Synchrony Financial (SYF) — Q3 2023 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the Company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast is 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. Today's Synchrony reported strong third quarter results, including net earnings of $628 million or $1.48 per diluted share, a return on average assets of 2.3% and a return on tangible common equity of 22.9%. These results highlight the strength of Synchrony's differentiated model and the resiliency of our business through economic cycles. Our diversified product suite and advanced digital capabilities enabled Synchrony to continue to deliver consistently strong results in an ever-changing environment. We are increasingly at the center of customers' everyday financing needs, and position as the partner of choice for retailers, merchants and providers alike as they seek enhanced value, greater utility and best-in-class experiences. We opened 5.7 million new accounts in the third quarter and grew average active accounts by 6%. We continue to drive growth with our $47 billion of purchase volume, representing a record third quarter and a 5% increase versus the prior year. This momentum is a testament to the power of our diversified portfolio. Health & Wellness purchase volume grew 14% compared to last year, reflecting broad-based growth in active accounts led by Dental, Pet and Cosmetics. The 7% growth in digital purchase volume was driven by higher average active accounts as several of our newer programs continue to resonate with consumers and diversifying value, purchase volume grew 7%, reflecting growth in out-of-partner spend and strong retailer performance. Lifestyle purchase volume increased 8%, reflecting growth in average transaction values and outdoor and luxury. And in Home & Auto, purchase volume remained flat versus last year as growth in commercial products, home specialty and the auto network was generally offset by lower retail traffic in furniture and electronics and the impact of lower gas and lumber prices. Dual and co-branded cards accounted for 42% of total purchase volume in the quarter and increased 13% as several of our newer value propositions continue to drive greater customer engagement. Synchrony's range of products and platforms gives us a unique view into the health of the consumer. Through our monitoring, we see continued trends of behavior normalizing to pre-pandemic levels. Across the portfolio, average transaction values leveled off through the quarter after modestly declining in the second quarter. Meanwhile, average transaction frequency, which had climbed throughout the year, showed some signs of stabilization towards the end of the quarter. Looking at our auto partners spend, our customers are becoming more selective in making larger purchases, including home furnishings and electronics and spending less on travel. Directionally, we see broad trends that are in line with our expectations across the portfolio with slowing spend growth, normalization payment rates and growth in balances, which is driving higher net interest income. While in the external deposit data we track, consumer savings balances remain approximately 8% above the average level in 2020. In summary, these trends show a consumer that continues to benefit from a strong labor market while reverting gradually towards historical spend and payment norms. As we closely monitor the health of the consumer, we also continue to develop and deploy the compelling products and value propositions that attract consumers and partners to Synchrony. We announced earlier this month that both the PayPal and Venmo cards can now be provisioned in the Apple Wallet, representing our latest enhancement as we evolve to meet the demands of our increasingly digital-first customers. Synchrony's journey began with in-store financing options, which have long been valued tools for both retailers and consumers to build loyalty and drive value. Over time, we've broadened the utility of these products through our dual and co-brand card strategies, which enable customers to make out-of-partner purchases, accumulate rewards and extract even greater value. Increasingly, our customers are taking that engagement even further as digital wallets enable everyday use functionality and extend our leading value propositions well beyond the store. Active wallet users are up over 45% year-to-date and sales on wallets are up over 70%. This trend is more than a simple technological enhancement. Synchrony's strategy to deliver enhanced utility and best-in-class experiences requires seamlessly integrated, tailored solutions and our investments in technology allow us to meet this demand. When our customers combine the broad utility of our products and services with our digital wallet functionality, the impact is clear. Our digital wallet users spend nearly twice as much and have over double the transactions on average. More broadly, we see the impact of expanded product utility in our results. Auto partner spend continued its outsized growth this quarter, up 12% compared to last year. We continue to develop our solution suite and extend the reach of our products meeting consumer demand for fast and secure shopping and opening new opportunities for customers to engage with their favorite brands. In Health & Wellness, we were pleased to announce partnerships with veterinary hospitals at three additional universities. CareCredit is now accepted at 95% of the nation's public veterinary university hospitals in addition to more than 25,000 provider locations, expanding access to flexible financing tools that enable a lifetime of care for all pets. The power of Synchrony's continually evolving model, supported by our focus on technological innovation, continues to position Synchrony as the partner of choice as we deliver digitally powered experiences and compelling value for our many stakeholders. And with that, I'll turn the call over to Brian.

Thanks, Brian. Good morning everyone. Synchrony's third quarter results reflected the strength of our financial model which demonstrates our consistent growth and strong risk-adjusted returns. The compelling value propositions of our broad product suite continue to resonate with our 70-plus million customers and drove broad-based growth across our sales platforms, with ending loan receivables growing 14% versus last year, benefiting from the combination of approximately a 120 basis point decrease in payment rates compared to last year and 5% growth in purchase volume. Our net interest margin was 16.3%, which still remains approximately 130 basis points higher than our five-year pre-pandemic historical average. Manage interest income increased 11% to $4.4 billion, reflecting 21% growth in interest in fees. The increase in interest in fees was due to the combined impact of higher loan receivables and benchmark rates as well as lower payment rates. Our net interest margin was 15.36% and declined 16 basis points compared to the prior year as higher funding costs more than offset the benefit of higher yields and favorable asset mix. Specifically, loan receivables yield grew 114 basis points and contributed 95 basis points to net interest margin. Higher liquidity portfolio yield contributed an additional 46 basis points to net interest margin, and our mix of interest-earning assets improved net interest margin by approximately 28 basis points, reflecting our strong growth in loan receivables. However, these gains were more than offset by higher interest-bearing liability costs, which increased 229 basis points to 4.34% and reduced interest margin by 185 basis points. RSAs of $979 million in the third quarter represented 4.04% of average loan receivables, a $7 million decline from the prior year, reflecting higher net charge-offs, which were partially offset by higher net interest income. Our RSAs continue to perform as designed. They provide a critical alignment with our partners as we navigate the evolving environment together and support greater stability in our returns. The provision for credit losses increased to $1.5 billion, reflecting higher net charge-offs and a $372 million reserve build, which largely reflected the growth in loan receivables. Other expenses grew 8% to $1.2 billion, primarily driven by growth-related items as well as technology investments and operational losses. Our efficiency ratio for the third quarter improved by approximately 330 basis points compared to last year to 33.2%. Summarizing our financial results, Synchrony generated net earnings of $628 million or $1.48 per diluted share, a return on average assets of 2.3% and return on tangible common equity of 22.9%. Next, I'll cover our credit trends. Our delinquency performance in the third quarter continued to reflect normalization towards pre-pandemic behavior with both the 30-plus and 90-plus delinquency rates approaching 2019 levels. Our 30-plus delinquency rate was 4.40% compared to 3.28% last year and approximately 7 basis points lower than third quarter of 2019. Our 90-plus delinquency rate was 2.06% versus 1.43% in the prior year and approximately 1 basis point lower than our third quarter 2019. Our net charge-off rate was 4.60% versus 3% last year. Synchrony remains approximately 115 basis points below the midpoint of our underwriting target of 5.5% to 6%, where our risk-adjusted returns are more fully optimized. Overall, our credit performance remains within our expectations and has benefited from investments in our advanced underwriting platform as we expect to continue on a path towards our long-term operating targets. Focusing on our more recent vintages, they continue to perform in line with those from 2019. While we're pleased with how these vintages are developing, we're continuously monitoring our portfolio and have implemented further credit actions including some tightening of our origination criteria. These proactive refinements are intended to position our business for 2024 and beyond. Moving to reserves, our allowance for credit losses as a percent of loan receivables was 10.40%, up 6 basis points from 10.34% in the second quarter. The reserve build of $372 million in the quarter was largely driven by receivables growth. Turning to our stable funding model and strong management of capital and liquidity, Synchrony continues to be positioned well for any environment. In the third quarter, customers continued to be attracted to our consumer bank offerings as we grew both direct and broker deposits to fund our anticipated receivables growth, with deposits representing 84% of our total funding at quarter end. The remainder of our funding stack is comprised of securitized and unsecured debt at 7% and 9% of our funding, respectively. We completed a $1 billion securitized issuance in the quarter, and we'll continue to be active in both markets as conditions allow. Total liquidity, including undrawn credit facilities, was $20.5 billion, up $275 million from last year. At quarter end, liquidity represented 18.2% of total assets, down 192 basis points from last year as we manage our liquidity portfolio and fund strong loan receivables growth. Moving on to our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony made its annual transition adjustment of approximately 60 basis points in January and will continue to make annual adjustments of approximately 60 basis points each year until January of 2025. The impact of CECL has already been recognized in our income statement balance sheet. Under the CECL transition rules, we entered the third quarter with a CET1 ratio of 12.4%, 190 basis points lower than last year's level of 14.3%. The Tier 1 capital ratio was 13.2% under the CECL transition rules compared to 15.2% last year. The total capital ratio decreased 120 basis points to 15.3%, and the Tier 1 capital plus reserves ratio on a fully phased in basis decreased to 22.5% compared to 24.1% last year. During the third quarter, we returned $254 million to our shareholders, consisting of $150 million of share repurchases and $104 million of common stock dividends. We are well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. We will also continue to seek opportunities to complete the development of our capital structure through the issuance of additional preferred stock as conditions allow. Now, please refer to our outlook for 2023. We expect our ending loan receivables to grow approximately 11% versus last year, reflecting the combined impact of payment rate moderation and slowing purchase volume growth. We expect a full-year net interest margin of approximately 15.15%. Net interest margin in the third quarter benefited from strong growth in interest and fees and receivables in addition to payment rate moderation and lower deposit betas. In the fourth quarter, we expect net interest margin to be impacted by higher average liquidity to pre-fund seasonal loan receivables growth impacting the mix of interest-earning assets, higher deposit betas driven by competition and movement in benchmark rates, and interest and fee growth, partially offset by rising reversals. From a credit standpoint, delinquencies nearly reached 2019 levels at quarter end, and should follow seasonal trends from this point. With the increased visibility into delinquency performance this year, we are tightening our forecasted net charge-off rate to approximately 4.85%, and we continue to anticipate our loss rate reaching a fully normalized level between 5.5% and 6% on an annual basis in 2024. As we noted, we will continue to monitor and position the portfolio for 2024 and beyond. We expect the RSA to trend at the low end of our prior outlook and to be approximately 3.95% of average loan receivables for the full year. This improved outlook reflects the impacts of the continued credit normalization, lower net interest margin and the mix of our loan receivables growth. As we generate higher-than-anticipated growth, we are maintaining our expectation for operating expenses at approximately $1.15 billion per quarter while we continue to make selective investments in our business. We're committed to delivering operating leverage for the full year. As Synchrony continues to leverage our core strengths, our advanced data analytics, our disciplined approach to underwriting and credit management, and our stable funding model, we're confident in our ability to execute on our key strategic priorities and deliver market-leading returns over the long term.

Thanks, Brian. Synchrony continues to demonstrate both the agility and consistency of our differentiated model. We remain focused on optimizing the outcomes for our many stakeholders by closely managing the drivers of our business, which we control, and intently monitoring and preparing for those which we do not. We are prioritizing sustainable growth to deliver appropriate risk-adjusted margins through changing market conditions. We are prudently investing in the future and long-term growth of the business, so we are able to exceed the increasingly digital demands of our consumers, and we are delivering on our financial commitments even as we ready the business for an evolving environment to ensure our continued ability to drive long-term value into the future. With that, I'll 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 yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session.

Maybe a two-part question on credit. First, can you if the full year guide implies a decent acceleration in charge-off performance in the fourth quarter. So, you can maybe just talk a little bit about what's driving that? And then second, maybe just tease out what gives you confidence that we're going to follow, seasonal patterns from here given a handful of moving pieces, inflation, resumption of student loan payments. And then obviously, we have the growth math impacts from '22 and '23 but offsetting that, you guys obviously were one of the more conservative in underwriting given some of the tightening that you have done. So can you maybe just walk through all of those moving pieces and what you think it means for the trajectory of credit losses?

Sure. I'll address all those embedded questions, Ryan. Firstly, regarding the fourth quarter, there's a little over $2 billion in the 90-plus delinquency category. If you examine how this evolves, it provides a reasonable insight into our expectations for the fourth quarter. The delinquency performance has been stable throughout 2023. Notably, the rate at which accounts enter delinquency remains below levels seen during the pandemic, and it's also lower than in 2018 and 2019, which makes collection efforts a bit more challenging for the accounts that do become delinquent. For 2024, as we evaluate credit performance, several factors come into play. Firstly, we maintained a consistent approach to our credit underwriting without broadening our criteria. During the early pandemic, we neither significantly tightened nor expanded our credit box when others were adjusting due to lost portfolios. Secondly, our advanced underwriting tools allow us to analyze data effectively, leading us to make sound decisions during the pandemic. Upon reviewing the data, the vintages from that period are performing comparably to those from 2018 and 2019, with no signs of deterioration. In fact, when we analyze external data from TransUnion, our performance exceeds that of others. Overall, we're confident in our tools and performance. However, we did implement some actions this quarter due to the shared consumer risk we face, as certain underwriting decisions by others can impact us. Therefore, we aimed to maintain our loss rate within the targeted range and actively worked to ensure we stay within our desired underwriting framework and optimize our risk-adjusted margins.

Got it. Maybe as a follow up, Ryan, so you know, the RSA seems to be coming in better than had initially been forecasted given the guidance for $395 million for the year. And we look forward, losses are on a continued normalization and loan growth seems to be slowing. So, can you maybe just tease out some of the moving pieces as we head into '24? It feels like we're kind of back in an environment similar to where we were in the 2018, 2019 timeframe when credit was normalizing and the RSA was coming in well below that 4% threshold. So, can you maybe talk through some of those pieces? Thank you.

Yes, thanks again, Ryan. As I think about the RSA, it's really performing as we designed it to be, right? So when losses were extremely low, it went over 6% level and now we're back into an environment today that's sub four, and again it's driven by a couple of factors. One, the charge-off rate, charge-off dollars are clearly an impact, most certainly the impact of cost of funds and interest-bearing liabilities just flowing through. I think as you think forward the things that are going to make it move a little bit, it's going to be the mix of the portfolio. Obviously, you look at something like health and wellness we don't have as much of RSA, it's growing a little bit faster. And then again, you're going to have in some of the other portfolios that have maybe a higher percentage of RSAs depending upon their growth rates will influence it. But again, it should track consistently. I always point to Ryan we've talked about this before, if you looked at RSAs as a percent of purchase volume, it is pretty stable through seasonal trends. So, again, we expect it to continue to operate the way it historically has.

My first question is on direction of the net interest margin. So it seems like we've fully solidified the notion of higher for longer in '24. How should we think about how your net interest margin should perform in a higher for longer environment? And as we think about funding costs on the other side of the cycle, when we eventually get to rate cuts, although the forward curve keeps pushing that out, how sensitive should we think about your funding costs relative to cuts and fed funds?

Yes, thank you, Erika. As we look at margins moving forward, there is still some benefit from the prime rate that will impact our fourth quarter. Additionally, we expect margins to benefit from higher revolving balances. Currently, we're seeing rates that are 130 basis points higher than during the pandemic, which should provide a push. However, we may also face some headwinds from reversals that could counteract that benefit. On the side of interest-bearing liabilities, many deposits that were added this year will need to reset next year, potentially leading to a modest increase in interest-bearing liabilities as shorter-term CDs renew. Looking ahead in the cycle, the trajectory is uncertain. It’s possible that some financial institutions may see a slower decrease in betas as they aim to gather deposits and enhance the yield on their investment portfolios, while others may focus on reducing funding costs or managing net interest margin sensitivity. As we approach that point, we will be able to provide more clarity on which direction things might go.

Got it. And my second question is on capital. There's been a lot of discussion for card companies in particular with regards to how we should treat unfunded commitments and also the timing differences in terms of higher ACL ratios in terms of the numerator deductions. So could you give us a little bit of a preview, so to speak, on how the pending new capital rules could impact Synchrony? And how you're expecting that to impact your approach to capital management?

Yes, great question, Erika. So when we look at the rules, the first thing I'd say, along with others, we're clearly disappointed with the proposed rules around capital, both from the process in which the Fed went through as well as certain elements that we don't think were fully thought through if you consider a holistic review of the capital stack. You combine that with what I would say some apparent gold plating. It's very difficult, I think, for the industry as a whole. I think you're seeing that in banks' feedback, I think you're seeing it through the trade group feedback. And I think there's some even level of concern with the Fed governors with regard to that. And then finally, when you think about Synchrony before I get to the details, we're clearly disappointed that the tailoring rules effectively have been eliminated by treating us on the same level as a lot of the other banking institutions. With that said, Erika, if we look at just taking those rules as they are, again, we're not sure that they will stay as they are. The impact to us is probably between the 15% to 20% higher impact to capital. And the range there depends really upon how you treat some of the RSAs when you found the operational risk pieces with the RSAs offset, the fraud and some of the revenue items. When I think about the unfunded commitments that is a fairly significant add-back to the RWA. The good news for us, I think we have a path where through mitigation strategy, we think this would be very manageable.

I guess my first question, Brian Wenzel for you in terms of the reserve rate going forward. We've seen some of the card issuers make adjustments to kind of what's inside the reserve and what's not. And there's some risks associated with inflation and the fact that behaviorally things are trending a little bit different than they have in the past. Maybe you could just talk about the migration of reserve rate going forward and do you feel comfortable with the methodology at this point?

Yes, thank you for the question, Sanjay. We are comfortable at the end of the third quarter with the level of losses we have. The base assumptions in our reserve model haven't changed significantly. Looking at the baselines, there isn't a notable shift in the underlying assumptions of the model. During the quarter, we observed a slight shift between the quantitative and qualitative portions of the model. However, based on our historical analysis, we believe we have accounted for a potentially worsening macro environment. We have also integrated inflation into our model along with considerations for student loans. Overall, we feel confident about our position today and believe we can handle changes in the macro environment. It is worth noting that between the second and third quarters, there is a 6 basis point difference in coverage based on these models, but that isn't significant, and I wouldn't interpret it as indicating a deteriorating outlook as we closed the quarter.

Okay. Great. And then maybe one for Brian Doubles. Brian, can you just talk about sort of the backdrop for portfolio acquisitions, any renewals that kind of stuff? And then maybe just the competitive environment in general?

Yes. Sure, Sanjay. So look, I would say, generally, it's a pretty constructive competitive environment. I think, what we're seeing in the market around pricing new opportunities and renewals is pretty disciplined. And I think any time you enter into a period like we're in right now where there's some uncertainty on the horizon, you tend to see issuers stay a little bit more conservative and a little more disciplined, which is good news for us. In terms of renewals, we just announced Belk this quarter. It's a great renewal for us kind of a normal quarter. Great partner, very engaged customer base, and so obviously, we're always out there working the renewal pipeline on our portfolio. And then in terms of new opportunities, I would say, on balance, it's probably more new program opportunities, startup opportunities, less of the kind of big programs that are out there coming to market. And I think that'll hold true probably for the next 12, 18 months. And then beyond that, I think you'll probably see some bigger programs come up and be in the market.

First up, you guys have had pretty steady flow of new accounts for us three quarters. I'm wondering, I mean given where you're underwriting and kind of what's going on in the world, kind of maybe what are the characteristics of the new customers and any change from where you were a few years ago? And then what are the sources of the new customers as well?

Yes. John, I would say consistent kind of trends on new accounts, both in terms of absolute magnitude as well as where the accounts are coming from. One of the things that Brian mentioned as we think about underwriting, we don't expand the credit box in really good times, and we try not to really restrict it in more uncertain times. And that means that we have more of a steady trend in terms of both new accounts, active accounts, et cetera. I would tell you that the new programs that we recently launched are performing really well. We're seeing really good growth there. So, we continue to be encouraged on that front. And you're seeing, I would say, really good trends across all of the platforms. As we look at growth, it's not one platform that's really outperforming. You're seeing that a little bit with Health & Wellness, but it's pretty broad-based and that's encouraging. I think the consumer has been much more resilient than any of us anticipated a year ago, and you're seeing that across the board, whether you look at purchase volume, receivables, new accounts, active accounts. If we had to pick a metric, that's one that's probably a little bit more important than new accounts because keeping that consumer engaged offering them more than one product, like that's a big part of our strategy. And so, we've been pleased so far all year.

Okay. That's very helpful. And then second question is, I think I said that you guys do some disclosure that you guys were involved in at least evaluating GreenSky. Yes. I'm wondering kind of what's the appetite for acquisition? I would assume the environment's a little bit better now with different opportunities. So, maybe if you could just take us through what you're looking at and where you might go from that perspective.

Yes, I mean, look, we're always opportunistic when it comes to potential M&A opportunities. You know, at the same time, John, you know, we're extremely disciplined around the financial return of those opportunities ensuring that they're accretive. We weigh that against buying back our stock and other opportunities. So look, we're always in the market. We've done some really nice smaller acquisitions over the last couple of years. Pets Best has been an absolute home run for us. Since we acquired that business I think the pets and for us is up 5x just between 2019 when we acquired it and now. Allegro has been a great acquisition for us. Again nice acquisition, relatively small in terms of the capital outlay for that, but we've been able to leverage the scale at health and wellness to grow that. We picked up some new products as part of that. So those are the types of acquisitions that we really like to do. But with that said we look at larger opportunities, but they've got to make sense and they've got to have a nice return profile for us and a good path to EPS accretion.

Have you seen any particular shifts in payment rate trends for the near prime to prime consumer? Appears some of your competitors mention that there's a little bit more weakness, primarily due to household net worth or even savings rates within that cohort, are you seeing any changes in payment rates there?

Yes, good morning, Kevin. The first thing when we think about the consumer, there's a lot of focus that goes into savings rates. And I'd say that's the higher-end consumer cohorts do have access savings that's in there. But the prime we kind of right on the prime level to subprime, they've benefited by a 22.6% wage increase since 2019, which has been able to really bolster them through this period. When I look at payment rates and compare them year over year, right, where you see probably the biggest shift in the payment rate is in that 6.60 to 7.20 bucket. They're all moving from a little bit more full pay, a statement pay down, but the biggest shift is in that 6.60 to 7.22, which isn't necessarily that concerning to us and is still above where they were in the pre-pandemic period. So I'd say a shift, it's not something that we are concerned about or find it to be concerning at this point.

Okay. And then, I know it's very early, but are you seeing any impact on payment rate trends for folks with federal student loans? I know it's, first few weeks…

It's early, but what's interesting, Kevin, is the analysis we've conducted on this group. In September, we observed a notable increase in individuals making payments ahead of their student loan payments starting in October, which is a positive indicator for us. When we examined their account performance against credit cohorts, we found that individuals with student loans are actually performing better compared to those without. They appear to be quite cautious, as evidenced by the significant number of people making payments before their due dates. Looking ahead, we anticipate that the fourth quarter will be somewhat chaotic, as some individuals may have forgotten their payments or changed servicers. However, we expect to gain clearer insights moving into the first quarter. A challenge for issuers will be that we do not expect reports to the bureaus until January 25. We will monitor changes in balances to see if payments are resuming and to what extent. We believe we have adequately prepared for potential struggles in advance.

Just wanted to get an updated view on the late fees from the CFPB here, I know we're almost done with October and I haven't heard anything yet. Just wondering, has there been any shift in the dialogue out there? Or are you still fully expecting the rules to come out as proposed? And I guess as a part of that question, when the rule comes out, are you going to be taking any sort of proactive, preemptive actions in preparation? Or are you more just going to be in the wait-and-see approach and wait to see how it plays out in the courts?

Yes. Thanks, Jeff. So look, we're obviously still waiting for the final rule to be issued. So, there's plenty of unknowns out there until we see the final rule. We got to see things like the implementation period, the final amount. We also believe that will be litigated. So, we're going to watch that carefully, and that could impact the timing as well. So I guess what I would say is, look, we're prepared for multiple scenarios in terms of timing. We've been working very closely with our partners for over six months now. We're working on pricing offsets really with the goal of offsetting the impact here and putting us in a position with our partners where we can underwrite a large cross-section of the customers that we do today. We're disappointed in the rule. Obviously, we think it has unintended consequences that weren't properly evaluated. Late fees are a very important incentive to pay; $8 just clearly is not an incentive. So without those offsets, it would restrict access to a pretty significant cross-section of consumers. No change to what we've said in the past. Our goal is to protect our partners, fully offset the impact and continue to underwrite and approve the majority of the customers that we do today.

Got it. Thanks. And just on the credit tightening side, I know you've discussed some more actions there, positioning yourself for 2024, but at the same time, you weren't leading it as hard as your peers, you were sort of ahead of the curve there. Just wondering what would cause you to lean back in at this point? Is there any sort of signals you're looking for out there or any sort of timing around that to be expecting?

Just to be clear to lean back into loosening credit or…

Yes. Listen, we have a very good credit team that's consistently evaluating performance of the portfolio by partner, by vertical, by channel. And I think to some degree we want to see how credit develops across the industry. Again, I talked about a shared consumer, so what other issuers are doing or not doing can have a flow-through effect to us. So, again, we will watch those things. There's not a telltale sign to say, once this happens, we will go. But our team has a lot of tools. We use a lot of data. We're using much more decision tree and non-core based measures in order to assess that. And again, the data elements that we get from partners will tell us how the consumer's performing. So we'll continue to look at that. And again, Brian said it, I said, we don't move the credit box around that often because our partners want consistency and origination. Our customers want to have consistent underwriting from us, and that's part of our lower line low and growth strategy.

Regarding the back to the late fees, can you maybe just give us a little bit of color on how you think about the timing of the offsets that you're negotiating at this time with your partners? You mentioned pricing and I'm assuming there's other factors, maybe if you could just talk about the once the rule goes in place, what type of timing should we expect in terms of being able to see some of the offsets of that initial impact?

So look, I mean obviously, there's still things related to timing that we don't know yet. And primarily that's when the rule goes into effect, the impact of any litigation as well as the implementation period. The original rule as written was 60 days. That's just clearly not enough time to get this done. So, we think that hopefully, it'll be longer than that. And those are the discussions that we're having with each of our partners and that will influence the nature of the pricing actions and the timing in which they go in. So I can't be really more specific than that, but we've got a really good plan in place, partner by partner. We've been working on this for over six months. We feel good about the conversations that we've had and the actions that we're going to take, if the final rule goes into effect as written. With regard to the credit actions we took, a lot of it is around originations, but not necessarily score cutoffs as much as it is different data elements or different criteria that we factor differently in account originations. We also are working on account management type actions. So triggers that come from the bureaus of certain attributes or criteria where we would turn in a form or watch to a credit line decrease or a closed account. So those are the five, two flavors of it. Again, it's not necessarily shifting cutoff, it's really focusing on different criteria that are coming into our underwriting account management engine. With regard to the second part of your question on the RSAs, we just highlighted, you know, health and wellness. And I think we said it before, you know, there's not a lot of RSA sitting in that particular sales platform. So we just, if that platform grows at a faster rate, has a little bit of an influence on the overall RSA for the company. Outside of that, we're not going to go into the different sales platforms from there; the rest do have some level in each of the sales platforms.

I wanted to start with just going back to the discussion around credit. Your credit guidance for the full year implies I think a 4Q pretty close to the 5.5%, getting back to your long-term target. I was curious on how you see that evolving. I know you've talked about keeping underwriting pretty steady, but you've also tied in that we've seen some pretty fast normalization here in the back half of this year. Do you think it gets above your 5.5 to 6% target for a little bit in 2024 before coming back down kind of a give back from the strong years you had over the last couple of years?

Yes, well, good morning, Mihir. The first thing I'd say, and I don't think we've got enough credit for it as a company. But we still haven't reached, and again, I know it's seven basis points and one, we still not have reached our pre-pandemic delinquency metrics. I think there's only a couple of issuers that are in that category. So I wouldn't, I think we shouldn't undersell that, number one. I think number two, when you look at the performance I'm not sure I would characterize it as accelerating in the fourth quarter. If you go back and look at the growth on a dollar basis, in ‘17 and ‘18 on average, versus this, they grew on average 18 to 19% in the ‘17 to ‘18 period. And we grew, you know, in this quarter 18 to 20% on a 30-plus and 90-plus basis. So, probably in line, I'd say with seasonality, when you look at the relative percentages, if you think about BPS, they were 40 and 20 or 50 and 20 we're 56 and a little bit over 20. So there is not, there's not a big deterioration, I'd sit there and say, characterize it that way. You know what, as I, as we look at the performance for net charge-offs next year as a full-year basis, one of the reasons why I think we've tightened a little bit here, again, given the share of consumers, we're trying to maintain losses inside that five and a half to six and setting up the portfolio well to perform there. Because that's where we think the optimized risk-adjusted margin is for us as a company. I know others, you know, clearly are thinking now that they're willing to take a higher net charge-off rate and a lower margin. That's not where we want to operate this company and deploy capital; it's not as effective for us. So we're going to be disciplined around that. So again, when I look at that, and if you go back to earlier in the call, I talked about some of the vintage performance and other things that we've seen, it gives us, you know, some level of comfort that we have a pretty good view of the trajectory.

Got it. And then maybe just switching gears completely a little bit. I wanted to ask about the BNPL offering at Lowe's, obviously not as topical today as maybe 12 or 24 months ago. But I think you've rolled it out this quarter or very recently. It looks like you are the exclusive provider for the BNPL offering there and it's a white label, basically of the Synchrony Pay, which they're calling Lowe's Pay. So I was wondering if you could just expand on that a little bit. Just talk about what the economics look like? Is it tied to your card offering in some way? Is this a competitive process? Is this an area you're looking to expand and build out with other retailers? How are you thinking about that product?

Yes, sure. So maybe to start more broadly. I think this has been an area where we've been investing with our partners. I think the pay-later products that we offer. It's a great way really just to engage more customers and offer them a new financing offer that's got really nice utility. We are seeing proof that the product does provide both value to us and to our partners. If you look at the results this quarter, year-over-year, we've grown installment and pay-later products 29%. So we're clearly over-indexing in that product. So we can feel pretty good. I think the multiproduct strategy that we've been talking about for well over a year now is starting to pay off, and you're seeing that with what we announced and launched with Lowe's. The Lowe's Pay is a white label version of that. And so one of the things that's really important to our strategy is flexibility both in terms of how we offer the product inside of our partners but flexibility to the consumer as well. So we're willing to offer that as Synchrony Pay Later, and we do that for a number of partners. We're also willing to white label it, which I think is a real competitive advantage for us because a lot of partners or a lot of competitors are not willing to do that. We're seeing really good traction on the launch so far, and we're just really pleased to be able to offer another product inside of our Lowe's partnership.

Talk a little bit more about the health of the consumer in terms of the lower end versus the higher end, and also do you feel more comfortable on one or the other based on what you're seeing going forward?

When analyzing the consumer through spending, payment, and credit metrics, it’s clear that the credit aspect is concerning. This segment of consumers is facing struggle, with delinquency rates returning to pre-pandemic levels and non-prime performance declining further. They are unable to recover from delinquency and are resorting to alternatives like settlements with debt companies, which is expected in the current environment due to limited liquidity access. However, a general wage increase is sustaining this consumer group, even though they've spent the pandemic-related funds. Their transaction values are lower, but spending frequency is up, reflecting a manageable level of expenditure. In comparison to 2019, the average balance in our book has increased at a compound annual growth rate of 5%, with open buys slightly higher, indicating that consumers are practicing discipline and liquidity is available. Conversely, high-end consumers are performing exceptionally well, with payment rates exceeding 2019 levels, indicating strength in that demographic. We have seen a shift toward more consumers in the super high-end prime category, bolstering portfolio performance. Overall, the entire portfolio's delinquency entry remains below 2019 levels.

Most have been asked and answered, but I just want to talk a little bit more about the RSA guide, and the improvement there. When we look at the charge-off rate, when we look at NIM, when we look at everything, it looks like everything is kind of within the range, but of expectations, both from an original perspective at the beginning of the year and from a second-quarter perspective. But for whatever reason, you feel like the RSA charge is going to be down a little bit is that really just a function of mix or what else is contributing to that?

It really is mixed between the platforms and between the portfolios and their each of these arrangements are different. They're unique by partners, so certain partners are performing better than others. Certain ones have volume-based measures as well. So it really depends upon where that volume goes and the performance of the individual portfolio. So that is the main driver.

Most of my questions have been asked, but maybe if you could just go back to your comments on reserve levels and reserve adequacy and where we go from here. I get that your reserves, you seem to be indicating that, that you feel comfortable with your reserve ratios and you are, I think still about 40, 50 basis points, if I'm not mistaken, above your day one CECL allowance levels. But you are expecting NCOs to normalize and, and move higher. I would expect your losses that'll flow through your reasonable supportable period will be moving higher as we move forward. But just maybe you can comment on your reserve outlook going forward and what would induce you to maybe build reserves. What would need to happen for some additional reserve builds above and beyond what you need for growth?

So, the way I would think about the reserve as we move forward is you should see a rotation as you stabilize in delinquencies in this normalization period that the quantitative model absorbs that trend line. And then as we get more comfortable with the macro backdrops, the effects of inflation, as student loans, if they have an impact, flow through the portfolio, you'll see the qualitative piece begin to come down, and effectively offset that and then you'll move down. Ultimately, we think towards that day one level. If the assumptions come in generally as we think about it, if you think about incremental provisioning on a rate basis here, again, most of the times we're talking about things that are growth-driven in the portfolio, but truly rate-driven ones. The couple of factors that we look at is clearly if you have a deterioration in collection performance that could do it mainly that's associated a lot of times with unemployment claims rising. So, that could be a second factor that kind of goes in there. But collection performance and unemployment claims are two of probably the bigger ones that we'd see. Again, we haven't seen trends in collections that would warrant that today. So, we feel good about that. And unemployment claims have still remained historically low. So again, we think we factored into our reserve at the end of the third quarter qualitative assessments for a potentially deteriorating macro, and we'll just have to see how that plays out.

Thanks. I'll be quick, look like your share buybacks came down just a touch. Can you talk about your outlook for buybacks in the quarters ahead?

Yes. First of all, Arren, glad we were able to get your question in. With regard to the buybacks, we generally do not give or we have not given quarterly guidance with regard to how their purchases flow out for the quarter. At the end of the quarter, we had $850 million remaining under the current share repurchase authorization. As we move to the end of the capital year in June of next year, what I probably want to be clear about with regard to that level for a second is what's not really driving the dollar amount. So I just really want to be clear that it's not related to a change in the macro environment for us, number one. Two, it's not related to any potential proposals on late fees, and then three, it's not related to Basel III end game. We have a set of mile markers that we've set out in the capital plan that's more RWA based and then how our income kind of comes in versus planned. So those are the factors. And again, we consider the other factors but that was not purchases.