more to announce, we'll certainly announce it.

Thank you.

Thanks.

Yeah, thanks. Could you discuss a little more about where we should expect some of the expenses to come out as you manage to a relatively flat efficiency ratio with the Walmart revenues going away?

Yes. So, look, first I'd say that we have very detailed plans that we're going to begin executing and have already started to execute this year to get that done. Some of the cost actions will actually happen in advance of the program moving. So, there are some costs that are not directly tied to the program. But I would think about Mark, the majority of the cost actions will be completed as soon as possible after the portfolio is sold. And one of the things that we're, obviously, very focused on as Margaret said is not affecting the performance of the program, making sure we ensure a seamless transition on our part. And so a lot of those costs remain in place until the portfolio transfers. But we do feel like we've got a really good plan in place to offset any impact on the efficiency ratio. We don't expect there to be any impact on our operating leverage. But you'll really see the full benefits of those cost actions in 2020. That will be our first year without the program.

Got it. And then on the Amazon renewal, were you able to make any changes to the agreement there that may improve your position in relation to chase like better geography on the website for advertising or acceptance that hold through?

Yeah, look, Mark what I would say there is we can't provide any specifics on any of our individual agreements. But as we've said in the past, whenever you do these renewals, you typically move around the economics, you look for ways to drive further alignment between us and the partner, you find ways to drive more growth. And in the case of all of our renewals, we've been able to achieve an attractive financial profile. I think in all cases, we have better alignment with the partner under to go-forward agreement and so we feel really good about what we did with Amazon, but in the case of all the renewals.

Okay, thanks.

Thanks.

Yeah, hi, thanks for taking my question. Understand that you're not going to provide specific sort of confidential terms on the Sam’s renewal. I was wondering if you could maybe just kind of give us directionally an idea, was it more of just a push out of the existing contract, or was it really back to the table open book negotiation with a longer potential duration to the renewal?

In all these cases, we have had successful negotiations. We had a productive discussion with Sam's and are pleased with the outcome. As Brian mentioned, this is a multiyear agreement extending beyond the original end date of the program. The most encouraging aspect is that we've renewed our partnership with Sam's and clarified the direction of the Walmart book, avoiding any uncertainties. Overall, the results of our negotiations are very positive for the company. We are confident in our ability to continue supporting Sam's Club effectively, driving their sales growth and membership expansion, which is what truly matters.

Thanks. And maybe just as a quick follow-up to that. From a higher level, obviously, a huge number of renewals on a lot of large partners and impressive outcome with respect to the 2019 guidance maintaining the 2.5 ROA, just curious, in these discussions was it in part motivated by serving an adjustment to the terms as far as on ROA and the share growth with respect to the tax reform? Or were there any other kind of consistent changes throughout the renewals, or was it really just kind of the duration was up? It was time to come back to the table and generally speaking not material changes and similar ROA outlook?

Yeah, look, I would say that every one of these is very unique. In some cases, you are moving around some terms, in some cases you're moving around the value prop or the marketing funds to benefit the consumer and drive growth, in some cases you're tweaking the RSA or the marketing funds. I mean there's just so many different things inside of these agreements so you can move based on what the partner wants and what we want to achieve. I'd say in all cases where we have moved around economics, we do it in a way historically that has benefited the consumer frankly and has we’ve put dollars to work to drive growth. As Margaret said in all cases, these renewals have a very attractive financial profile. We gave you our 2019 outlook that includes the impact of all the renewals and you can see as you mentioned the RSA percentage and ROA percentage are right in line with the historical run rate. So you always move some things around in these to get both parties happy. But in all cases, we were able to get this done with a pretty attractive financial profile for us.

Got it. Thanks very much, guys.

Thanks.

Thanks.

Margaret, in your prepared remarks, you had called out something about Google. But I didn't see it on page three. I was just wondering if you could just revisit what you said there, it sounded important?

Yes. We renewed our partnership with Google. We actually financed their hardware, so Pixel and items that they sell on their website. So that was an extension we did as well in our fourth quarter. So that's kind of what I said in the prepared remarks.

Okay. And then also in your answer to the first question, you gave some of those technology related metrics that you frequently share. I was wondering if you could repeat those, you were going kind of quick there?

Our year-over-year mobile growth reached 39%, and 52% with PayPal in the fourth quarter, indicating strong traction. This can be attributed to two main factors: the enhanced capabilities we are developing to create a seamless mobile experience and the increasing tendency of consumers to shop using their tablets or phones. Our online sales, particularly for retail cards, grew by 35% in the fourth quarter. We are also seeing growth in new account applications, with 45% of our applications now being submitted digitally, and that figure rises to 49% when including PayPal in the fourth quarter. Furthermore, we have integrated the SyPi capability into 21 of our partners and brands, which allows for seamless card servicing within retailers' apps, ensuring a smooth user experience. Last year, we achieved $1 billion in card payments, reflecting positive progress in the capabilities we are implementing. We are collaborating closely with our partners to support their digital roadmaps, providing ongoing solutions that meet their needs quarterly. We are truly excited about our developments and recognize that there is still significant potential for growth in our digital initiatives and customer partnerships.

Thank you very much.

Hi, thanks for taking my question. I had a question on PayPal acquisition. And sort of how it's trending, it's kind of hard to see exactly what's going on. But Brian, I think you called out some NIM or yield pressure related to PayPal. And also, just if you can give us a sense of the growth profile on the ROA at this point. It doesn’t quite seem like with delinquencies building and the yield coming down a little bit, I'm not sure how to think about the return profile of the PayPal transaction at this point. Thanks.

Our program is performing exactly as we expected. We anticipated some fluctuations in certain metrics for 2018. As we mentioned, we are working through the reserve build for the portfolio. We still expect the program to be beneficial in 2019, with no changes to our previous statements. The yield impact is mainly due to the PayPal portfolio having a lower yield compared to our overall book. We implemented some pricing changes that will start to take effect in 2019 and continue into 2020, which will help mitigate this issue. Essentially, the PayPal portfolio is lower-yielding, which is reflected in our net interest margin and yield for the quarter. The credit metrics you're observing are related to the finalization of purchase accounting, which is nearly complete this quarter. We've previously noted that the PayPal portfolio is likely to push the net charge-off rate higher into 2019, as highlighted in our outlook. For net charge-offs, if you consider a range of 5.7% to 5.9%, this includes the effects of PayPal and a partial offset from Walmart. Excluding these influences, the core net charge-off rate remains stable. We aim to provide clarity on how PayPal impacts these metrics, but overall, the program and portfolio are progressing as we had anticipated.

That's helpful. Thanks. And a separate question. You mentioned, Toys'R'Us having, I think a benefit on retailers sharing this quarter. And just sort of studying back since that bankruptcy occurred in 2018, we potentially could have more retail bankruptcies in your portfolio in the future. Is that a glitch from an earnings-neutral event to think in this case Toys'R'Us, like is this test case suggest that we shouldn't worry too much about retailers too much along the future? Thanks.

Yeah. Look our goal is to always try and keep it earnings neutral. Toys'R'Us is a good example, gives you an indication of the options that we have when that happens to one of our partners. So, in that case, we took those account holders. We converted them into a Synchrony branded general-purpose card. We stopped paying the RSA, as we indicated, and we used those additional dollars to fund a very attractive value prop. So that's certainly our goal. And we do have options to help mitigate the impact in those cases.

Great. Thanks so much.

With that, we have time for one more question.

Thank you. Good morning. I had a couple of quick ones. First, on your loan growth guidance, what was the balance of the Walmart loans at the end of 2018? I want to make sure that we're looking at the correct point or period and 2018 base for the guide?

Yeah. I mean, Bill, I can't give it to you specifically. But we indicated it was 10 billion, expected to be 9 billion when we close, so it's somewhere in between. That's probably as close as I can get you.

Okay. Lastly, could you provide some insight into the potential impact of the Walmart portfolio on your results after the sales? I understand the agreement has tough financial terms, but what kind of impact should we anticipate, if any?

It will have no impact on our results post sales. This is a complete transfer of the portfolio. We are retaining no risk. There is no ongoing sharing. There is no loss support. There is nothing. This is a very standard clean transaction. So, when it closes, it's closed.

Okay. So it's reasonable then to conclude that essentially the three parties for the transactions; yourself, Capital One and Walmart, Capital One's indication last night that its losses are limited, which suggest then that Walmart is playing a role in absorbing losses beyond a certain amount, but not to you guys.

Yeah. Look, I can't comment on the agreement between the other two parties. What I can tell you is that our side of this is pretty clean from that perspective, very standard transfer of the portfolio, very market. We're not retaining any risk.

Okay. Understood. Thank you very much. Congratulations.

Thank you.

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.