Synchrony Financial (SYF) — Q1 2022 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'll now turn the call over to Brian Doubles.

Thanks, Kathryn, and good morning, everyone. Synchrony delivered strong financial results for the first quarter of 2022, including net earnings of $932 million or $1.77 per diluted share, a return on average assets of 4% and a return on tangible common equity of 34.9%. This financial performance was driven by the core strengths of our business and the continued execution of our key strategic priorities to drive greater value for our partners, providers and customers. We continue to expand and diversify our portfolio during the first quarter with the addition or renewal of more than 15 partners. We also continue to extend our reach and engage more customers, thanks to the powerful combination of our seamless experiences, attractive value propositions and broad suite of flexible financing options. New accounts grew 10% during the first quarter, reaching $5.5 million, and average active accounts increased 6%. Turning to customer spend, we continue to experience broad-based demand across the many industries we serve. Purchase volume increased 17% versus last year, driven by double-digit growth in our diversified value, digital, health and wellness and home and auto platforms. We also continue to see higher engagement across our portfolio as purchase volume per account grew 10% compared to last year. Customer spend reflected strong cross-generational growth. Millennial and Gen Z spend increased 23% year-over-year, and Gen X and baby boomers spend increased 15%. The combination of strong purchase volume and a slight moderation in payment rate drove loan receivables growth of 8% on a core basis. Dual and co-branded cards accounted for 42% of the purchase volume in the first quarter and increased 29% from the prior year. On a loan receivables basis, including the loan receivables held for sale, dual and co-branded cards accounted for 25% of the portfolio and increased 16% from the prior year. In short, Synchrony has continued to see strong engagement across our customer base and momentum across our product suite, thanks to our ability to deliver flexible financing options that specifically address whatever our customers' transactions may look like on any given day, whether they're looking to cover a health care need, purchase supplies for a home repair, or they're simply convenience or value shopping. Our customers can access financing solutions that specifically address their needs while optimizing the value they seek. Of course, in an ever-changing consumer landscape, the financing needs and expectations of customers evolve as do the strategic priorities of our partners. To an increasingly greater degree, it's no longer simply about reward points or cash back. It's also about delivering an end-to-end experience or the kind of perks that attract a customer to the product and are designed to anticipate and optimize value. The more dynamic and data-driven those experiences and the value propositions are, the deeper the customer relationship and the stronger their lifetime value over time. In order to deliver consistent and compelling outcomes for both our customers and partners, we consistently invest in our digital capabilities, our product suite and our value propositions so that we can continue to meet our customers where, when and however they want to be met. These investments take shape in a number of different ways, whether it's through loyalty, technology or marketing spend, our partners' interests are aligned with ours. So we structured the majority of our economic arrangements such that the investment and upside opportunity are shared. Synchrony's innovative digital capabilities allow us to deeply integrate with our partners and providers to deliver seamless and engaging omnichannel experiences while also leveraging our data and insights to optimize customer outcomes. In particular, we are often able to develop highly tailored value propositions to attract customers for whom we can predict transaction behavior and financing needs, which ultimately leads to more engaged and satisfied customers, higher spend and better outcomes for all. We are always looking for ways to enhance our program performance. Value proposition refreshes are a particularly attractive and effective way to drive deeper engagement with existing customers and attract new customers, resulting in higher lifetime value of each account. We have far more data and insights to leverage based on our experience with an existing portfolio. And since our partners' interests are aligned with ours, the investment costs are generally shared. Simple program enhancements like deeper integrations, more relevant and universal value propositions and greater product flexibility enable us to deliver greater utility and value to our customers and stronger results for our partners. Our customers receive greater financial flexibility to address their broad range of needs and make smarter purchases while also maximizing the rewards they care about. And our partners attract new customers and drive greater customer loyalty larger ticket sizes and more frequent transactions. Our partnership with PayPal is a great example of how, together, we continue to evolve and enhance our offerings to drive still greater outcomes for all. Earlier this month, we announced the launch of our new and refreshed co-branded PayPal Cashback credit card. The consumer value proposition is a best-in-class cash-back offering where the consumer will earn unlimited 3% cash back when paying with PayPal at checkout and 2% everywhere else Mastercard is accepted. The card has no annual fee, no category restrictions and can be added to the digital wallet for easy, fast and secure checkout. We're excited about this opportunity as it delivers exceptional consumer value while leveraging the innovative digital experiences from previously launched partner programs to deliver a truly seamless and elegant customer experience. In particular, the PayPal card experience will be fully integrated with the PayPal app empowered by native APIs. Customers will be able to apply for the card and service their accounts all within the app as well as receive personalized notifications and alerts to manage their credit account. Thanks to our integration within the PayPal app, customers will be able to redeem their rewards into their PayPal balance to use for future purchases or transfer into their PayPal savings account powered by Synchrony Bank. The rollout of the new product, enhanced experience and value proposition began earlier this month, and we expect it to be fully deployed this quarter. Given the level of integration and functionality we are launching with this card, as well as the best-in-class value proposition we're delivering, we expect to see meaningful growth in new accounts and spend on the card. We're truly excited to continue to raise the bar by consistently investing in and delivering innovative financing experiences for our partners and customers. And with that, I'll turn the call over to Brian to discuss the first quarter financial performance in greater detail.

Thanks, Brian, and good morning, everyone. Synchrony's first quarter performance reflected continued strength across our diversified sales platforms and, in particular, the powerful combination of our digitally powered product suite, seamless customer experiences and compelling value propositions, which resonate deeply with the needs of our customers and partners. We generated over $40 billion of purchase volume in the first quarter of 2022, reflecting a 17% increase compared to last year. From a platform perspective, our home and auto, diversified value, digital and health and wellness platforms each continue to experience double-digit year-over-year growth in purchase volume, reflecting strong demand for both our products and attractive partner and provider networks. At the platform level, home and auto purchase volume was 10% higher due to continued strength in home and improvement in auto as more consumers return to the road. In diversified and value, purchase volume increased 25% driven by strong retailer performance and higher customer engagement. The 20% year-over-year increase in digital purchase volume generally reflected the growth across the platform. We experienced greater customer engagement, including higher active accounts and higher spend per active among our more established programs and continued momentum in our new program launches. The 17% increase in health and wellness purchase volume was driven by broad-based strength led by dental given the benefit of increases in patient volume compared to the prior year. Our lifestyle platform generated purchase volume growth of 4%, reflecting strong retailer sales and growth in music and specialty, partially offset by the ongoing impact of inventory shortages in power and particularly strong growth in the prior year period. Loans grew 8% year-over-year to $83 billion, including loan receivables of $78.9 million and held for sale receivables of $4 billion. At the platform level, year-over-year loan growth rates accelerated from the fourth quarter as strong purchase volume and some easing in payment rates contributed to balance growth. Net interest income increased 10% to $3.8 billion, primarily reflecting a 7% increase in interest and fees due to higher average loan receivables. On a sequential basis, first quarter payment rate was down approximately 25 basis points to 18.1%, but was still approximately 45 basis points higher than last year and approximately 225 basis points higher than our 5-year historical average. As we progressed through the first quarter, payment rate declined to 17.2% in February but increased in March, reflecting normal seasonality associated with the tax refund season. That said, March was the first month where payment rate was lower versus the prior year since the pandemic began in 2020. Net interest margin was 15.8% in the first quarter, a year-over-year increase of 182 basis points. The primary driver of this NIM expansion was a 6.5% increase in the mix of loan receivables relative to total interest-earning assets due to the growth in average receivables and lower liquidity. This accounted for 126 basis points of the year-over-year increase in our net interest margin. In addition, the first quarter's 32 basis points improvement in loan yield and a 33 basis points reduction in interest-bearing liabilities cost each contributed 26 basis points of NIM improvement. RSAs were $1.1 million in the first quarter and 5.4% of average receivables. The $150 million year-over-year increase was primarily driven by the continued strong performance of our partner programs. The provision for credit losses was $521 million, an increase of 56% versus last year due to lower reserve release that was partially offset by lower net charge-offs in the first quarter of 2022. Included in this quarter's provision was a reserve release of $37 million, inclusive of the reserve reductions from our held-for-sale portfolios of $29 million. Excluding the impact of our held-for-sales portfolios, the $8 million reserve release reflected an improvement in our loss forecast and credit normalization trends based on continued strong performance, partially offset by an uncertain macroeconomic environment. Other income decreased $23 million, primarily reflecting higher loyalty costs due to purchase volume growth. The year-over-year comparison was also adversely impacted by lower investment gains from our ventures portfolio. Other expenses increased 11% to $1 million due to the impact of higher employee, marketing and business development and technology costs. Other expenses also included the impact of $10 million related to certain employee and legal matters. Our efficiency ratio for the first quarter was 37.2% compared to 36.1% last year. In total, Synchrony generated net earnings of $932 million or $1.77 per diluted share during the first quarter. We also generated a return on average assets of 4% and return on tangible common equity of 34.9%. These strong net earnings and returns demonstrate the power and efficiency of our digitally enabled model, combined with the compelling value of the financial products and services we offer through our financial ecosystem. Not only were we able to support our strong customer demand with a diverse range of products, but we are able to do so while maintaining cost discipline and strong risk-adjusted returns. Next, I'll cover our key credit trends on Slide 9. Elevated payment rates continue to drive year-over-year improvement in our delinquency metrics. Our 30-plus delinquency rate was 2.78% compared to 2.83% last year, and our 90-plus delinquency rate was 1.30% compared to 1.52% last year. When removing the impact of the held-for-sale portfolios on our delinquency measures for the quarters of this year and last year, the 30-plus delinquency metric would have been down about 15 basis points versus 5, and the 90-plus metric would be down about 30 basis points instead of 22. Our portfolio's strong delinquency trends have continued to drive year-over-year improvement in our net charge-off rate, which was 2.73% compared to 3.62% last year, an 89-basis-point improvement year-over-year, primarily reflecting a very healthy consumer and a 45-basis-point higher payment rate. The 36-basis-point sequential increase from our fourth quarter net charge-off rate of 2.37% primarily reflected the impact of approximately 25-basis-point sequential decline in the payment rate as some consumers continued to revert back towards pre-pandemic payment behaviors. Our allowance for credit losses as a percent of loan receivables was 10.96%, up 20 basis points from the 10.76% in the fourth quarter. Let's focus on some key trends that have supported our strong performance and the confidence we have in our business. First, as we just discussed, the underlying trends within our portfolio are performing better than our expectations heading into the year. Our portfolio payment trends continue to show gradual normalization across the credit spectrum, reflecting the strength of the consumer more broadly. In addition, the population of customers within our portfolio that are now in post-exploration forbearance programs from other lenders has performed better than our expectations. This suggests to us that with the benefit of excess savings due to stimulus, modified spending behaviors and widespread forbearance, these borrowers manage their personal balance sheet well through the pandemic and therefore, have a lower probability of default. According to data from a recent survey, two-thirds of consumers have either only spent a portion of the stimulus or have the entire amount of stimulus they received still saved. The remaining one-third of consumers have spent the entirety of the cash stimulus they received during the last two years. When tracking consumer balance trends by tiers, zero to $2,500, $2,500 to $5,000 and balances greater than $5,000, the data indicates that while all balanced tiers of stimulus-receiving customers have seen balance declines between $200 to $300 from peak levels observed last fall, the two higher tiers continue to show growth in their savings balances since the third stimulus check. The lower tier with balances of $2,500 or less has generally remained flat aside from the stimulus checks over the last two years. Meanwhile, labor markets continue to be robust as unemployment levels decline and wage growth continues. Through mid-April, consumer spending continues to be strong, reflecting broad-based spending across our platforms and products. Finally, our portfolio is well positioned to navigate changing market conditions given its inherent diversification across bank categories, financing options, channels, and customer demographics. Synchrony's sales platforms encompass a broader range of discretionary and non-discretionary industries through a wide network of distribution channels. More than a quarter of our purchase volume in 2022 came from each of our diversified value, home and auto, and digital platforms. Another 8% of purchase volume came from health and wellness. And almost half of our sales spend in 2022 was comprised of bill pay, discount store, drugstore, healthcare, grocery, and non-grocery food, and auto and gas spend. In addition, our disciplined approach to driving consistent growth and attractive risk-adjusted returns means that our portfolio credit mix remains balanced and favorably positioned compared to the mix in the first quarter of 2020. At the end of the first quarter of 2022, approximately 40% of our balances represented super prime customers, another 35% came from prime, and the remaining 25% came from non-prime. And in terms of average credit line by credit segment, our portfolio's super prime, prime, and nonprime lines are still lower by an average of 8% compared to two years ago. Moving on to another Synchrony strength, our funding, capital, and liquidity. Deposits at the end of the first quarter were $63.6 billion, an increase of $814 million compared to last year. Our securitized and unsecured funding sources declined by $1.8 billion. This resulted in deposits being 83% of our funding compared to 81% last year, with securitized funding comprising 8% of our funding sources and unsecured funding comprising 9% at quarter end. Total liquidity, including undrawn credit facilities, was $17.8 billion, which equated to 18.7% of our total assets, down from 29.2% last year. As a reminder, before I provide the details of our capital position, it should be noted we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. The impact of CECL has already been recognized in our income statement and balance sheet. This transitional adjustment pertains strictly to our regulatory capital metrics. To that end, the first-year phasing of the impact of CECL on our regulatory capital resulted in a reduction of our CET1 ratio of approximately 60 basis points in the first quarter. We ended the quarter at 15.0% CET1 under the CECL transition rules, 240 basis points below last year's level of 17.4%. The Tier 1 capital ratio was 15.9% under the CECL transition rules compared to 18.3% last year. The total capital ratio decreased 250 basis points to 17.2%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 24.5% compared to 28.7% last year. We continue our track record of robust capital returns to shareholders. In the first quarter, we returned $1.1 billion to shareholders through $967 million of share repurchases and $114 million of common stock dividends. Even when factoring in the roughly 180 basis points of remaining CECL transition impacts on our capital ratios over the next three years, Synchrony still has considerable excess capital on our balance sheet to deploy in order to get to our 11% CET1 target ratio. This, coupled with the meaningful earnings and capital generation of our business, thanks to our disciplined approach to growth at appropriate risk-adjusted returns means that Synchrony is particularly well positioned to execute our capital plan as guided by our business performance, market conditions, and subject to our capital plan and regulatory restrictions. As part of our capital plan, the Board has approved a 5% increase in our common dividend, bringing it to $0.23 per share beginning in the third quarter of 2022. In addition, our Board has approved an incremental share repurchase authorization of $2.8 billion for the period ending June 2023. Inclusive of the remaining $251 million authorization we had at March 31, this brings our total share repurchase authorization to $3.1 million. Finally, let's turn to our updated outlook for the full year, which is summarized on Slide 12 of our presentation. We've assumed that the pandemic remains well controlled and that any rising cases will not have a material impact on the economy or our customers. Our macroeconomic scenarios include a minimum of 5 interest rate increases during 2022, qualitative tightening measures starting in the second quarter, a slowing economy resulting from these actions, and continued higher inflationary conditions. While the macroeconomic environment is uncertain, given the dynamics of the portfolio as we see them today, we do not anticipate a material impact on our full year 2022 outlook for loan receivables and credit performance. We expect consumer demand to remain robust, supporting broad-based purchase volume growth across the various industries and markets we serve. As consumer savings begin to decline and payment rate moderates, while on a lag, we would expect purchase volume growth to moderate as the year progresses. Given the strong purchase volume and loan receivables growth we've achieved, we expect ending loan receivables growth of approximately 10% versus the prior year. To the extent that payment rate moderates further, we would anticipate purchase volume to moderate and loan growth to accelerate. We expect our net interest margin to be between 15.25% and 15.50% for the full year. As we move through the year, NIM will be impacted by the fluctuation in the percentage of average loan receivables to average earning assets due to the impacts of seasonal growth, portfolio conveyances, and the timing of funding. As mentioned earlier, our NIM outlook also reflects the anticipated impact of rising benchmark rates as well as rising interest and fees, which will be partially offset by higher reversals as credit normalizes. In terms of credit performance, we expect a rise in delinquency and loss from current levels. For the full year 2022, we expect net charge-offs to be less than 3.50%. Based on the performance we've seen across the portfolio, we now expect the portfolio to reach our mean annual loss rate of 5.5% until 2024, unless significant changes in the macroeconomic environment develop. Of course, as credit normalization continues to take shape, we expect interest and fee yields to increase. As charge-offs peak, this growth in interest and fees will be partially offset by peak reversals. We expect reserve builds in 2022 to be generally asset-driven. RSA expense will continue to reflect the strength of our program performance and purchase volume growth but should begin to moderate as net charge-offs rise. For the full year, we expect the RSA as a percentage of average loan receivables to be between 5.25% and 5.50%. As a reminder, we anticipate the GAAP and BP portfolio conveyances to occur in the second quarter, producing a nonrecurring gain of approximately $130 million. We expect to completely offset this gain through increased investments or incurring certain discrete items and thus be EPS neutral for the full year. Included in this quarter was $10 million of certain employee and legal matters, leaving approximately $120 million of the incremental costs remaining for the full year. In terms of other expense, we continue to expect the quarter levels to be approximately $1.05 billion. This outlook excludes the impact of the $130 million gain on sale we are reinvesting or incurring in our business. We remain committed to delivering positive operating leverage. To the extent that receivables or revenue growth is not tracking ahead of expense growth for the full year, we will moderate our spending where appropriate while still prioritizing the best long-term prospects for our business. An example of such an opportunity might be through fewer workforce additions or reducing other discretionary spend. So to conclude, Synchrony is operating from a position of strength as we progress through 2022. We're confident in our business' ability to deliver sustainable, attractive risk-adjusted growth even if the market conditions change. Our innovative customer experiences, compelling value propositions, and flexible product offerings are resonating across the diverse industries, partners, and customer demographics we serve. Our sophisticated cycle-tested underwriting as well as our deep domain experience of lending and servicing at scale, mean that the predictive power of our credit decisioning and account management capabilities will continue to support the stability of Synchrony's target loss range. Finally, our RSA functions as an economic buffer. As interest and fees rise with credit normalization and receivables growth, the RSA absorb the impact of both rising net charge-offs and a large proportion of any increases in growth-oriented costs. These factors enable Synchrony to deliver consistent results with a peer-leading range of risk-adjusted returns over time. I'll now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. We deeply understand the needs and expectations of our customers and partners, which enables us to deliver financing solutions and experiences that strongly resonate building long-lasting relationships and greater value over time. Synchrony's differentiated business model consistently positions us as the partner of choice. Whether we're powering financing experiences for local merchants, healthcare providers, or our national brands, we're able to meet our customers where, when and however they want to be met. The scalability of our technology platform, the breadth of our product suite and the depth of our lending insights across many industries enables us to consistently deliver sustainable and attractive outcomes for all of our stakeholders. And with that, I'll turn the call back to Kathryn to open the Q&A.

That concludes our prepared remarks. We'll now begin the Q&A session. Operator, please start the Q&A session.

Great. Thanks. And Brian, I wanted to kind of just follow-up on the net interest margin guidance. Obviously, on a year-over-year basis, there's a big change in the mix of earning assets. And you kind of alluded to the fact that that might be normalizing. So is there a way to relate the 10-ish percent growth in loans to growth in net interest income in dollars? In other words, how much of that expected decline from current levels in the margin is more about asset mix than it is about other factors?

I would expect that the way Brian, the leadership team, and I are managing the business will lead to asset growth reflected in net interest income. The most uncertain factor will be the interest expense aspect. We anticipate that, in dollar terms, this will at least align with the top line revenue. Additionally, I touched on the timing regarding changes in funding costs we will implement. One significant uncertainty will be the average loans as a percentage of average earning assets, which was slightly higher than usual at 85% during the first quarter; typically, it runs one or two points lower. However, it should track in dollar terms back to asset growth, at least from the revenue perspective.

So, Brian, the credit outlook, both near and intermediate term seems more upbeat and I was wondering if you could maybe just talk about what you're seeing in the underlying portfolio that led to the better credit outlook. And the outlook from unemployment to remain pretty strong here, just maybe outside of a recession, can you just talk about what you see as the drivers of normalization? And are you seeing any impact from inflation on your customer spending habits?

Thank you, Ryan. As we began the year, we were particularly focused on the large number of our customers who were in forbearance with other institutions and how they would transition out of that. We reviewed our own forbearance performance and considered the customers without forbearance. Over the past four months, we found that the performance of those customers exceeded our expectations. We also monitored the performance of our customer base after the adjustments we made last year, which gave us confidence that there wouldn't be a rapid normalization of credit, leading to a slower return to our average loss rate in 2024. So far, at the beginning of April, there hasn't been any significant change in that perspective. Regarding inflation and its effects on customers, they are in a strong position with excess liquidity, as indicated by their high savings rates. Currently, our credit delinquency and average balances are healthy, and unemployment remains low. In terms of purchasing behavior, we notice minor signs of inflation in our portfolio, especially in categories like gasoline, where the average transaction value has risen 22% year-over-year. However, for groceries, the average transaction value has remained consistent year-over-year and month-over-month, although purchase frequency has increased, suggesting customers are managing their spending well in that area. There are slight increases in apparel prices, but overall, we haven't seen a significant impact from inflation as we continue forward. Looking at unemployment, it is stronger than we expected at the start of the year and remains robust. There are more job openings available, and with the continued strength in the job market, we believe our credit forecasts for this year and next will hold.

Could you unpack a little bit the loan growth acceleration that you got in digital? And help us understand how much of that is coming from the new cards you have out there, PayPal, Verizon, et cetera, the new offerings, the refreshed offerings on PayPal and other drivers of that and contrast it with the home and auto, which may be decelerated a bit?

Yes. Sure, Betsy. I'll start on that. I'd say, look, generally, digital is a platform that we clearly expect to outpace the rest of the business in terms of growth rate. We're definitely seeing that. A big chunk of that is obviously attributed to Venmo and Verizon. Both of those programs continue to perform really well. I still believe those will be top 10 programs for us in the future. We're getting great both qualitative as well as quantitative feedback on both in terms of the experience, the value proposition, et cetera. There's really nothing inside the digital numbers this quarter for the PayPal launch. That just happened, but we're really excited about that as well. I think that's going to be a terrific offering. It's really, really two parts. First, the value proposition, we think is best-in-class. It's going to be a top-of-wallet card for folks. And then I would say the other thing that we did is we really launched probably our most sophisticated technology stack in terms of how we're integrating inside of the PayPal app. So the experience is really fantastic. So again, I think digital will continue to outpace the rest of the business.

Yes. I think just to add on, Betsy, for the home and auto piece, when you look at that platform, auto is clearly improving. It came off of a low last year. So that's obviously a positive trend. With regard to inside home, there's a little bit of continued softness in the furniture portion of home, which, again, is a little bit more of the inventory backlog clearing out. Again, we bill when furniture is delivered. So we expect that to continue to be a headwind here for the next quarter or two, hopefully, as the inventory and supply chain clear out.

I think this is also the benefit of having a really diversified business. We're seeing really strong growth in digital, really strong growth in health and wellness, and that's a little bit immune in terms of impact from supply chain and other things if you think about health and wellness and the backlog that those providers are working through. So again, I think it speaks to the benefit of having a very diversified portfolio.

Obviously, the drumbeat on macro weakness is increasing since we last spoke. And I know Brian Wenzel, you talked about all the statistics that make you comfortable on the state of the consumer. I'm just thinking about the reserve posture. You guys are pretty well above sort of where you were CECL day 1. Maybe you could just talk about how you accounted for the macro environment at the time CECL day 1 was set and then where we are today because at some point, we're going to migrate back down to CECL day 1 if losses remain well below those levels, correct?

I would consider our reserve position today in relation to the CECL adoption. Our average loss rate has not changed from the 5.5% target. Ultimately, it's the loss forecast during the reasonable supportable period and any potential overlays that matter. If you look at the current macroeconomic conditions, it suggests that our coverage ratio would be lower than on day one. We still have qualitative overlays, including relief efforts we've mentioned, as well as uncertainties related to Ukraine and the high inflation environment, which keeps the reserve slightly elevated compared to day one. I believe we will eventually return to that day one level, especially as inflation pressures and global geopolitical uncertainties subside. The reserve growth in the coming months will be more focused on growth. Overall, absent any mix changes, we still anticipate reverting to the day one CECL rate while considering the uncertainties present in the market. We're prepared for our next call.

Do we have any discussions about the partner pipeline or any major partnership renewals as we move through this year?

Yes. Look, I would say we've got a very strong pipeline across all five of the platforms. if I look at it, today, it tends to skew a little bit more towards start-up programs and opportunities like that as well as, I would say, distribution partnerships and opportunities for our products. There isn't as much out there with the exception of maybe one or two that are large existing programs, but we'll obviously get a look at those as well as they come up in the next year or two. And then I think for us, we're actively renewing our programs. We don't have anything significant of size coming up in the next few years. But we're always in discussions with our partners about what kind of changes can we make to drive even better performance? Can we do that in the context of a renewal? So our teams are actively working those opportunities where they exist. But generally, I feel like we've got a pretty good pipeline, and we're well positioned. We're also getting a lot of good traction on the product suite and I think the benefits of having an integrated product suite. So as we're out there competing, I think that's a real differentiator for us, too.

Regarding the PayPal cashback card refresh, do you anticipate a similar amount of revolving credit to decrease, or do you foresee a shift toward more transactor activity? Additionally, Brian Doubles, do you believe that the integration is substantial? Does this enhance the relationship and reduce renewal risk over the long term?

Yes. So look, I'd start by saying we're really excited about the launch of the new value proposition and the new experience inside of the app. I think it's going to be a game changer. PayPal is excited about it, so are we. I would tell you that these opportunities that we have to relaunch a value proposition, it does drive a lot of traffic, a lot of new accounts, a lot of spend. And I think with a value proposition like this, it will definitely be a top-of-wallet card. We had a good value proposition before, but this is incremental. So we're really excited about it. And I would tell you on your integration question, Don, absolutely. I think that our goal is for our integration to be absolutely seamless to the customer. And we started doing this years ago with SyPi. Now we're leveraging our API stacks, and I can tell you when you're inside the PayPal app, the Venmo app, you don't know what was something that was developed by PayPal or something that was developed by Synchrony. It's just completely seamless. You never know. You never have to step outside of the app. You never get kicked to a website. It's 100% integrated and completely seamless. So that's our goal. We don't necessarily focus on how does that impact the renewal down the road, we're really focused on just how do we deliver the absolute best experience we can for a PayPal customer, a Venmo customer, et cetera. So we're very excited to have this launched and look forward to seeing how it does.

I wanted to just go back to payment rates for a second. You saw a pretty big moderation in March. Maybe you could just talk a little bit about that. I guess, what made the payment rates go from up 140 basis points year-over-year or down 50 basis points. The reason, I guess, I've got March is that's when we started seeing a lot more conversation around inflation, higher gas prices starting to have an impact. So was that a consumer thing? Was it as you expected? Is there something else about the year-over-year comp we should be keeping in mind? Anything there?

Thank you, Mihir, for your question. There is some timing related to tax refunds affecting our results. We observed that refunds were issued more quickly in February compared to March. Overall, this tax refund season is showing average refunds up about 13% from last year, which translates to around 14 billion dollars. This likely influenced February more than March. Additionally, we have noticed changes in consumer payment behaviors. Since late 2021, certain segments of our portfolios have seen a decline in payment rates, which has continued into 2022. Analyzing just March, the decrease in payment rates affected all credit grades, with the most significant drop occurring in the prime segment rather than among subprime borrowers. While there has been a decrease in those making minimum payments, there has also been an increase in those paying in full. This indicates that the issue is widespread and not solely driven by inflation. We believe the shift in payment rates is part of a normalization trend, although we are uncertain about the exact timing of this change. Thank you, Mihir.

When we consider the operating expenses and discuss the additional reinvestments in 2022, I'm wondering if we should view that as a regular rate. Or should we think of the $120 million you have left for the remainder of the year as more of a one-time or additional amount as we look at future numbers?

Great. Great. Thanks for the question. It will be onetime expenses. We had the $10 million in the first quarter, they're related to some employee-related reductions. I think as you step into the second quarter, again, we'll detail this out, you'll see some further reductions in some of our physical footprint and structural costs inside the business. You will see some incremental dollars that are put into marketing to really accelerate growth, and that will be onetime in nature. So I would not anticipate it to be an ongoing expense. Again, what we're trying to do is take the onetime gain, really reinvest it back into the business either to reduce structural costs or accelerate growth. So it should be a net zero for this year and not comp into next year, but hopefully help the growth.

I would like to revisit your comments on net interest margin and the anticipated deposit costs. Deposit costs are higher in the current rate cycle compared to the previous one, but your balance sheet is more reliant on deposits than it was before. Therefore, it appears that you should have a slightly improved liability structure in this rate cycle. Could you elaborate on your expectations for deposit betas in this cycle compared to the last one and your outlook for overall funding costs, especially considering the uncertainties regarding rates and inflation?

Yes, that's a great question. Looking back at the previous cycle and rate increases, we were significantly growing our deposit book starting around 2010 to 2015. This growth was accelerated as we were a newly separated company, which included some higher costs. You’re correct that we have transitioned from about 75% deposit composition in our funding to at least the low 80s, now potentially mid-80s. I believe we're at 83% this quarter, which will provide a benefit. There will be some rotation as interest rates rise, with many people opting for savings over CDs. In the short term, this could have a negative impact, but in the long term, encouraging people to invest in CDs is a better strategy for us. We see this as a positive move if we can get more people into term-related savings products. Regarding deposit betas, with the initial 25-basis-point increase, less than half has reflected in our high-yield savings rates. Depending on the duration, it’s been up to 100%, but we are focusing on raising deposits to target a growth rate of around 10% to address funding-related issues. Our actions will depend somewhat on market competition, but we might see slightly higher responses than in previous cycles. However, so far, people have been slow to react to the current environment. The higher deposit mix should be very advantageous for us when considering our net interest margin moving forward.

So I guess, on Slide 12, you guys mentioned the annual loss rate won't hit the mean until 2024, unless significant macro changes. Can you sort of just quantify what comprises some of these changes? I just sort of wanted to get a sense on how you're thinking about downside scenarios?

Yes. When you think about our loss rate, the biggest variable that drives loss in a recession or any other environment is unemployment. And what's going to be different, I think, as people think about the macroeconomic backdrop is that you're coming from incredibly low unemployment, and you really have built up savings in the prime and super-prime segment. So when you traditionally think about a credit normalization or an increase in your loss expectations, it's driven off of unemployment, number one. And then, two, in that prime segment, it really goes into people that struggle that have higher exposure at the fall. So I think as we look at it going forward, because you have such low unemployment, you have more jobs than you have today, up until now, albeit not necessarily offsetting inflation, a rising hourly wage, that buffer some of the unemployment pressure that you would see in the loss rate. And the excess savings that you have would buffer some of the loss content that you'd see in the prime segment. That's what gives us probably greater comfort that there's more of a glide even in a slightly difficult scenario. The scenario where macroeconomics change is you do have a rapid rise in unemployment, and you have a very fast depletion and savings rates in the prime customers could dictate a higher loss rate over that horizon.

On the payment rate expectation, I know you flagged the decline that you saw in March, which is encouraging. Can you maybe talk about your confidence in sustainable decline there on the payment rate front? And then on the flip side, I appreciate the color you gave on the delinquencies and at least some of the progression on credit by customer segmentation, are you seeing any stress at all in the lower income bands that's noteworthy here because we're hearing about some payment issues at the lower income at other payment providers out there.

Yes. In response to your latter question about lower credit, we are not experiencing pressure as you've described. Instead, we observe a normalization in payment rates and delinquency flows, but no additional pressure. Other subprime issuers may be facing challenges because they were more aggressive in expanding their credit origination during the mid-pandemic period, a strategy we did not adopt. Consequently, we are not seeing any incremental pressure; rather, we are witnessing a return to pre-pandemic levels concerning lower credit quality. Regarding payment rates, we monitor this closely through various metrics, including credit rates and who is paying their statement balances. We are tracking a trend that seems to be moving positively. However, we will need to observe the tax return season, which concludes in April, to understand how consumers react. Currently, they are spending healthily within the credit card space, which should bolster the payment rate and align it with average trends. Overall, we do not see any signs of stress or indications of a negative shift in performance. Next question, Brandon.

The loan growth guidance is slightly above what you consider a long-term expectation. Can you explain whether this is due to a higher payment rate, an increase in customer activity, or if it's still partially a recovery from pandemic-related issues, perhaps on the healthcare side?

Yes. Look, I would say maybe just to take a step back, I'd say, generally, we feel pretty good about the operating environment as we look at it here for the balance of the year. We were talking about high single digits earlier this year, I think we feel better than that's going to be in that kind of 10%-plus range. We're not relying on an enormous amount of payment rate moderation in that. It really is more top line purchase volume driven. We just had our highest first quarter ever in terms of sales on our products. So we're seeing really good growth across the portfolio. We had growth rates on receivables in the five platforms anywhere from 6% to 12%. So it's broad-based. It's not one platform that's really driving that. It really is across the business. So we feel like, at least for the balance of the year, the consumer is strong. As Brian said, two-thirds of them saved at least a portion of, if not all of the stimulus. So we're seeing that come through in purchase volume. We're seeing it in the credit metrics. So like I said, we feel pretty good about the environment right now, and it really is driving what we're seeing on the growth side, and it's not necessarily a reversion to the mean on payment rate.

I guess as you think about the outlook for the consumer and how you feed that through managing the business, it's tricky, right? Because you've been very clear. Everything you're seeing recently is better than budgeted. Consumers in great shape. One of the narratives in the market is the Fed's got to jack rates to 3% plus, and it's got to get unemployment up to tame inflation. And it's kind of like all going to play out over the next six months or so, but we really won't know the impact until next year. And so I guess the spirit of the question is like, as you think through your underwriting and your marketing this year, I know you're always making changes and always trying to be thoughtful and proactive. Is there any scenario where like you're tightening underwriting even though your book is doing great because of that forward Fed risk? Or how you think about meeting that unusual interest rate risk through the book and through your marketing plans as we move through the year?

Yes, generally speaking, we're experiencing an extremely strong period concerning credit performance. We've never encountered delinquencies and loss rates at these levels. They are about half of what we would typically consider a target NCO rate. So, I want to clarify that we are not changing our expectations for what will occur in the latter half of the year because we did not take this chance to adjust significantly. We're not underwriting to the current environment, whether that involves how we're assessing consumers or how we're evaluating new programs. We're focusing on a long-term average loss rate for our underwriting. It's crucial for our business to maintain discipline, especially when conditions are exceptionally good. We assess the value of customers or program agreements over multiple years, anticipating some reversion to the mean during that time. This approach is a key part of our underwriting strategy. Whether we are evaluating consumers or new programs, we aim to incorporate our expectations for the next few years and not exploit the highly favorable conditions we are currently experiencing.