Synchrony Financial (SYF) — Q2 2021 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 uncertainties, 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 Brian Doubles, Synchrony's President and Chief Executive Officer, and Brian Wenzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles.

Thanks Kathryn and good morning, everyone. Synchrony delivered strong results during the second quarter, reflecting the power of our technology-enabled model, the durability of our partner-centered value proposition, and early indications of a consumer resurgence. With now more than a year of the COVID-19 pandemic moving into the rearview mirror, I am proud of how our team has continued to execute on our strategic priorities. Our multiproduct, multi-capability strategy has enabled us to nimbly adapt and deliver best-in-class products and services to address our partners’ evolving needs while also generating appropriate risk-adjusted returns for all our stakeholders. Let's get things started by reviewing some of the key financial highlights from the quarter. Net earnings reached a record $1.2 billion or $2.12 per diluted share. This reflected an increase of $2.06 over last year, as we mark the anniversary of the pandemic's initial impact on our business and really the world. We are deeply grateful for all of the frontline workers, scientists, and leaders who have done to support our community and make progress toward an eventual return to normalcy. Purchase volume grew 35% over last year, reflecting a 33% increase in purchase volume per account. This increase in spend was broad-based across our five business platforms. This strength in purchase volume was largely offset by the persistently elevated payment rate trends resulting from government stimulus and industry-wide forbearance actions, leading to a slight increase in the loan receivables which were $78.4 billion for the second quarter. Average balances per account were down about 4% for the period while new accounts were up 58%. Net interest margin of 13.78% was 25 basis points higher than last year. Elevated payment rates and excess liquidity levels continued to have an impact on receivables and yield. The efficiency ratio was 39.6% for the quarter, primarily reflecting lower net interest income. Expenses were down about 4% compared to last year and down 5% year-to-date as our cost efficiency initiatives continue as planned. We remain on track to remove about $210 million from our expense base by year-end even as we continue to invest in our business. Credit continued to perform very well. Net charge-offs were 3.57% for the second quarter, down almost 178 basis points from last year. Turning to our balance sheet, deposits were down $4 billion or 7% versus last year, reflecting retail deposit rate actions we took to manage our excess liquidity position. Deposits represented 81% of our funding mix at quarter-end, a slight increase versus last year due to the retirement of some of our debt during the second quarter of 2021. During the quarter, we returned $521 million in capital through share repurchases of $393 million and $128 million in common stock dividends. We also continue to reinvest in our business. One of our greatest competitive differentiators remains our digital capabilities. We continue to invest in innovative products and services that enable our partners to meet their customers wherever and however they want to be met. That where and how of course can change fairly quickly, as can the objectives that our partners seek to achieve, so we need to stay nimble and ahead of the curve. We have continued to win and renew key partnerships, including our recent renewal with TJX Company. This has been a very valuable partnership for over 10 years now and we're excited to continue to provide innovative financing products to TJX customers. We also renewed 10 other programs during the quarter, including Shop HQ, Daniels and Sutherlands, and added four new programs including JCB and Ochsner Health. Our go-to-market strategy utilizes innovative and scalable ways to reach and serve customers effectively across a broad spectrum of industries and financing needs in the course of their lifecycle. We have built a technology platform that harnesses our proprietary data analytics and cutting-edge digital capabilities to offer a customized suite of products specifically designed with our partners and their customers in mind, while delivering appropriately aligned economic outcomes. Our recent business reorganization which included the creation of a growth organization and the redistribution of our partners from three sales platforms into five, will allow us to better leverage these company resources and deliver swifter, more optimized products and capabilities for our partners and sustainable profitable growth for our business. In fact, the growth we expect to achieve within each platform will be driven by utilizing our suite of products to expand lifetime value, deploying more of our digital capabilities to expand customer reach by adapting our value propositions to harness organic trends as the landscape evolves. In the case of our home and auto platform, a combination of all three. In particular, our home partnerships have been a focus of Synchrony's going back to our business inception when we started providing financing for appliance purchases. Over the years, we've significantly broadened the scope of this platform and expanded our customer reach. Today, Synchrony has penetrated across all distribution points in each sector of the home market. From big retailers to independent merchants and contractors and OEMs and dealers, our home platform provides financing solutions to about 60,000 merchants and locations across a broad spectrum of industries, including furniture and accessories, mattresses and bedding, appliances, windows, roofing, HVAC, and flooring. Our partnerships are deeply rooted in industry expertise, data-driven strategic objectives, and mutually beneficial economic outcomes. The average length of our top 20 partners is over 30 years because we are able to deliver a breadth of financing products, innovative digital capabilities, and seamless customer experiences that are customized to each partner’s needs as they evolve over time. Our data insights and analytics expertise, when combined with the partners' own data, empowers each merchant as they seek to optimize their marketing, customer acquisition, and sales strategies. The value that our suite of products provides to their customers is clear. About 58% of our sales are repeat purchases, with our customers looking to upgrade their living room couch or suddenly find themselves in need of a new washing machine. We enable our partners to consistently support those needs through a variety of financing options that are best suited to the customer and the particular purchase they're considering. Whether we've been entrusted to enhance customer loyalty, drive transaction volume, or assure our retailers' adoption of digital assets, our strategy has enabled steady growth across the home market. For the four years prior to the pandemic, Synchrony’s home receivables grew at a 7% CAGR as consumer spent within home improvement, furniture and decor, and electronic and appliances sectors each grew by between 4% and 8% annually. Certainly the pandemic has brought with it both challenges and opportunities. As consumers quarantined in their homes, the desire to renovate their homes or upgrade their furniture and décor intensified. As people started to leave crowded metropolitan communities for suburban neighborhoods, home improvement spending increased. In 2020 alone, the home industry represented an approximate $600 billion market opportunity. Synchrony serves a fraction of that today. Even as we normalize toward a pre-pandemic cadence, the consumer's desire to invest in their living spaces is as strong as ever, perhaps reflecting a secular shift in favor of more remote work. We have positioned our home platform very well to capitalize on these trends. We have opportunities to deepen the scope and reach of existing partnerships while also implementing a number of strategic initiatives to better leverage our core competencies and deepen our market penetration. For example, we have begun using more data and advanced analytics to enhance our acquisition marketing and drive higher repeat sales. We've also launched our direct-to-device capability which puts the simplicity of our financing application and the power of our underwriting in the hands of the contractors and customers as they seek to install a new HVAC system, replace their windows, or repair an oven. This direct-to-device technology is also being deployed in retailer locations, which helps shorten checkout lines and delivers a completely digital solution to apply and buy when in-store. In short, we are excited about the opportunities for growth that we see in our home platform. There are certainly some natural tailwinds in the industry that should fuel home spend, even if life normalizes in the post-pandemic world. We are actually more excited about the ways in which we're leveraging our technological innovations to extend our customer reach, enhance the value of the products and services we offer, and deepen our competitive differentiation. As we continue to execute on our long-term strategy, we are driving even greater customer lifetime value for our partners, better experiences for their customers, and strong returns for our stakeholders. With that, I'll turn the call over to Brian.

Thanks Brian and good morning, everyone. As Brian mentioned earlier, the strong results we achieved during the second quarter reflected a number of factors. First, healthy consumers with significant savings and pent-up demand for spending leading to broad-based purchase volume growth. Second, continued strengthening credit quality across our portfolio. We continue to closely monitor our portfolio as industry-wide forbearance begins to expire across the broader consumer finance landscape and for some customers as rental forbearance also expires. Finally, the strong positioning of our business, combined with consistent execution by our team while we maintain focus on efficient delivery of customized financing solutions and digitally enabled customer experiences across our diverse portfolio partners, merchants, and providers. Focusing on the healthy consumer who has robust savings and a desire to spend in an environment with improving economic trends. During the second quarter, consumer savings rates remained strong, unemployment continued to improve, and consumer confidence reached a 16-month high. As a result, discretionary spending seems to be gradually returning to pre-pandemic levels. In fact, a conference board survey from June indicated that there is also healthy interest among consumers to spend on long-lasting manufacturing goods over the next six months, including homes, cars, and major household appliances which we expect to be a positive tailwind for our home and auto platform in particular. Across our diverse set of platforms, strong consumer spend trends contributed to 35% higher purchase volume compared to last year, primarily reflecting a 33% stronger purchase volume per account. When comparing these trends to the more normalized operating environment of the second quarter 2019 and excluding the impact of Walmart, purchase volume was 18% higher in the second quarter of 2021 and purchase volume per account was 22% higher. This demonstrates strong consumer demand translating into higher spend relative to pre-pandemic levels. Dual and co-branded cards accounted for 39% of the purchase volume in the second quarter and increased 56% from last year. On a loan receivables basis, they accounted for 23% of the portfolio and were flat to the prior year. Average active accounts were up about 2% compared to last year and new accounts were 58% higher, totaling more than 6 million new accounts in the second quarter and over 11 million new accounts year-to-date. Loan receivables reached $78.4 billion in the second quarter, a slight increase year-over-year as the period's strong purchase volume growth was largely offset by persistently elevated payment rates. This marks the first quarter of the year-over-year growth since the start of the pandemic. The payment rate was almost 300 basis points higher compared to last year, which primarily led to a 6% reduction in interest and fees on loans. Our return on capital increased by $233 million or 30% from last year and were 5.25% of average receivables. The increase relative to last year's second quarter was primarily reflected in significant improvement in net charge-offs. As a reminder, our retailers' share rates are designed to share in programs performance portfolios that are performing better on a risk-adjusted basis, our partner share in this performance. So the RSAs performing as it is designed, and the elevated levels we've seen over the last three quarters are a reflection of Synchrony’s particular financial strength throughout the pandemic. We continue to expect RSAs to decline as net charge-offs begin to rise. With improved credit performance and a more optimistic macroeconomic environment, we reduced our loan loss reserves by $878 million this quarter. Other income decreased by $6 million, generally reflecting higher loyalty program costs from higher purchase volume during the quarter. Other expenses decreased by $38 million due to lower operational losses, partially offset by increases in employee, marketing, business development, and information processing costs. Moving to our platform results, we saw broad-based purchase volume growth across all five platforms as consumers have become increasingly confident and remaining local restrictions are being lifted. Both our health and wellness and diversified value platforms experienced more than 50% growth in purchase volume. In health and wellness, this primarily reflected the lifting of local restrictions on in-person interactions and consumers being more comfortable with the environment and undergoing elective procedures. The lifting of state restrictions was also a primary driver of the significant purchase volume growth in our diversified value platform as consumers increased their discretionary spending in categories like clothing and assorted household goods. Meanwhile, purchase volume grew by 30% in our digital platform, 25% in home and auto, and 9% in lifestyle. Loan receivable growth trends by platform generally reflected stabilization or modest growth versus the prior year, as the higher purchase volume was partially offset by the elevated payment rates, the one exception being our diversified value platform, which was also impacted by store closures in 2020. Average active account trends were mixed on a platform basis, up by as much as 5% in digital and down by as much as 6% in health and wellness. The active account growth in digital generally reflected a combination of a shift in the timing of annual promotional events and the ramp-up of some of our recent partner launches. The active account decline in health and wellness was primarily associated with continued strength in consumer back balance sheets. Interest and fees were generally down across the platforms with the exception of lifestyle due to lower yield as a result of elevated payment trends we've been discussing. During the quarter, the continued combined impacts of the mark stimulus and high savings balance built during the pandemic led to higher than average payment rates across our portfolio. As payment rates ran approximately 280 basis points higher than our 5-year historical average, and about 300 basis points higher relative to last year’s second quarter. It’s worth noting the gradual moderation in payment rates from April to June, at which point the payment rate was 18.5%, a 90 basis point decrease from the March monthly peak of 19.4%. We expect continued gradual moderation in payment rates as consumers continue to spend the excess savings they accumulated resulting from the combined impact of stimulus and slower discretionary spending during the lockdown. Interest and fees were down about 6% in the second quarter, reflecting lower financed charge yield from elevated payment rate trends and continued lower delinquent accounts resulting from our strong credit performance. Net interest income decreased 2% from last year. The net interest margin was 13.78% compared to last year's margin of 13.53%. A 25 basis points year-over-year improvement driven by favorable interest-bearing liabilities cost and mix of interest-earning assets partially offset by the pandemic's impact on the loan receivable yield. More specifically, the interest-bearing liabilities cost were 1.42%, a year-over-year improvement of 73 basis points primarily due to lower benchmark rates. This provided a 62-basis-point increase in our net interest margin. The mix of loan receivables as a percent of total earning assets increased by 170 basis points from 78% to 79.7%, driven by lower liquidity held during the quarter. This accounted for a 32-basis point increase in the margin. The loan receivables yield was 18.62% during the second quarter. An 84 basis points year-over-year reduction reflected the impact of the highest payment rate and lower interest and fees which we discussed earlier and impacted our net interest margin by 65 basis points. We continue to believe that in the second half of the year, liquidity will continue to be deployed into asset growth and slowing payment rates should result in higher interest and fee yields, leading to an increasing net interest margin. Next, I'll cover our key credit trends. Our 30 plus delinquency rate was 2.11% compared to 3.13% last year. Our 90 plus delinquency rate was 1% compared to 1.77% last year. Higher payment trends continue to drive delinquency improvements. Focusing on the net charge-off rate trends, our net charge-off rate was 3.57% compared to 5.35% last year. Our reduction in net charge-off rate was primarily driven by improving delinquency trends as customer behavior patterns improved over the last several quarters. Our allowance for credit losses as a percentage of loan receivables was 11.51%. As far as our credit outlook is concerned, we're monitoring trends in our portfolio closely as the accounts enroll in multiple forbearance programs roll off but have not seen any indication in the portfolio to date. Our best expectation at this time is that delinquencies should begin to rise sometime in the back half of 2021, peaking mid-2022. This would translate to a net charge-off peak in late 2022. Moving to our expenses for the quarter. Overall expenses were down $38 million or 4% from last year to $948 million as we continue to execute on our strategic plan to reduce costs and remain disciplined in managing our expense pace. Specifically, the decrease was driven by lower operational losses, partially offset by increased employee, marketing, business development, and information processing costs. The efficiency ratio for the second quarter was 39.6% compared to 36.3% last year. The main drivers of the increase of the efficiency ratio were a negative impact from lower revenue resulting from a combination of lower receivables and lower interest and fee yield, partially offset by a reduction in expenses. Given the reduction in our loan receivables in 2020 and early 2021 and the 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 uncertain and volatile periods, we continue to actively manage our funding profile to mitigate excess liquidity where appropriate. As a result of this strategy, there was a shift in our mix of funding during the quarter. Our deposits declined $4.3 billion from last year. Our securitized and unsecured funding sources declined by $2.6 billion. This resulted in deposits being 81% of our funding compared to 80% last year, with securitized funding comprising 10% and unsecured funding comprising 9% of our funding sources at the quarter end. Total liquidity, including undrawn credit facilities, was $21.2 billion, which equated to 23% of our total assets, down from 29% 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 which had two primary benefits. First, it delays the effect of CECL transition adjustment for an incremental two years, and second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 17.8% CET1 under the CECL transition rules, 250 basis points above the last year's level of 15.3%. The Tier 1 capital ratio was 18.7% under the CECL transition rules compared to 16.3% last year. The total capital ratio increased 250 basis points to 20.1%, and the Tier 1 capital plus reserves ratio on a fully phased-in basis was 28% compared to 26.5% last year, reflecting the impact of the retained net income. During the quarter, we returned $521 million to shareholders, which included $393 million in share repurchases and paid a common stock dividend of $0.22 per share. During the quarter, we also announced the approval of a $2.9 billion share repurchase program through June 2022, as well as our plan to maintain a regular quarterly dividend. Our business generates a considerable amount of capital, thanks to the scalability of our digital capabilities, utility of our diversified product suite, and the prioritization of growth at attractive risk-adjusted returns. We will continue to take an opportunistic approach to returning capital to shareholders as our business performance and market conditions allow, subject to our capital plan and any regulatory restrictions. As we exit the pandemic and the environment normalizes, we're confident in our capabilities and the positioning of our business. We are emerging from this period as a stronger and more dynamic company and we are excited about the opportunities we see to drive strong financial results and shareholder value. I will now turn the call back over to Brian for his final thoughts.

Thanks Brian. While the pandemic has presented our company and the world with never-before-seen challenges, Synchrony has continued to arise to the occasion facilitating the evolution of many of our partners as the new operating environment has been ushered in. We have a truly unique understanding of the partners we serve and the customer needs they seek to address. We have an almost 90-year history in consumer financing. We have continued to invest in our comprehensive product suite, amass our proprietary data, and leverage our advanced analytics to achieve targeted outcomes for each of the merchants we work with. We have been consistently investing in digital innovation for years and have demonstrated how effectively we can adapt to deliver the value of our partners have come to expect while also driving strong financial results and attractive returns for our shareholders. With that, I'll now turn the call back to Kathryn to open the Q&A.

That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I'd like to ask the participants to please limit yourselves 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.

Thanks, good morning. So Brian Doubles, you mentioned an early indication of consumer resurgence. I'm just curious which macro data points and micro ones give you the most encouragement and then I guess the question I'm getting quite a bit is what the setup is for loan growth with us moving away from stimulus and there being other benefits coming from the government like the tax credits and obviously infrastructure. Maybe you could just help us think through all of that. Thanks.

Yeah hey Sanjay. So look, I think no matter where you look, we feel pretty bullish around what we're seeing in the economy. Consumer confidence continues to build; the trends on retail sales and spending, all of that is translating into really good spend on our cards. So as we look across our five platforms, it really is broad-based. 35% purchase volume growth year-over-year, really strong across all five platforms. The fact we’re up 18% versus 2019, I think is a really good indication. So it's not just that we’re comparing against the weak 2020; it really is broad-based growth across the company. And then as you look at kind of per account purchase volume, per account was up 33%, so that’s another positive indicator. And then, this is a little more anecdotal, but as we talked to our partners, no matter what segment we’re in, they’re seeing a lot of pent-up demand to spend. The providers in CareCredit, they’re booking appointments now, 3, 4 months out, they’re opening the practices on Saturdays and Sundays to keep up with the volume. So, I know that's a little more anecdotal but as our teams are out every day talking to the partners, they’re in the stores, they're seeing and feeling a lot of pent-up demand to spend. And I don't know Brian, if you want to add to that a little bit on.

Yeah, the only thing I would add Sanjay to that is as we look at savings rates, you clearly see the consumer who increased their savings in the beginning part of the pandemic when stimulus happened. That came back down in line with historical averages towards the end of 2020, and we saw that lift here in the end of the first quarter, into the second quarter with the stimulus actions. We begin to see now, across between our largest banks that began to crowd down a little bit. So, some of those will come back in line clearly with the spending, behavior pattern as well as the increase in financial obligations as mortgage forbearance, auto forbearance, and the enhanced unemployment benefits began to fade here in the back half of the year.

Yeah, I think Sanjay, you touched on receivables growth, that will absolutely come. We had four out of our five platforms had receivables growth. The payment rate is a little bit tough to predict, but we don't see anything that is permanent inside of the portfolio. So I do think we will see a reversion to the mean around payment rate. And based on the spend that we're seeing on our cards, receivables growth will absolutely come, and we're starting to see some positive signs there in, like I said, four out of our five platforms this quarter.

Okay, great. That's perfect, and just a follow-up, there's a couple of portfolios that have been out there mentioned to be far I'm just curious how you are seeing your pipeline develop in terms of deal, your portfolio acquisition except from maybe you just touched on that and just one want clarification Brian Wenzel, the framework for key drivers from last quarter. I mean it sounds like most of them stand but I just wanted to clarify that they still stand? Thanks.

Yeah, so let me start on the pipeline question Sanjay. So I would say across all five platforms we've got a good pipeline of new opportunities. One of the benefits of the reorganization is our teams are getting even deeper and aligned by industry. And we've got a fresh set of eyes on certain things and we're looking at opportunities for new programs and start-ups that are a little bit unconventional, a little bit creative, and I think that's a great sign and part of what we are trying to achieve with the reorg. I would tell you most of the opportunities that we’re seeing in the pipeline are start-ups or new programs with a couple exceptions of things that are out there that we’re looking at that they have existing portfolios, but again a strong pipeline across all five platforms.

Yes, Sanjay, to your framework question so the lack of the page I wouldn't confuse with the fact that we’re changing that framework again. I think when you look at what we've put out in the first quarter, we highlighted the continued high payment rates that will impact loan growth in the first half of the year, and that's going to continue. We do think it begins to abate in the back half of the year. So I think when the purchase volume and receivable growth standpoint it's the same. Clearly, the elevated payment rate and persistency of that will provide a little bit of headwind and manage margin as we move into the back half of the year. From a credit perspective you know the higher payment rate really is giving us what I’ll say almost pristine type credit so I think you’ll see in the back half of the year. Really for the full year for the company, we’re going to be some 4% on a lost rate perspective which is remarkable for this business given high margins. And then the RSA following those trends will be a little bit more elevated in the back half of the year. Which again is working as it's designed to share the upside performance of the company, so that's how I think about it. It’s largely consistent with what we’ve said back in the first quarter.

Hey good morning and thanks for taking my questions. Good new customer activity, maybe can you tell us how much of that was say from the New York channels like Venmo and Verizon? Maybe just give us kind of an update on call it the maturation of those two new programs?

Yeah John, so we obviously can’t break out any specific performance on the programs, but I can just talk generally about both. Venmo is going really well. We're in full launch mode; I would say performance is better than our expectations so far. We are getting really great feedback from the customers around just the profit and the fact that we maximize rewards in those spend categories. They love the card design; they love the QR code, the ability to split payments and share, and so that program’s off to a great start. It's still early, but all of the key indicators that we look at are performing really well. Similarly on Verizon, this is another program for us that will be a top 10 program in the future. It's performing ahead of our expectations and a great feedback on the product. It's definitely behaving like a top of our card, which is what we intended. That was the goal, and so we’re seeing really good spend on Verizon products and even outside as well. So, off to a great start on both and like I said, I think these can both be top 10 programs for us in the future.

Okay, very good thanks. And then Brian, maybe you could give us a high-level kind of quick discussion at the state of the market and really what I'm kind of interested in is you've got some new kind of emerging market purchase spends in the buy now pay later product and so forth. And so I'm kind of wondering what your senses for kind of underwriting quality across the spectrum and kind of competitive factors across the spectrum given the changing elements of the market?

Yeah John, it's a great question. Obviously, there are always new entrants in the buy now pay later space, I think it’s pretty clear at this point that every financial service provider out there will offer a buy now pay later product. Equal pay financing is a big part of our business already; we highlighted we do over $15 billion of balances currently on equal pay products we offer those products at over 70,000 locations. So our goal at the end of the day is to have a multi-product multi-capability solution. I think ultimately that's what's going to win, and that's what we're offering to our providers in terms of the competitive dynamics. It's hard to tell how others are underwriting. What I can tell you is we've been in this business a long time; it is really important to stay disciplined which means you don't go a lot deeper in really good times and you try not to contract too much in bad times because we know that our partners really value that stability, the consistency of our underwriting. They get used to a certain approval rate, and we try to protect that in both the good times and bad times. And as we all know, if you’ve been in this business a long time, if you do take on substantially more risk and you’re winning business by lowering your underwriting standards, that’s a losing strategy over the long-term. That’s not how we operate; we’ve got a very experienced, disciplined credit team. And look, we want to win business based on our products and capabilities, based on our technology, our partnership model; we never want to win business based on just going deeper and taking on more risk.

Yes, Brian can you talk a little bit about the child tax credit? Digging a little bit more, for example, do you think that will lead to higher payment rates in July versus June? And how do you think about the raw overall materiality of it versus prior stimulus?

Yeah thanks Don. Obviously an influx of $15 billion of cash on top of what is really out there is clearly not going to be beneficial. That being said, it's been targeted to folks under $150,000; that's a pull-forward really from 2022. I'm not necessarily sure it will have a material impact necessarily on our payment rates as we look in the beginning of July. We have not seen a real elevation of payment rates, more consistent with what we saw as we exited out of June. So I don't really see any data yet that says that that’s going to be a potential problem. Certainly we’ll watch and see whether or not that becomes a permanent credit and a permanent pull forward as legislature gets enacted later on this year, so we’ll continue to watch it, Don.

Okay, thank you I’m all set.

Thanks Don, have a good day.

Hi a couple of questions just the first one you talked through the NIM and the loan growth how it’s being impacted by the payment rates, etc. but could you speak to how much the loan growth and potentially NIM is impacted by some of these new entrants that we’ve been seeing and discussing here, be it either BNPL or other kinds of payment schemes that enable people to really shift some of their spending away from what might have been their primary payment device? I'm just wondering if that's had any impact?

Yeah Betsy, I’ll let Brian chime in here but what we're seeing is really attributed to the higher payment rate just because consumers' balance sheets are stronger than they have ever been and I think that is the primary driver. I don’t think this is competitive pressure in any way, but I’ll let Brian add some color to that.

Yes, I’ll just point back to a couple of things Betsy. First, when you look at our new account origination, just 6.3 million new accounts, up 1% versus 2019, so we’re not seeing an impact, and even when we look down at the providers that may have alternative type of products, at least buy now pay later products. We're not seeing a real impact relative to new accounts. We also don't really see it in the payment rate where we’re coming through. It really is, as Brian pointed out, the accumulated savings rates that you see in a stimulus that has flowed through the consumer that's really driving the pressure against purchase volume and headwinds, which is producing tremendous credit which we sometimes put in the back mirror, but the credit is really terrific right now. So we will continue to monitor it but we don't see an impact from the alternate players.

Great, ok now I get it and clearly credit is a part of the mass here so it’s a little bit surprising when people only look at like a buy now pay later instead of including the credit; I agree I guess the other question I have on this is, with regard to deposit products that you might be planning or thinking of offering because when you think about the BNPL, the pay in for. I know there are different BNPL, but the pure pay in for should be finance stirred or funded with a checking account right. I mean you shouldn’t be paying for your pay in for with a card balance, but I just wanted to understand how you're thinking about that when you're developing your own products and whether or not we should be anticipating more in the way of deposit products coming out from you? Thanks.

Yeah, no, I mean Betsy's, it’s a great question. And we agree you shouldn’t pay for one credit product with another credit product, so we agree with that. I think we're looking at some alternative kind of savings products as part of our broader product strategy. Buy now pay later is obviously top of mind right now across all issuers. Like I said, I think everybody will have a version of it. We have $15 billion balances today, as I said, and we’re rolling out some new capabilities and features in the second half of the year. So nothing I can get too specific at this point, but I would want to comment, definitely part of our multiproduct strategy I touched on earlier.

Hey everybody, thanks for taking my question this morning. Brian, you did a great job highlighting the impact of home and auto on the portfolio. I'm curious with the changes in the composition over the last several years. How important do you think back-to-school is particularly in light of the challenges for back-to-school spending last year?

Yeah, back-to-school hasn’t been a big driver for us for a number of years Rick, which is kind of surprising. You know we just we don't see a ton of volume there and I think it's not as much of an event as it was probably when you and I were growing up. It was more then I know even for my girls they don’t there isn't a back-to-school event where they all go get new clothes and stuff for school. So we tend to see that spend space out over a longer period of time and it’s less of a spike for us so. I think that trend will continue even in the new paradigm.

Great, thanks. Brian, I'm hoping that you could talk a little bit about the kinds of conversations that you have with your large retail partners about BNPL. In other words, I have to believe that they are quite invested in the success of your programs given they earn a significant amount of money whereas on BNPL they’re kind of paying a significant amount of money. So kind of maybe could you just, obviously not asking about any specific partner but what are those conversations like?

Yeah so it's a great question Moshe. I think a lot of our partners are still in kind of the evaluation phase where they look at the buy now pay later products and they obviously see a customer desire for that product, right, and a customer demand for it but one of the big questions is, as you pointed out, it’s around economics. And it's still early there, and I think some retailers are willing to pay what is a pretty steep merchant discount rate, if they believe that they are attracting new customers and they're getting sales that they wouldn't otherwise get. But when they look at that comparison, they look at compared to some of our products where not only do we not charge interchange, we are also paying them quite a bit through the RSA and they look at that and they say, okay. Clearly, economically, they would prefer that the purchase goes on the private label card or a co-brand card because it's much better for them financially. And so to the extent that they stop believing that they’re actually getting incremental purchases or new customers, then the economic trial is very clear, and so I do think down the road there’s an economic reckoning that will happen as this plays out, and it's still early in terms of these products and how they’re offered. The other thing I would mention is that the other advantage that we hear from our partners is they like the lifetime relationship that a card provides; they can do lifecycle marketing, they can do promotions and offers over number of years. And one of the things that we talk a lot about with our partners is I think we measure across all of our partners is repeat purchases and we talked to you guys a lot about that as well because that has been a big focus for us over the last five years, and one of the things that frankly our partners look to us for is that ongoing customer loyalty. We measure that, we look at by customer, when was the last time they made a purchase, okay, let’s send them a customized offer or promotion. So, they like that ability to do that lifecycle marketing. So, I think it’s a combination of economics and that’s still kind of TBD and how this is going to shake out.

Thank you. And my follow-up question is for Brian Wenzel. You kind of highlighted the impact of, I believe these along with the payment rate. Could you just talk a little bit about how that comes back? Like what is the timeframe? Is it kind of the early stage delinquencies? How should we think of the normalization of that factor?

Yeah, great question Moshe. I think the way we've kind of think about credit outlook now, delinquencies built towards the latter part of this year, adding into 2022. So, that will begin to come back first before you get into the charge off. So if you believe that in the latter part of this year, you'll begin to see the yield impact benefit coming from higher late fees in the portfolio.

Yeah, thanks. I had the question about the NIM. Can you help us think about the lift that you made yet from both the normalization of the payment rate to kind of the long-term historic average and also over the normalization of liquidity as a percentage of assets?

Yeah, so the way I was thinking about, let's take liquidity first and the portfolio. So clearly we've been able to burn off some of that liquidity here in the second quarter, both through the $2 billion in asset growth that we've had as well as acceleration of some of the maturities in the funding profile. So we’re running over $2 billion continuous excess liquidity as we enter into the back half of the year. If you take out all the excess liquidity from here, that’s probably another 40 basis points out to the net interest margin that you’d see a lift from. Again, we’ve highlighted before if I have 20 basis points to 30 basis points from benchmark rates, so put that off to the side. The residual comes in probably two: one is late fees, which you probably see an 80 basis point to 90 basis point lift going back to a normalized late fee, relative to not even—about higher than 5.5— but their normal load and you have the residual which will be the revolve when payment rates come back in line. So the one thing I’d say is we do not see anything in the portfolio today that gives us any indication that the measures margin in that 16% realm is not going to be the mean that we go back to, and we’ll continue to watch it but there’s nothing fundamentally or structurally that we think is different, it’s just really the time when we get there, given the excess liquidities that the consumer has and that they're going to deploy here in the short term.

Okay, great. That's helpful. And then just a follow-up question on Brian on your comments about your partners really wanting to kind of stimulate the longer lifecycle with customers. Do they find that using the revolving products, what they've got, incentives on spend is the best way to do that as opposed to offering some type of, maybe a lower rate kind of fixed loan product on balances?

Yeah Mark, I mean, it really does vary by partner, but I would say the majority, particularly the larger partners, they see the value of the value proposition. Right, the rewards, the loyalty that that drives when they go into one of our large partners and a lot of time they’re saving 5%, that is really meaningful. We do that at Amazon, we do that at Lowe's, and we do that at a number of places now. And that is, that’s a great way to incent that repeat purchases. I think the other thing that we've been doing for a number of years now and most of our partners we store, the card is the default payment type. And so you don't even have to think about it. It just goes right on the card you gave your 5% and that’s something that our partners have been very focused on as well to drive that again the lifetime relationship with the cardholder and the loyalty that comes with it.

Okay, and I assume that they will get the fastest checkout using their revolving products, correct?

Yeah, it’s just instant. For example, the store, I know for Amazon for me, the store is my default, I get my 5%, I don’t even think about it; it just goes on automatically on the card. So, it’s certainly the easiest and fastest way to check out for most of our partners.

Hi, this is a question on behalf of Mihir Bhatia. I'm interested in the trends regarding urban costs and the emerging portfolios. I would like to know how many awards are being recognized in industries that could be beneficial, or if you're planning to enhance your portfolio to attract more customers.

Yeah, the quality wasn't that clear; you're asking about the loyalty cost trends.

Is the increase observed in the newer portfolio doing well, such as with more promotions? I’m curious if this is adding to our efforts or simply reflecting the portfolio aimed at acquiring new customers.

Yeah, the way I would think about the loyalty cost, you know first of all, high time was up significantly year-over-year versus 2019, so you’re going to see a general trend in loyalty cost because higher more certainly than new growth programs at Verizon and Venmo will have those costs, and then set have to be a higher percent of the assets because the assets are just beginning to build, but it's not significantly different than our overall portfolio. Not necessarily the drivers would really the increased purchase volume across the entire portfolio that's driving our value for the loyalty costs.

Thank you for taking my questions. Can you explain the differences in the new segments and platforms that you have established? What led to the decision to separate them this way? Additionally, how are the marketing teams approaching their go-to-market strategies, and are they utilizing different software for each platform? Thank you.

Yeah, sure. So the reason to reorganize and align more by industry was a couple of reasons. First, in terms of your point, the products and capabilities that we offer tend to align better by industry, and even more important than that, how we integrate in the products and capabilities and how we integrate into the digital environment or the store footprint, tends to align as well by the industry. So, one example for our purely digital players, such as Venmo, Amazon—we’re integrating through our API technology or through SPY technology right inside of their house, and that's different than what we would do in home and auto where for some of our larger partners we’re integrating both in their digital environment and mobile online, but we also have tools and technologies to apply and buy in-store. And so, because of the products that we tend to be tailored more towards the industry because of the types of products that they’re selling as well as whether or not they are purely digital or they have a store footprint, it just made more sense to align by industry. And the second piece of this when we saw this in CareCredit over the last 30 years, it really is an advantage to get really deep domain expertise in an industry. And one of the things that I think has been a secret to our success in CareCredit is that domain expertise; our teams build lifetime relationships, they get really deep in the different domains that we support, etc. And we're trying to replicate that in these other platforms, so those were the two primary reasons. I can tell you it's been great just a couple of months in having these teams in place, looking at these segments in a different way, and seeing kind of natural synergies and ideas for new products and capabilities as they're out talking to partners and thinking about it, more with the industry than just itself. So far the progress has been really great.

Thank you for that detailed response. I know this might be a long shot, but could you discuss the tender share for each segment? If specific numbers aren't available, could you indicate which segments fall below or above the average tender share for the whole company? Additionally, regarding the RSA in the second quarter, do you believe that reflects the market's high watermark on a percentage basis? I appreciate your insights on this. Thank you!

Yeah, let me start on the penetration question. I would say across each of those platforms we've got significant room to grow penetration. Inside of each of those platforms we’ve startup programs where we’re relatively small percentages of the payments inside of those programs, and we have very mature programs where we can be 30% to 40% spend. What I can tell you is we measure our teams on increasing that penetration rate regardless of where they are at. So, even for the more mature programs, our teams that are embedded inside of our partners, they get measured based on growth and driving that incremental tender share. So even in our mature programs, we are very focused on that penetration rate. Now, Brian, if you want to take the second piece of that?

RSA yield in the second half of the year will be influenced by two main factors. First, purchase volume rates for RSAs include both sharing and buying-oriented purchases, showing strength in the latter. Second, we need to monitor how the next charge-off and provisional line evolve. I previously mentioned that we anticipate the NCL rate for the entire year to remain below 4%. However, potential ACL releases could affect that figure. Therefore, we expect the rates in the second half of the year to remain higher than they are now, but they should be significantly greater than what we experienced in the second quarter.

And thank all for joining us this morning. The Investor Relations team will be available to answer any further questions you have.