Synchrony Financial (SYF) — Q4 2020 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. 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. On the call this morning are Margaret Keane, Brian Doubles and Brian Wenzel. I will now turn the call over to Margaret.

Thanks, Kathryn, and good morning, everyone. 2020 was a challenging year marked by a global pandemic, economic disruption and unrest due to racial injustice. It was a true test of our resilience, our agility and our strength as a business. We're proud of the way Synchrony managed through these challenges. Though there have been significant developments that provide hope that the pandemic will begin to moderate, the virus resurgence and resulting regional shutdowns and continued impact on unemployment is something we are still managing through. And though the pandemic continues to impact results, we are encouraged by some of the trends that have developed. Later in the call Brian Wenzel will detail these impacts on the quarter’s results and provide a view on how we think this year might develop. I will provide a high-level overview here. Let's first focus on our quarterly results, including some of our recent successes, which are outlined on slides 3 and 4. Earnings were $738 million, or $1.24 per diluted share, an increase of $0.09 over the last year. Loan receivables were down 6% to $81.9 billion and average active accounts decreased 10% from last year, with new accounts down 19%. Purchase volume per account increased 10% over the last year to $602, and average active balance per account increased 4% to just under $1,200. Net interest margin was down 37 basis points to 14.64%. And the efficiency ratio was 37.1% for the quarter. Net charge-offs hit a new low at 3.16%. As a result of our liquidity and funding strategy, in response to COVID-19 impacts on our balance sheet, deposits were down $2.3 billion or 4% versus last year. This includes a strategic decision to slow overall deposit growth given the excess liquidity we have. Total deposits comprise 80% of our funding, and our direct deposit platform remains an important funding source. Our ability to service and provide digital tools to customers makes our bank attractive to depositors, and we will continue to build out additional capabilities. During the quarter we returned $128 million in the quarter through common stock dividends. We also announced that the Board authorized $1.6 billion in share repurchases for 2021 beginning in the first quarter. We have a solid pipeline across our platforms, a mix of start-up and existing programs. But we are being very disciplined around risk and return given the uncertainty in the current environment. And while this return landscape is shifting, we believe similar opportunities will continue as evidenced by recent wins. I will touch upon a few highlights. We announced that we will become the issuer of Walgreens cobranded credit card program in the U.S., the first such credit program in the retail health sector. The card will allow customers to earn rewards for purchases anywhere MasterCard is accepted. We expect to launch the new program in the second half of 2021. This new agreement builds upon the company's existing strategic partnership. CareCredit is already accepted at more than 9,000 Walgreens and Duane Reade stores. We are committed to providing Walgreens customers and patients with unparalleled experiences, a best-in-class loyalty program and the ability to manage their health and wellness spending. In addition, we renewed our strategic partnership with Mattress Firm. We provide flexible financing solutions and innovative business tools that empower Mattress Firm to meet their customers at critical moments in the purchasing journey, which is increasingly online. Our digital tools and industry leading credit programs team, including marketing and analytic retail experts have optimized every step of the omni-channel customer journey to deliver a competitive user experience. We look forward to many more years as a strategic partner of Mattress Firm. We also reached a definitive agreement to acquire Allegro Credit, a leading provider of point-of-sale consumer financing for audiology products and dental services. Allegro offers numerous customers loan options through its merchant partners with flexible payment terms at the point-of-sale. These products are designed to offer customers choice to purchase the products and services they need or want. The addition of Allegro Credit’s merchant network and customers complements our strategy of growing CareCredit, our leading health and wellness financing platform. The transaction is expected to close in the first quarter of 2021. All together this quarter, we signed nine renewals and won seven new deals along with the acquisition. I cannot overstate the importance of digital innovation to the success of our programs. Consumers are rapidly adopting technologies that enable contactless commerce and expect engagement along their digital purchase journeys. We are leveraging our digital assets and continuously investing to ensure our partners are well positioned in this rapidly evolving dynamic. These investments include the capabilities to empower staff and seamless integration with our partners’ digital assets, enable customer choice at the point-of-sale, enhance contactless experiences, facilitate a seamless and easy application process, bring the in-store experience to a customer's digital devices for applications and payments, and integrate our financing office throughout the entire digital shopping experience. We also continue to expand our digital penetration of all aspects of our customer journey: apply, buy and service. Approximately 50% of our applications were done digitally during the fourth quarter and grew 18% in mobile channel applications. In Retail Card 51% of our sales occurred online. Finally, approximately 65% of our payments were made digitally. In short, we’re rising to the challenges presented by this difficult time. We have strengthened the strategic positioning of our business and expanded the opportunity set that lies before us. And we're investing in the right strategy that will enable near-term successes while also driving considerable shareholder value over the long-term. With our future in mind, as you know, a few weeks ago, we announced some important changes to the leadership of this company. Effective April 1, I will transition to the role of Executive Chair of our Board of Directors and Brian Doubles will become Synchrony’s President and CEO. Synchrony means so much to me. And one of my goals as CEO was to set up based off a leadership transition with a successor who will advance what we have built. Both the Board and I believe there was no one in the world better equipped to do that than Brian. Brian has helped to build Synchrony every step of the way. He has been my trusted partner for more than a decade, including through our IPO. When we started Synchrony back in 2014, we set out to build a great business with a great culture that delivers for our partners and customers every day. Together with our 16,500 employees, we are doing just that. With Synchrony in a position of strength, now is the time to implement this transition, allowing Brian to continue the incredible progress that has been made and to drive the next stage of Synchrony’s exciting growth journey. I look forward to working with Brian through this transition and continuing to support Synchrony’s growth and future success as Executive Chair.

I want to start by thanking Margaret for all that she has done for Synchrony and for me personally over the last decade. We truly would not be where we are or who we are today without her leadership and it's an absolute honor to succeed her and lead Synchrony into the future. I'm also grateful that we will continue to benefit from Margaret's expertise and leadership in her role as Executive Chair. And I'm excited to partner with her and the Board, our leadership team, and especially our employees as we continue to capitalize on our momentum. There's a lot to be excited about as we continue Synchrony’s journeys. We have a strong business, a winning culture, and a tremendous opportunity to build on the strong foundation. As incoming CEO, I will continue to implement the strategies that we've developed over the last three years, which has enabled the momentum that our business has today. We will continue to leverage our competitive strength, deepen our market leadership, and invest in digital, data analytics and new product offerings to create a seamless customer experience. We will continue to grow our business and drive value for all of our stakeholders, our investors, our employees, our partners, and our customers.

Thanks, Brian, and good morning, everyone. Before I begin, I want to congratulate Margaret and Brian on their new roles and thank them for what they have done for Synchrony and for me personally. I speak for everyone in the company when I say we look forward to working closely with them in the next chapter for Synchrony. As we begin 2021, we're encouraged by the developments being made to fight the pandemic and continue to be inspired by those on the frontlines. For our part, we remain dedicated to keeping our employees safe, in helping our partners, customers and communities during this difficult period, guided by our values and principles and with the partner-centric focus, we are working to help our constituents navigate this environment with an eye towards the future and the opportunities ahead of us as we begin to overcome the pandemic. During the fourth quarter, the pandemic continued to impact our growth in several areas, as noted on Slide 7. However, our business mix, which includes a significant digital component and certain industries benefiting from staying at home such as home-related products and services, veterinary services, and electronics and appliances have outbalanced against some of the effects of the economic downturn. Purchase volume was essentially flat, down 1% versus last year and in line with our expectations for the quarter, despite some pressure from new shutdowns and restrictions as the pandemic progressed during the quarter. The continued pressure caused our average active accounts to be down 10% and a decrease in loan receivables of 6%. Payment rates continue to be elevated relative to normalized levels. Interest and fees on loans were down 11% from last year, consistent with the core decrease we experienced last quarter. Dual and co-branded cards account for 38% of our purchase line in the fourth quarter and declined 4% from the prior year. On a loan receivable basis, they account for 24% of the portfolio and declined 10% from the prior year. While we're seeing positive trending in our growth metric as we enter the quarter, the acceleration of the pandemic resulted in regional shutdowns and diminished effects of the CARES Act stimulus slowed that early momentum. While our sales are stable, we are encouraged by recent developments, including the recently enacted stimulus, the proposed stimulus, a new administration and national rollout of a vaccine. We believe these factors will have a positive impact and should provide momentum as we progress through 2021. I'll provide a more comprehensive view on 2021 shortly. RSAs increased $18 million or 2% from last year. RSAs as a percentage of average receivables were 5.2% for the quarter. This was elevated from the historical average, primarily due to the significant improvement in net charge-offs and the elimination of Walmart, which operated at a lower than company average RSA percentage. The improvement in net charge-offs resulted in a decrease in the provision for credit losses of $354 million or 32% from last year. This was partially offset by a reserve build in the fourth quarter of $119 million. Other income decreased $22 million, mainly due to higher loyalty costs. Other expenses decreased $79 million or 7% from last year due to lower purchase volume and average active accounts, coupled with lower employee costs as we have begun to implement our strategic plan to reduce operating expenses. Moving to our platform results on Slide 8. Our sales platforms continue to be impacted in varying degrees due to COVID-19, and their trajectories through this period have been different based on factors such as business and partner mix, digital concentration, provider access and availability of hardline goods. In Retail Card, loan receivables were down 8%, with the COVID-19 impact being partially offset by strong growth in digital programs. That resiliency is evident in the growth in purchase line, which was up 1% over last year. Other performance metrics were down due to the impact from COVID-19. We're excited about the launch of our new value prop with Sam's Club. They are an important and valued partner, and we're excited about the changes in this program for Sam's Club members. The continued strength of Power Sports and Home Specialty in Payment Solutions helped offset some of the impact from COVID-19. Loan receivables declined 2%. Average active account and interest and fees on loans were down 9%, which was driven primarily by lower yield on loan receivables. Purchase line decreased 7% this quarter. We signed several new programs and renewed several key partnerships this quarter. We continue to drive growth organically through our partnerships and networks and added over 2,800 new merchants during the quarter. We also continue to drive higher card reuse, which now stands at approximately 34% of purchase volume, excluding oil and gas. Our efforts and successes are expanding an already solid base for growth as we exit the pandemic. Although CareCredit was impacted the most by COVID-19 earlier this year, we began to see some improvement as the year progressed as providers continue to increase elective and planned services from the trough in the second quarter. That said, rising infection rates and increasing stay-at-home restrictions did slow some of this progress. Loan receivables declined 7%, with interest and fees on loans decreasing 4% primarily driven by lower merchant discount revenue as a result of the decline in purchase volume, which was down 6%. Average active accounts decreased 10%. As Margaret noted earlier, we're excited about our partner activity within this platform including the acquisition of Allegro Credit, our Aspen Dental renewal and expansion and our new partnership with Community Veterinary Partners. During the quarter, we also continued to grow our CareCredit network and enhanced utility of our card. The expansion of our network and acceptance strategy has helped to drive the reuse rate to 59% of the purchase line in the fourth quarter. We are proud of these achievements, and particularly excited about the opportunities we see to drive future growth in this platform as the impact of the pandemic subsides. I'll move to Slide 9 and cover our net interest income and margin trends. Net interest income decreased 9% from last year primarily driven by an 11% decrease in interest and fees on loan receivables due to the impact of COVID-19. Net interest margin was 14.64% compared to last year's margin of 15.01%, largely driven by the impact of COVID-19 on loan receivables, an increase in liquidity and lower benchmark rates. Specifically, the mix of loan receivables as a percentage of total earning assets declined approximately 30 basis points from 80.2% to 79.9%, driven by higher liquidity held during the quarter. This accounted for a 5 basis points of the net interest margin decline. The loan receivables yield of 19.93% was down 94 basis points versus last year and was a driver of a 75 basis point reduction in our net interest margin. The liquidity yield declined as a result of lower benchmark rates and accounted for a 30 basis point reduction in our net interest margin. These impacts were partially offset by an 89 basis point decrease in the total interest-bearing liabilities' cost to 1.69%, primarily due to lower benchmark rates and a higher proportion of deposit funding. This provides a 73 basis point increase in our net interest margin. Next, I'll cover our key credit trends on Slide 10. In terms of specific dynamics in the quarter, I'll start with the delinquency trends. The 30-plus delinquency rate was 3.07% compared to 4.44% last year. The 90-plus delinquency rate was 1.40% compared to 2.15% last year. Higher payment trends have helped drive the improvement in delinquency rates. Focusing on net charge-off trends. The net charge-off rate was 3.16% compared to 5.15% last year. The reduction in the net charge-off rate was primarily driven by improving delinquency trends as customer payment behavior improved throughout 2020. The allowance for credit losses as a percent of loan receivables was 12.54% with the increase to last year being primarily driven by the adoption of CECL in 2020 and the impact from COVID-19. Moving to Slide 11, I will cover expenses for the quarter. Overall expenses were $1 billion for the quarter, down $79 million or 7% from last year. The decrease was driven by lower purchase volume and average active accounts as well as a reduction in employee costs and operational losses. The efficiency ratio for the fourth quarter was 37.1% compared to 34.8% last year. The ratio was negatively impacted by lower revenue that resulted from lower receivables and lower interest and fee yield, which was partially offset by the reduction in employee costs and operational losses. Moving to Slide 12. Given the reduction in our loan receivables and strength in our deposit platform, we continue to carry a higher level of liquidity. While we believe it's prudent to maintain a higher liquidity level during this uncertain and volatile period, we are actively managing our funding profile to mitigate excess liquidity where appropriate. As a result of this strategy, there is a shift in the mix of our funding during the quarter. Deposits declined $2.3 billion from last year. Our securitized and unsecured funding sources were down $2.6 billion and $1.5 billion, respectively. This resulted in deposits being 80% of our funding compared to 77% last year with securitized and unsecured funding, each comprising 10% of our funding sources at quarter-end. Total liquidity, including undrawn credit facilities, was $23.7 billion, which equated to 24.7% of our total assets, up from 22% last year. Before I provide details on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the joint federal banking agencies in March, which had 2 primary benefits. First, it delays the effects of the CECL transition adjustment for an incremental 2 years; and second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 15.9% CET1 under the CECL transition rules, 180 basis points above last year's level of 14.1%. The Tier 1 capital ratio was 16.8% under the CECL transition rules compared to 15.0% last year. The total capital ratio increased 180 basis points as well to 18.1%. And the Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 27.0% compared to 21.4% last year, reflecting the increase in reserves as a result of implementing CECL. During the quarter, we paid a common stock dividend of $0.22 per share. For the full year, we returned approximately $1.5 billion to shareholders in the form of share repurchases and common stock dividends. As we finish 2020 and enter 2021, we have continued to assess the capital and liquidity strength of the company and the stability of our business at this point in the pandemic. With this backdrop, the Board has authorized $1.6 billion in share repurchases for 2021, beginning in the first quarter. Repurchases are subject to our capital plan, and regulatory restrictions as well as overall market conditions, including any potential deterioration from the ongoing pandemic. Next, on Slide 13, we are providing a framework on key drivers for 2021. It goes without saying that the current environment will have periods of uncertainty and volatility until the pandemic is under control and resulting impact to the economic environment is more fully known. While our visibility is limited, we're providing this framework about how we are thinking about the year might unfold based on our best assessment as of today. These views assume that in the first half of the year, there is continuing pressure from the pandemic and a slow economic recovery. In the second half, we assume the pandemic is largely under control and economic recovery accelerates. First quarter purchase volume is expected to be consistent with the trends that developed at the end of 2020. Second quarter comparisons will obviously reflect the economic trough experienced in the second quarter of '20. The second half of the year, we anticipate improving growth trends as the pandemic impact moderates and macroeconomic growth accelerates. Regarding loan receivable growth. In the first half, we expect continued higher payment rates from the stimulus actions to impact loan growth. In the second half of the year, we believe payment rates will slow as stimulus abates, and we return to more normalized payment behavior patterns, combined with the expected increase in purchase volume from an improving macroeconomic environment. These drivers will contribute to accelerating asset growth. For net interest margin, overall, we expect continued improvement as we enter 2021. Regarding the improvement in the first half we anticipate that higher payment rates will contribute to continued excess liquidity impacting asset mix. In the second half, excess liquidity is reduced through asset growth and slowing payment rates, which drive normalized interest and fee yields leading to increasing NIM. With respect to our view on credit for the year, delinquencies are expected to increase with peak delinquencies occurring in the third quarter of 2021 and result in sequential quarter increases in net charge-offs. We would expect reserves to be largely driven by asset growth and the impacts from any changes in the credit macroeconomic scenario. We anticipate a reserve release during 2021 as the credit macroeconomic environment develops. RSAs will remain elevated in the first half primarily reflecting the strong program performance, including revenue and net charge-offs. In the second half, we expect lower RSAs, generally reflecting the higher net charge-offs, partially offset by higher revenue. As we outlined previously, we've implemented cost reductions across the organization. We believe this will result in expense reductions of approximately $210 million during the year. Partially offsetting these cost reductions will be expense increases relating to growth in addition to the anticipated increase in delinquent accounts. We will continue to closely monitor how the pandemic develops and its impact to the macroeconomic environment and adjust as the landscape unfolds. As we enter 2021, we remain optimistic in the strength and the strategic position of our business to meet the challenges and exit the pandemic period in a stronger position than when we entered. We will continue to make investments in our people, products, technology and platforms to drive long-term value and continue to ensure the safety of our employees, while meeting the needs of our partners, merchants, providers and cardholders. I will now turn the call over to the operator to begin the Q&A portion of our call.

Margaret, first, just wanted to say that it's been a pleasure working with you over the last 7 years. I've really enjoyed the opportunity to learn from you and best of luck in your next role as Executive Chair.

Thank you so much, Ryan.

So maybe I'll kick it off a question for Brian Wenzel. So Brian, the RSA to loans was over 5% in the quarter, just given the better-than-expected credit. And I was wondering if maybe you could just give us a framework on how to think about the RSA for 2021? If your base case that you outlined on the slide plays out, can we expect it to kind of remain in this 5% RSA to loans range before eventually dipping later in the year?

Thanks, Ryan. As we begin 2021, we've seen an increase driven primarily by credit, which improved by 200 basis points in net charge-offs. This was slightly countered by some interest expense and net interest margin, but overall, it's clearly elevated. Looking ahead into 2021, we anticipate that as net interest margin continues to rise, there will be positive effects that will flow back to the retailers, pushing it up. However, as credit returns to normal levels, we expect some deflation. Our outlook is for it to stay somewhat elevated, but we do not foresee that level at the end of 2021. Moving into 2022 and beyond, we expect it to return to the typical range we experienced before the pandemic.

Got it. And Brian Doubles, thank you for all the color on the equal payment strategy. Can you maybe just expand on the product offering and how you think it can evolve over time? So if I look, your products generally started around 3 months of financing. So I was wondering if there was potential we could see some of these short-term products evolve into your own buy now pay later product? And second, just given some of the new players in the space are charging merchants pretty healthy fees for these products, can you maybe just talk about the pricing on merchant discount rates in some of your equal pay products? And can you maybe use pricing as a lever to drive volumes towards your offering and maybe away from some of these newer entrants?

Yes, Ryan, that’s a great question. It’s important to take a step back and recognize that our strategy revolves around providing a comprehensive range of products that meet the needs of both our partners and consumers. Buy now pay later and installment loans are enduring trends. When considering our business, it’s clear that a one-size-fits-all approach is not effective due to our diverse set of partners. We collaborate with each partner to understand their goals and how we can assist them in driving sales and engaging with their customers throughout their lifecycle. This often leads to a desire for a variety of products; sometimes a revolving product is more suitable, while other times an installment product may be a better option. For higher-ticket items, longer-term installment options make sense, which could be revolving or closed-end, whereas smaller ticket items tend to lean towards shorter-term installment strategies. Ultimately, it’s about what the partner desires. You raise a valid point regarding merchant discount pricing. The shorter the term, especially if there’s no interest charged, the higher the merchant discount. It really comes down to the needs of the partner and the consumer. I’m very optimistic about our product offerings. However, it’s crucial to remember that the product is just one part of the equation. We are focused on how to seamlessly integrate the product into the shopping journey, making our integration increasingly important. In the end, it’s about the features and capabilities rather than just the products. These products aren’t overly complex; it’s all about how we implement and embed the financing offer throughout the shopping experience.

My congratulations to everyone. It's a bit unusual because the strong credit quality is impacting you more as you're sharing some of the benefits with the retailers. I'm curious about the impact of stimulus benefits on credit quality and whether you anticipate it diminishing at some point. Did you notice any signs of it wearing off in the fourth quarter? I'm trying to determine how long you think credit will stay favorable, considering your predictions that things might revert to the average.

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

Got it. And maybe one for Brian Doubles, just on the Verizon and Venmo Card. I'm just curious, I know they're an important part of the growth story at least over the intermediate period as we're waiting for offline to recover. I'm just curious if you're seeing progress and how they're doing relative to your expectations?

Yes. I'd say both are doing really well. Verizon, we launched back in the summer, and again, it was our first launch during the pandemic. I think as we started out more online and as the stores have opened up, we're definitely seeing real positive momentum there. People are liking the value prop. So we feel really positive about our Verizon relationship and where that could be. On Venmo, we did the soft launch in the fall, that's gone also very well, and consumers are really liking how the product operates within the Venmo app. I think there's a lot of technology that both parties built out to make that really an integrated experience for consumers, and we are getting a lot of positive momentum there. As we roll out to the broader population soon, we expect that to continue to be a big part of our growth story as we go forward with the company. So 2 really exciting programs, 2 programs where technology and our investments have really paid off, and we look forward to continue to advance our investments in technology as we continue to integrate even further.

Yes. The only thing I would add to that is I wouldn't gloss over Walgreens. We're really excited about that relationship, and I put that in the same category as Venmo and Verizon in terms of the opportunity for us. Sanjay, 90 million Walgreen loyalty customers, we're really excited about what that relationship can do for us as well.

Great. And congratulations, both Margaret and Brian. And maybe just a follow-up on that exact question. And clearly, each of these is kind of independently large customer bases and large opportunities. But maybe is there a way to kind of discuss how the combination of the type of customer that has the loyalty to that particular brand and the value proposition kind of translate into a credit offering. And in some way, kind of thinking about the 3 of them and perhaps even ranking them in terms of how you see them kind of contributing to growth at Synchrony?

Yes, it's still early to rank them. However, our experience suggests that customers can compartmentalize these services. For instance, Venmo is likely to become a more everyday card, especially for those who use the app frequently. Its integration into payment mechanisms and the ability to split payments provides a unique experience for users. The major opportunity with Venmo lies in the ability to use the card at a wider range of merchants, and as QR code technology becomes more prevalent, this will enhance its appeal. The in-app experience allows customers to collaborate on purchases, while the QR code opportunity presents new experiences and could broaden our customer base. Regarding the other two, the value proposition is crucial. With Walgreens, we understand from CareCredit that consumers often compartmentalize their healthcare spending. As they face increasing healthcare costs, this card represents a solid entry into the healthcare space, building on our existing relationship with Walgreens, where CareCredit is already accepted. This connection enables customers with healthcare and wellness needs to benefit from rewards, and we aim to offer a seamless digital experience. In terms of Verizon, the value proposition revolves around how customers utilize their services. I often joke about how hard it is to get older kids off my plan, and leveraging that value towards their bills demonstrates the positive momentum we're seeing. We believe all three programs hold significant growth potential, showcasing our agility in adapting during the pandemic and fulfilling strong customer needs through technology.

Got it. I understand your point about the phone plan. As a follow-up, Brian Wenzel, considering what you mentioned regarding the strong capital positioning, you earned over $1 billion last year while the balance sheet decreased. How do you connect the $1.6 billion buyback authorization to that? It seems like that could strengthen over time, so could you elaborate on how that decision was made?

Thank you, Moshe. It's important to highlight that our recent announcement and the Board's authorization differ slightly from our historical approach since this pertains to a calendar year. While the Fed has implemented some restrictions for the first quarter, we will continue with our ongoing process. We have been following a quarterly governance process, assessing loss stresses and monitoring our balance sheet's performance. Looking back a quarter, there was uncertainty about starting the year on a strong note, as we anticipated more activity in the latter half of the year. However, after discussions with the Board, we acknowledged the company's robust capital and liquidity, noting its stability as we moved through the latter part of 2020. As we head into 2021, we remain cautious due to anticipated volatility but are hopeful that the pandemic will be brought under control in the first half and that the broader economy will improve. Therefore, we believe it is wise to initiate this process. We will formally submit our capital plan to the Fed by the end of March or early April, and then we can evaluate the appropriate amount. We consider this a prudent figure, particularly as we navigate this transitional year full of uncertainties. Our long-term outlook regarding capital remains unchanged; it's merely about the pace of our approach. We feel confident that this is a suitable starting point, with the option to reassess as the year progresses.

And also, let me extend my congratulations to both Margaret and Brian. I wanted to start by clarifying your comments on Walgreens. Is it going to be included in CareCredit or in your Retail Card sector? It seemed from your release that it was in CareCredit. Additionally, are there any implications of that? Historically, CareCredit has had no RSA or a much lower RSA. Is there something specific about Walgreens that we should consider, which makes it different from a typical co-brand or Retail Card program?

I'll start and then Brian can discuss the RSA. I believe we have a unique insight into the healthcare wellness space because of our CareCredit platform. We expanded that platform throughout last year by entering hospital networks, particularly through our acquisition of Allegro Credit. We think that consumers are looking for rewards in everyday wellness spending. Walgreens is a strong partner since we already accept the CareCredit card there. We see this area as a significant opportunity due to our extensive knowledge and experience over the past 30 years, and we view Walgreens as a way to continue to expand and differentiate ourselves in the healthcare market. Brian, would you like to mention the RSA?

Yes. One thing I want to add to Margaret's comments is that we have a CareCredit dual card that functions well. While we are a large business, we will certainly use the tools, technology, and talent we possess to manage the co-brand relationships within the Retail Card segment. We will collaborate with those teams to integrate healthcare expertise and knowledge. In our payment solutions platform, we do have some limited RSA, which you may notice; however, it's important to note that this is a $10 billion platform for us. Therefore, I wouldn't consider it to be significant in the early stages. Still, you can expect some development in that area over time.

Understood. I wanted to ask about capital and your comments on deploying it to bring your ratios in line with competitors. It seems you have had excess liquidity since becoming public. Is there an opportunity or interest in using that capital for portfolio acquisitions or other forms of inorganic growth like mergers and acquisitions? Or do you think you have enough to manage with Walgreens, Venmo, Verizon, and the economy reopening, suggesting that we should focus on those areas for now?

Yes, that’s a great question. Our top priority regarding capital is to focus on organic growth. We have significant opportunities with established programs like Amazon, PayPal, TJX, Sam's, and Lowe's. We also see potential in newer programs such as Verizon, Venmo, and Walgreens, into which we want to invest. Beyond that, we will have additional capital available. Considering our business's capital generation, return on investment, and the strength of the RSA, we expect to have surplus capital. Our next priority will be to maintain our dividend and return value to our shareholders. Additionally, any excess will likely be directed towards share repurchases. Should an attractive acquisition opportunity arise, whether it involves a portfolio or businesses, we will definitely consider that as well.

I think that was demonstrated this quarter by the acquisition of Allegro. So if the right opportunity comes along that fits with our long-term strategy and is at the right return for us, we certainly are looking at those opportunities should they come forward.

And that's the key point. Still in this part of the cycle, I'm not sure valuations have checked up enough where we would do something large. But to the extent that they do and an opportunity exists, we would gladly deploy that capital for long-term value creation.

Brian, we're getting more questions around regulation, and I just wanted to sort of get your perspective on how you're thinking about that risk? And is there any parts of your business that could become more of a focus from mostly the CFPB et cetera?

Yes, Don, I'll take that. I'm assuming this is in relation to the new administration. We've been around for a long time and have worked with all administrations. We feel confident that we can manage any changes that may come with the new administration. We believe we are well positioned. The focus of regulation is always on being fair and transparent to consumers, which we see as our responsibility. We have the necessary infrastructure and people in place. We're ensuring that we are doing the right things from a consumer perspective while also collaborating with our partners. Therefore, we are not overly concerned. There may be more developments in the future, but we will adapt as needed.

Margaret, it's been such a pleasure working with you. And I know you're still going to have a fantastic influence over at Synchrony in your new role. But thanks very much for all the time that you've given us over the years. And Brian, looking forward to even working with you closer.

Thanks, Betsy.

Thank you very much.

Okay. A couple of questions on SetPay. Just wanted to see if you could give us some color on the take-up rate at your partners and things like what percentage have been rolled out to? How much do you think you can push that in 2021, which is a period where I think you're going to see some of the pure-play guys really push hard to get into merchants? So want to get an understanding of that from you? And whether or not the partners that you have today with another being PL platform can add SetPay on top of that? Or do you have to wait for their programs to come up for RFP in a few years? Just some color there would be helpful.

Yes, sure, Betsy. It really does come down to the individual partner and what they're trying to achieve. And I think obviously, this is a hot topic. That's why we put a slide in the deck today just to kind of lay out in more detail how much of this business we actually do today. I don't think it's well-known that we have $15 billion of balances that are on equal pay products, both short and long-term. And I think it really does come down to partner choice. So as I said, we sit down with each one of our partners, in some cases, they love the idea of an equal pay product because that's what the consumer wants. That's what their customer wants, but they want to put it on a revolving product. And part of the reason for that is it gives them an ongoing relationship with the customer, right? It allows them to drive the repeat usage. It allows them to do the lifecycle marketing. All of those things that are really important to our partners and that, frankly, they've been trying to drive for the last 5 or 6 years. We always talk to you about how much reuse we get on the card. And that's a big priority for our partners is creating that lasting relationship with their customer. And then we also have some customers that depending on their customer base and the types of products they sell, that they're actually interested in more of a short-term closed end installment product. And so we're able to provide that as well through SetPay, and we can do that very short-term, we can do it longer term. But it really is customized for the individual partner in terms of what they're trying to achieve. The one thing I can tell you is we are seeing slightly higher growth rates on those installment products than we're seeing on the other products in the portfolio, which I think is good news. I mean, we absolutely have to stay ahead of that curve. It's rapidly evolving. But the product is just one piece of the equation. I touched on this earlier, what our partners really want to make sure we can do. And this is very different depending on the types of partners is how do we integrate into their digital point of sale. And if I look across the investments that we're making in the company, that's one of the biggest ones. So it's not enough just to have the product, actually having the product is the easier part in a lot of cases. But how do you integrate seamlessly inside of all of our partners' digital assets? So how do you do that online? How do you do it in their mobile app? And you can imagine, given the breadth of our partner base, we have to have solutions that customize for each of those individual partners. And so it really is more about the experience than the actual product at the end of the day. Did I answer your question?

I also add my congrats to you both, Margaret and Brian. You have a lot of great new programs that you're investing in as you look to the resumption of growth in new and active accounts coming out of this. But can you give a bit more color on how you're gauging what the right level of investment is, your guidance for operating expenses calls for higher investments, but maybe you can give a little bit more context, maybe in terms of an efficiency ratio?

Thank you, Bill. We have continued our investments throughout the pandemic, unlike many of our peers. We did not slow down in our technology and resource allocations for growth initiatives; we simply reprioritized some elements to focus on greater short-term opportunities. We will keep investing. The year 2020 was significant for us, particularly in establishing Venmo and Verizon, and we are excited about the full Venmo launch planned for 2021. We have invested substantially, with Walgreens following closely behind. We strive to enhance core productivity while continuing our investments. Our long-term vision includes targeting an above-average return on assets by 2025, and we aim to bring our efficiency ratio back to historically favorable levels while ensuring we achieve that return given our revenue mix and portfolio risks. We will seek opportunities to increase our portfolio margins and reduce incremental costs to sustain and potentially expand our technology investments, which is crucial for our medium and long-term strategy.

That's super helpful. Separately, on capital, can you give a little bit of more color on how you guys are thinking about the CECL and CARES Act phase-ins on your ability to return excess capital? And I guess, just is there a possibility that we could see you guys increase that $1.6 billion authorization under a favorable macro scenario where you guys end up releasing a sizable amount of reserves as we progress through 2021?

Yes. Let me clarify that. In all our projections for 2020 and 2021, we have consistently included the transition adjustment related to CECL, which we believe impacts our capital generation during those years. We're estimating this to be around 60 basis points, assuming current regulations remain unchanged. We continue to have discussions with our stakeholders about achieving a form of permanent capital relief because we believe our Tier 1 capital plus reserves at 27% is quite high. We think there should be credit applied, whether it's in Tier 1 or Tier 2 concerning CECL. This has always been part of our plans and should not significantly affect our strategy. Regarding your second question about the macroeconomic improvements, we are not limited to the $1.6 billion figure. We currently see it that way, but we will undergo our capital planning process in the first quarter, have our plan approved by the Board in March, and submit it in April. We hope to provide a more comprehensive update in the second quarter. There is a possibility that we could return more capital. As of January 29, starting the year at $1.6 billion during a somewhat uncertain transition period is a reasonable place to be. We'll continue to assess this as time goes on, and we initially believed no actions would be taken until the latter half of this year. We will keep evaluating, Bill.

Congratulations, Margaret and Brian, and welcome, Kathryn. I have another question regarding the RSA. I'm curious to know if there is a different perspective on what our average RSA should be over time. While I understand that it may be elevated due to the charge-off cycle, it seems like there might be some modest change due to the Walmart transition. Is there anything else that could impact the long-term average RSA levels?

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

My final question is about the new products you've discussed, and I appreciate the customer-focused approach. When will the mix of these new products start to influence the economics of your business? For example, the closed-end product may have a higher merchant discount affecting a different line item in your profit and loss statement. When should we expect to see changes in that mix, and what form could those changes take?

Yes. Thanks, John. I'll just start on that. I mean, look, as you know, we are pretty disciplined around pricing. And I think we try and maintain pricing that gives us an overall and attractive return either for the program or the product that we're underwriting. And so that will remain consistent. I think there are certainly trade-offs. And I think how you earn on these products is a little bit different. Obviously, shorter-dated promotions, you're maybe getting more merchant discount; you're getting less off of the APR or the consumer. But I wouldn't see having a material impact on our overall profitability return, longer term, you might just see the components change, which, as you know, both of those run through net interest income. So I don't think you wouldn't see it have a significant impact there. I don't know, Brian, if you'd add anything.

Yes. We have $81 billion in assets, so to significantly change metrics, it would need to be a very large factor. While you might observe growth rates in smaller competitors, at this scale, it shouldn't have a notable impact, especially in the short to medium term, given how our profit and loss statement is structured.

I believe the best way to view this is that these will be very appealing opportunities for long-term growth for us. Our product strategy involves a lot more business than many people realize. We are well-known for revolving credit, but we also engage significantly in installment loans. We are quite comfortable with underwriting and pricing in this area. As I mentioned, we're observing better growth here compared to our other products, which is promising. Ultimately, it's about the choices available to our partners and customers, and we are positioned to offer whatever solutions they require.