Synchrony Financial (SYF) — Q4 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 webcasts are located on our website. On the call this morning are Brian Doubles, Synchrony's President and Chief Executive Officer, and Brian Wenzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles.

Thanks, Kathryn. Good morning, everyone. Today, Synchrony reported strong fourth quarter results, including net earnings of $440 million or $1.03 per diluted share, a return on average assets of 1.5%, and a return on tangible common equity of 14.7%. These fourth quarter results contributed to full year 2023 net earnings of $2.2 billion or $5.19 per diluted share, a return on average assets of 2%, and a return on tangible common equity of 19.8%. This strong financial performance was supported by continued consumer resilience empowered by our multiproduct strategy and diversified sales platforms. We achieved another year of record purchase volume, totaling $185 billion for the full year and up 3% from last year. Our compelling products and value propositions helped drive the origination of almost 23 million new accounts in 2023, and also helped grow our average active accounts by 2.5%. The broad utility and value of our product offerings continue to resonate deeply with our customer base, leading to another year of record purchase volume. This combined with a continued moderation in payment rates to drive loan receivables growth of 11.4%. Credit continued to normalize this fourth quarter, net charge-offs reached pre-pandemic levels, in line with our expectations and contributing to a full-year net charge-off rate of 4.87%, still below our target underwriting range of 5.5% to 6%. We also drove continued progress toward our target operating efficiency ratio demonstrating cost discipline, while maintaining investments to ensure the long-term success of our franchise. And through strong execution and prudent capital management over time, Synchrony continued our long history of capital returns, including $1.5 billion returned to shareholders this year. Since 2016, we have paid $3.6 billion in dividends and reduced our outstanding shares by 50%. Synchrony's ability to consistently generate and return capital to our shareholders is enabled by our differentiated business model, which prioritizes the sustained delivery of attractive risk-adjusted returns through changing market conditions and economic cycles. Our focused execution across key strategic priorities enabled Synchrony's resilient returns by reinforcing our core strengths and facilitating our ongoing evolution to meet changing preferences and needs. With that in mind, Synchrony continued to grow and win new partners over the past year, with the addition of more than 25 partners and over 30 renewed relationships. Among our new partnerships, we were excited to announce that J.Crew selected Synchrony to launch its first co-branded credit card, which will be a digital-first program with mobile wallet provisioning, robust pre-approval capabilities, scan-to-apply, and direct-to-device credit applications. This competitive win is a testament to our culture of innovation, consistent investment in our digital ecosystem, and a strategic focus to empower our customers and partners to connect seamlessly through best-in-class omnichannel experiences. We also continued to diversify our programs, products, and markets during 2023. Broadening the utility of our offerings and extending our reach. Synchrony believes in the power of choice, choice for our customers and partners, providers, and merchants as they engage in-person and digitally across a full suite of everyday financing options. This year, we launched multiproduct pre-qualification and began presenting customers with side-by-side offers of both revolving and installment solutions to bring choice to the forefront. These enhancements empower customers to weigh the benefits of various options in real time and make the decisions that best suit their financing needs in that moment. We continue to scale our pay later solutions, which is now offered at over 200 provider locations in our health and wellness platform and at 18 retail partners. For our partners and providers, pay later seamlessly integrates into the broader partner relationship and product offering and provides another tool for deepening engagement with customers and the response has been strong. Since we launched, partners who have offered these solutions have seen a 20% lift in new accounts, with 95% of pay later sales coming from net new customers. Synchrony's continued diversification and expansion of our offerings over the last year benefited from opportunities to extend our reach. In the fourth quarter, we announced the sale of our Pets Best insurance business and through a minority interest from that sale, the opportunity to build a strategic partnership with Independence Pet Holdings or IPH, one of the leading pet-focused companies in North America. Since acquiring the Pets Best business in 2019, we've grown pets in force by over 45% per year on average, more than double the industry's growth rate to become a leading pet insurance provider in the US. We're very proud of what we've been able to achieve with such a great business and team, which enabled us to gain considerable insight into the pet industry more broadly over the last four years and we are confident that IPH will be able to use its pet insurance expertise to unlock new opportunities for Pets Best and offer still greater value for Pets Best customers. And through the strategic relationship forged between IPH and ourselves, Synchrony is positioned to gain still greater exposure and insights into the rapidly growing pet industry, as we seek to expand access to flexible pet care financing across the country. More recently Synchrony announced still another opportunity to expand our business and accelerate our growth with the acquisition of Ally Lending's point-of-sale financing business. This $2.2 billion loan portfolio consists of partnerships with nearly 2,500 merchant locations, and supports more than 450,000 active borrowers in home improvement services and healthcare industries. Through this acquisition, Synchrony will create a differentiated solution in the industry, simultaneously offering both revolving credit and installment loans at the point-of-sale in the home-improvement vertical. This multiproduct presentation furthers our product diversification strategy, delivering consumer choice while maximizing conversions and sales for our partners. This opportunity also enables Synchrony to expand our home specialty financing in roofing, windows, and electrical services. We are excited about the natural synergies we see between Ally Lending and Synchrony's Home & Auto, and Health & Wellness platforms. We look forward to leveraging our industry expertise and scale to drive operating efficiency and accelerate growth across platforms with attractive market opportunities and return profiles over time. And of course, Synchrony's ability to successfully deliver a breadth of financing solutions across an expansive distribution network is reliant on delivering best-in-class experiences with each customer interaction. This year, we continued to elevate the presence and utility of our offerings across in-person and digital transactions by adding digital wallet provisioning capabilities for eight partners, including PayPal and Venmo, Verizon, TJX, and Belk. And our digital sales continued to grow at an outsized pace, climbing 9% to nearly 39% of our total 2023 sales. Over the last year, Synchrony launched the first phase of our marketplace on synchrony.com and within our native app where shoppers can find hundreds of offers showcasing our partner brands paired with Synchrony's tailored multiproduct financing solutions. In fact, as Synchrony leveraged our analytics and marketing capabilities to develop compelling cross-shopping opportunities in this initial launch, the marketplace attracted over 220 million visits by shoppers for our partners, providers, and merchants, as we more than doubled the number of partners participating. In summary, Synchrony is increasingly anywhere our customer is looking to make a purchase or a payment, large or small, in-person or digitally, and across an ever-expanding range of markets and industries. We can meet them whenever and however they want to be met with a variety of flexible financing solutions to meet their needs in any given moment. Our ability to deliver the versatility of our financial ecosystem seamlessly across channels, industries, partners, and providers alike is what positioned Synchrony so well to sustainably grow and deliver attractive risk-adjusted returns, particularly as customer needs and market conditions evolve. With that, I'll turn the call over to Brian to discuss our financial performance in greater detail.

Thanks, Brian, and good morning everyone. Synchrony's fourth quarter results demonstrate the power of our differentiated business and financial model performing as designed. Our diversified sales platform and spend categories enabled record purchase volume growth as our disciplined underwriting and credit management kept credit performance in line with our expectations. Our retail share arrangements ensured alignment of economic interest between Synchrony and our partners. As credit normalized towards historical pre-pandemic levels, and funding costs increased from higher benchmark rates, our RSA payments were lower, providing a partial buffer to the economic environment, and enabling Synchrony delivery of consistent attractive risk-adjusted returns. And our strong balance sheet provides the flexibility to return capital to shareholders, while investing in opportunities to achieve our longer-term strategic goals, all while delivering for our customers and partners and their evolving needs today. Overall, our prudent business management and differentiated financial model have positioned Synchrony to deliver sustainable outcomes for our customers, partners, and shareholders through an uncertain macroeconomic backdrop this past year and as we move forward in 2024. Now, let's turn to our fourth quarter results. Purchase volume increased 3% versus last year and reflected the breadth and depth of our sales platforms and the compelling value our products offer to bind with a resilient consumer. In Health & Wellness, purchase volume increased 10%, reflecting broad-based growth in active accounts, led by dental, pet, and cosmetic verticals. Digital purchase volume increased 5% with growth in average active accounts and strong customer engagement. Diversified value purchase volume increased 4%, reflecting a higher in and out of partner spend. Lifestyle purchase volume increased 3%, with stronger average transaction values in Outdoor and Luxury. In our Home & Auto, purchase volume decreased 4%, as lower customer traffic, fewer large ticket purchases, and lower gas prices more than offset growth in Home Specialty, Auto network, and commercial. Purchase volume across Synchrony Dual and co-branded cards grew 9% and represented 43% of total purchase volume for the quarter, reflecting the broad utility and value that these products deliver for our customers. As we've discussed in the past, our out-of-partner spend is split roughly evenly between discretionary and nondiscretionary categories. And this trend held steady throughout the year. In the fourth quarter, we saw assumptions in categories, as consumers shifted from travel spend to clothing for instance and from gasoline and automobiles towards spend at grocery and discount stores. We've not seen any meaningful changes in the overall composition between discretionary and non-discretionary spend. The combination of broad-based purchase volume growth and approximately 110 basis-point decrease in payment rates drove ending loan receivables growth of 11.4%. Our fourth quarter payment rate of 15.9% still remains approximately 115 basis points higher than our five-year pre-pandemic historical average. Net interest income increased 9% to $4.5 billion, driven by 16% growth in interest and fees. The increase in interest and fees reflected the combined impact of higher loan receivables and benchmark rates, as well as a lower payment rate. Our net interest margin of 15.10% declined 48 basis points compared to the prior year. The decrease largely reflected higher interest-bearing liability costs, which increased 169 basis points to 4.55% and reduced net interest margin by 138 basis points. This impact was partially offset by 66 basis points of growth in loan receivables yields, which contributed 55 basis points to net interest margin. Higher liquidity portfolio yield added 29 basis points to net interest margin. And our loan receivables growth improved the mix of interest-earning assets, contributing 6 basis points to net interest margin. RSAs of $878 million in the fourth quarter or 3.49% of average loan receivables, a reduction of $165 million versus the prior year reflecting higher net charge-offs, partially offset by higher net interest income. Provision for credit losses increased to $1.8 billion, reflecting higher net charge-offs and a $402 million reserve build, which largely reflected the growth in loan receivables. Other expenses grew 14% to $1.3 billion. The increase primarily reflected growth-related items as we continue to see strong growth in volumes as well as the return of operational losses to pre-pandemic average levels as a percent of our purchase volume. Expenses in the quarter also included several notable items, including $43 million in employee costs related to a voluntary early retirement program, $9 million in real-estate-related restructuring charges as we continue to adjust our physical footprint in favor of a hybrid working environment, $9 million for the FDIC's special assessment, $7 million of preparatory expenses in anticipation of a potential late fee rule change and $5 million of transaction-related expenses related to the sale of Pets Best. Our efficiency ratio for the fourth quarter improved by approximately 120 basis points compared to last year to 36%. Excluding the impact of the notable items in the quarter, our efficiency ratio would have been approximately 200 basis points lower in the fourth quarter. All-in, Synchrony generated a net earnings of $440 million or $1.03 per diluted share, a return on average assets of 1.5%, and a return on tangible common equity of 14.7%. Next, I'll cover our key credit trends. Overall, we see the consumer remaining resilient as we managed through inflation and higher interest rates. The external deposit data we monitor also supports this view, as it shows average savings account balances return closer to pre-pandemic levels during 2023 and remained relatively steady through the third and fourth quarters. At year-end, average industry savings balances remained approximately 9% above levels from 2020. Our disciplined through-cycle underwriting and active credit management has positioned us well as we enter 2024. Our delinquency ratios finished the year slightly above average levels from 2017 to 2019 prior to the pandemic. At year-end, our 30 plus delinquency rate was 4.74% compared to 3.65% in the prior year and 12 basis points above our average for the fourth quarters of 2017 to 2019. Our 90 plus delinquency rate was 2.28% versus 1.69% last year and 4 basis points above our average for the fourth quarters of 2017 to 2019. And consistent with our expectations, Synchrony's net charge-offs reached 5.58% in the fourth quarter compared to 3.48% in the prior year and an average of 5.49% in the fourth quarters of 2017, 2018, and 2019. We continue to monitor our portfolio and implement actions as necessary to proactively position our business for 2024 and beyond. Moving to reserves, our allowance for credit losses as a percent of loan receivables was 10.26% down 14 basis points from 10.40% in the third quarter. The reserve build of $402 million in the quarter was largely driven by receivables growth. Turning to our balance sheet, our consumer bank offerings continued to resonate with customers in the fourth quarter, driving over $3 billion of growth in total deposits in the quarter or 13% compared to the prior year. At quarter-end, deposits represented 84% of our total funding, while securitized debt comprised 7% and unsecured funding 9%. Total liquid assets and undrawn credit facilities were $19.8 billion, up $2.6 billion from last year and at quarter-end, represented 16.8% of total assets, up 42 basis points from last year. 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 will continue to make its annual transitional adjustments to our regulatory capital metrics of approximately 50 basis points each January until 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Additionally, in the fourth quarter, Synchrony made a change to its balance sheet presentation of contractual amounts related to our retailer partner agreements. At year-end, assets of approximately $500 million, which were previously classified as intangible assets, were reclassified to other assets and prior periods were reclassified to conform to this presentation. This change in presentation had a corresponding impact to each of our regulatory capital metrics and resulted in an increase of approximately 50 basis points to our capital ratios in both the current and prior years. Under the CECL transition rules and including this balance sheet change, we ended the fourth quarter with a CET1 ratio of 12.2%, 110 basis points lower than last year's 13.3%. The Tier 1 capital ratio was 12.9% compared to 14.1% last year. The total capital ratio decreased 60 basis points to 14.9%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 22.1% compared to 22.8% last year. During the fourth quarter, we returned $353 million to shareholders, consisting of $250 million of share repurchases and $103 million of common stock dividends. At the end of the quarter, we had $600 million remaining in our share repurchase authorization. We remain 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. Synchrony remains committed to our capital allocation framework, which prioritizes investment in organic growth and payment of our regular dividends, followed by share repurchases and investments in inorganic growth opportunities where the rates of return meet or exceed that of our other potential uses of capital. To that end, as Brian mentioned, Synchrony announced the acquisition of the Ally Lending point-of-sale financing business, which we view as a great opportunity to expand our leadership position in home improvement and health and wellness verticals, while leveraging our industry expertise and scale to unlock still greater value. We've agreed to purchase approximately $2.2 billion of loan receivables at a discount. Upon closing the transaction and subject to completion of purchase accounting, we expect our CET1 ratio to be reduced by approximately 50 basis points inclusive of our provision for credit losses of approximately $200 million relating to the initial reserve builds. Synchrony expects this acquisition to be accretive to full-year 2024 earnings per share excluding the impact of the initial reserve build for credit losses. Upon integration of our business, conversion to our PRISM underwriting model and execution of our strategy, we expect to achieve attractive internal rate of return with approximately 3.5-year tangible book value earn back. Additionally, the sale of our Pets Best business will result in approximately $750 million gain net of tax in 2024, which will contribute to an approximately 80 basis-point increase to our CET1 ratio, inclusive of the capital required to be held on minority interest in IPH. Excluding the gain on sale, we expect the transaction to be neutral to earnings. We're excited about the opportunities we’ve identified to continue to drive consistent growth at appropriate risk-adjusted returns, and have established a long track record of execution across both strategic and financial objectives. During 2023, we drove strong growth in purchase volume, which combined with the payment rate moderation to deliver solid growth in loan receivables. We were opportunistic in funding net growth and continue to expand our deposit franchise and in turn delivered attractive net interest income. Credit normalized in line with our expectations and our RSA functioned as designed. And finally, we fulfilled our commitment to deliver positive operating leverage. Turning to our outlook for 2024. Our baseline assumption for this discussion include a stable macroeconomic environment, full-year GDP growth of approximately 1.7%, a year-end 2024 unemployment rate of 4.0%, and an ending Fed funds rate of 4.75% with cuts beginning in the second half of 2024. This outlook also assumes the closing of our Pets Best and Ally Lending transactions in the first quarter of 2024. And given the uncertainty of timing and implementation of a potential final rule regarding late fees, we've not assumed any related impact to our 2024 financial outlook. In the event that the final late fee rule is published, we will provide an update with the associated impact to our financial guidance. Starting with loan receivables, we expect our compelling value propositions and the broad utility of our products will continue to drive purchase volume growth. We also expect payment rates to continue to moderate although we anticipate they will remain above pre-pandemic levels through 2024. Together, these dynamics should deliver ending loan receivables growth of 6% to 8%. We expect full-year net interest income of $17.5 billion to $18.5 billion. Net interest income should follow typical seasonal trends through the year, adjusted for several impacts. One, higher interest-bearing liabilities expense as our fixed-rate debt re-prices with higher benchmark rates. Two, the impact of competition for retail deposits and pace of deposit repricing once rate cuts begin. Our expectation is for betas to trend near 30%, as rates begin to decline later in the year, thereby reducing impact to interest expense during 2024. And three, interest and fee yield growth, partially offset by higher income reversals. We expect net charge-offs of 5.75% to 6%, within our targeted underwriting range of 5.5% to 6%. Losses are expected to peak in the first half before returning to pre-pandemic seasonal trends following the normalization of delinquency metrics in 2023. We expect RSAs of 3.5% to 3.75% of average loan receivables for the full year. This reflects the impact of continued credit normalization, higher interest expense and the mix of our loan receivables growth, partially offset by purchase volume growth. The reduction in RSA demonstrates the functional design of the RSA and the continued alignment of interest with partners. Finally, we expect to reach an operating efficiency ratio of 32.5% to 33.5% for the year driven primarily by the optimization of our loan yields as credit normalization occurs. This outlook excludes the impact of the Pets Best gain on sale, which we recognized in other income. We remain committed to delivering operating leverage for the full year and continuing to invest in our long-term success of our business. As demonstrated again this past year, Synchrony's purpose-built business and financial model is performing as designed. Through an evolving backdrop, our diversified portfolio of products and platforms continue to drive growth. Our leading credit management ensures attractive risk-adjusted returns, our RSA provides a buffer against changes in economic performance, and our stable balance sheet creates opportunity. Taken together, our business continued to deliver value for each of our stakeholders in 2023 and positioned well for 2024. I'll now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. Synchrony delivered another strong performance in 2023. We executed on key strategic priorities that expand the breadth and depth of our customer acquisition and engagement, further diversify the products, services, and value we provide, and enhance the quality of the experiences we power for our customers, partners, providers, and merchants. This focus on deepening our core strengths while continuing to evolve with the ever-changing world of commerce has enabled Synchrony to deliver strong financial results and returns to our shareholders, while also preparing our business for the future. We are confident in our ability to continue to sustainably grow and deliver resilient risk-adjusted returns over time, and are excited about both the near and longer-term opportunities we see ahead to deliver still greater value for our many stakeholders. And 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.

Thanks, good morning. Can you maybe just talk about the cadence we should expect for delinquencies in 2024? Should the fourth quarter or first quarter be kind of peak delinquencies? And then as we look forward out to 2025, can you maybe just talk about your confidence level that you'll stay within this net charge-off range of 5.75% to 6%?

Sure. Thanks, Terry. When we analyze our delinquency formation, especially in the fourth quarter, it's important to note that we normalize at a slower pace than our peers, partly because we didn't make significant changes to our credit criteria during the pandemic. Our advanced underwriting tool, PRISM, which we have invested in since 2017, along with the data we utilize, has really aided our formation as we move out of 2023. Notably, the delinquency rates for both 30 days and 90 days in the fourth quarter were only slightly above their three-year averages from 2017 to 2019, specifically 12 basis points and 4 basis points, respectively. Furthermore, the current delinquency credit mix is quite similar to what we observed in 2019. In examining the trends in delinquency, the growth over months and years for both 30-day and 90-day delinquencies has remained steady, ranging from 109 to 116 basis points for 30 days and between 55 to 63 basis points for 90 days. This consistency aligns well with typical seasonal patterns. Additionally, the entry rate remains better than in 2019. Moving forward, we anticipate that first-half charge-offs will be higher, followed by a decline in the second half, resulting in an annual range of 5.75% to 6%, which aligns with our underwriting targets. Remember, we took certain actions in the second and third quarters, which are starting to show effects on delinquencies for the first half of 2024. Overall, we feel optimistic about our credit position and will keep a close eye on the trends and any incoming data. The positive entry rate, although it has a slightly negative impact on loss float, is encouraging as we enter the year.

Got it, thank you. And then my follow-up on just the NIM and NII guide. It looks like you assumed about two rate cuts. Can you maybe just talk about what we should expect if we get more than two rate cuts for the year?

Yeah. Thanks for that question, Terry. If I look at what we're projecting, we actually had three rate cuts, really beginning in September of 2024 going through the end of the year, which I hit the point on betas, it's 30%. So if you think about having rate cuts that late in the year, digital banks generally lag about 30 to 90 days with regard to when they start to move rates, and then you also have to take into consideration the fact that in the fourth quarter when we want to maintain a higher level of financing to fund seasonal growth. So that's why the beta is a little bit lower. If you were to get rate increases either more than that early in the year, you would get in theory some benefit on to the net interest margin and lower interest on interest-bearing liabilities.

Got it, thank you.

Thanks, Terry.

Thanks, everybody, for taking my questions this morning. Really just wanted to talk a little bit about the relationship between NCOs and RSAs when we look at the '24 guidance. '24 guidance from an NCO perspective basically puts you at the higher end but within the range of NCO targets. RSA looks a little bit lower than what we would have seen on a pre-pandemic basis. And I'm assuming that's really not a function of credit, but more a function of interest rates. And as we look forward, if we assume net charge-offs wind up in that 5.5% to 6% target range, but interest rates start to come down, will the RSA trend back up? I just wanted to sort of get a sense of what we should be looking at in a normal environment for that RSA ratio.

Thank you, Rick. I want to direct your attention to Page 4 of our materials this morning, which illustrates the risk-adjusted return and the correlation between net charge-offs and RSA, both of which generally move in tandem. As you consider 2024, you will notice a continued increase in the net charge-off line, which influences the RSA. We are facing challenges as the interest-bearing liabilities will reset, with 92% of our CDs and 74% of our debt resetting in 2024. This will reflect a full-year impact from the rate increases experienced in 2022 and 2023. Our guidance indicates that the payment rate is unlikely to return to pre-pandemic levels, so we won't see the full interest and fee yields coming back. While higher interest-bearing liabilities could theoretically benefit the company through a low RSA, if these liabilities decrease more rapidly due to other resets, we would observe an increase in the RSA.

Great. That's it from me. Thank you guys.

Thanks, Rick.

Thanks, Rick. Have a good day.

Good morning, guys.

Good morning, Ryan.

Good morning, Ryan.

Brian, maybe as a follow-up to the first question. I just wanted to flush out the NII and NIM guide a little bit more. Can you maybe just talk about, one, what gets us to the bottom end of the range to the top of the range, obviously, it's a pretty wide range and maybe just explain a little bit further, what is the 30% beta? Is that a point-to-point? Is that a downside? I just want to make sure we fully understand that. And lastly, just given that you are liability-sensitive on the way up, do you still see a path to a 16% NIM and over what timeframe? Thanks.

Thanks for the question, Ryan. Let's start with the beta comment. When considering beta, we are really looking at the beta for the end of the year. Over a longer time, especially during a rate decline cycle, I wouldn’t expect a beta of one since we didn’t see that on the way up, so it's unlikely on the way down. In our portfolio, we have about 80% beta on savings and 90% beta on CDs. I anticipate that as rates come down, it will likely reflect the pattern we saw when they went up. Regarding net interest income, it hinges on various assumptions. If we have three rate cuts in and the market expects six, some as early as March, that could increase your NII if interest-bearing liabilities decline sooner and more steeply. However, if the rate cuts don't happen, it might slightly decrease. Another significant factor will be the payment rate, which we have conservatively projected as not returning to pre-pandemic levels. This decline in payment rate has been slower than we anticipated in 2023. These are generally the key factors as we navigate a range of $17.5 billion to $18.5 billion.

Got it. As a follow-up on credit, you mentioned that delinquencies are beginning to follow more normal patterns and charge-offs will be discussed by the second quarter. Brian, if your outlook is accurate, when can we expect the allowance to start decreasing? When is the peak expected, and how significantly could it drop over the year? Thank you.

Yeah. So we're entering the year at 10.26% on a coverage rate basis. I would expect in the first quarter, you're going to see a rise in normally seasonally rises, receivables go down, number one. Number 2 is of just under $200 million, around $200 million for the Ally Lending portfolio that we bring over. There will be some on the purchase accounting marks that will increase that coverage rate a little bit as well it doesn't go through the P&L. So you're going to see a rise really in the first-quarter, call it, seasonally. We anticipate that it will be lower than 10.26% as we exit out of the 2024. So you're primarily going to see growth builds as we move throughout the year, but you will see rate declines. Some of the QAs burn-off or get realized. And again, if credit performs as we think it would, you’d be exiting down towards the day-one, we won't be at day-one most certainly in 2024, but trending downwards as we move through the year.

Thanks for the color, Brian.

Thanks, Ryan.

Thank you. I understand that your guidance does not yet include the late fee ruling since it hasn't been issued. However, you mentioned that you spent $7 million in preparation. Can you elaborate on what preparations you are making and share any updated thoughts you have, considering it is now towards the end of January and we have not received any updates from the CFPB?

Yeah, sure, Moshe. I'll start on this. We're obviously still waiting for the final rule to be issued, but with that said, while there are still some unknowns in terms of the implementation period and other things that we'll see in the final rule, we've been working on this for almost a full year now at this point. It's very complicated. Our teams have done a lot of work in preparation for this. We spent a lot of time with our partners. We've agreed on pricing actions and offsets that we would deploy when we see the final rule. So it's really all the work that has been going on over the past year. I mean it's systems work. You've got to issue a lot of CITs, change in terms. And so it's really that kind of stuff. I will say that the conversations with our partners have been very constructive. They fully recognize that without these offsets, that a meaningful portion of their customers that we approve today and that we underwrite and give credit to would no longer have access to credit. And that's something clearly we do not want, and they do not want. So really no change to what we said in the past. Our goal is to protect our partners, fully offset the impact of the final rule when it does come. And we want to continue to provide credit to the customers that we do today.

Great, thanks. And just as a kind of as a second thought, when you look at the different kind of verticals, obviously you had strong growth in 2023, and a couple of them in Home & Auto had been somewhat weaker, particularly as you got closer to year end. As you look into 2024, any changes in mix in terms of the growth, anything that you're seeing for launches and product refreshes that are going to drive in those various lines?

Yeah, I think, look, generally we would continue to expect outsized growth in Health & Wellness. That's a platform where we've accelerated investment in the past year or two. We're seeing really good growth from our acquisition of Allegro Credit. It's a big market. We've got a leading position. This is dental, vet, cosmetic, great engagement with our partner network. And so that's a platform we'll continue to invest in, and we would expect to see growth there on the higher side relative to the other platforms. The other one I would mention is digital. That's where we've got Venmo, Verizon, PayPal, Amazon, and so I think you'd continue to see some outsized growth there. And then maybe a little bit softer in lifestyle and home and auto. I don't know, Brian, if you’d add anything to that.

Health & Wellness and digital will perform better than average. Diversified value will be around the company average, possibly slightly lower, while lifestyle will experience some challenges. In the home and auto category, we are noticing lower foot traffic in stores. While purchase frequency remains relatively stable, the transaction values are decreasing. Consumers are opting for lower-priced mattresses instead of high-end options. We anticipate this trend will persist into the beginning of 2024.

Thanks very much.

Thanks, Moshe.

Thanks, Moshe.

Good morning, and thanks for taking my questions, guys. Most of my questions have been asked and answered, but I guess one other question I have is, I think we've had depleted recoveries on the charge-offs side, part of that equation over the past couple of years. I'm wondering, Brian, to what degree does maybe a recovery and recoveries impact the NCO guide?

Yeah. Thanks for the question, John, and good morning. When we look at recoveries, we've done a couple of things really through the pandemic. Number one, we made a strategic shift to in-source our recovery operations. So we used to have a lot of it externally managed, we brought it in-house, which effectively drove rate increases on the ultimate recoverability of dollars written off, so that was a positive as we move through. You are right, when you look at it, particularly when you're doing some level of forward flow, on a rate basis, that's down and your total charge-offs are down, but I think the swing that we had of being more efficient by in-sourcing has helped to offset that. So, I think on a relative percentage, it's been flat. Most certainly, it should rise as we step out of 2023 for a couple of reasons. Number one, you're right, we will get more volume just on the net charge-off basis. And then if you do see an easing of rates, the cost of capital associated with people who purchase written-off paper should go down and you get better pricing in the market. So, there's a number of different dynamics for us that it hasn't been much of an issue on net charge-offs and probably exiting out of '24 maybe provides a tailwind beyond.

Okay, and maybe kind of a higher-level question. I think, Brian, you mentioned non-discretionary versus discretionary purchase activity was consistent. I'm wondering, I mean, given inflation is stabilizing, we got student loan repayment to turn back on, are you seeing anything on the margin that would reflect changing consumer behaviors? Is it just sort of been steady-as-she-goes given those changes in the macro?

Yeah, as we highlighted, John, what we're seeing is a little bit of a rotation out of some of travel into some of the other items. Again, that was a trend more in the fourth quarter. We would expect travel to ease as you move into 2024, so that's bigger. So, we do not see the shift between discretionary and nondiscretionary. We do not see a shift where the consumer is trying to really stretch dollars. We do see our transaction values down and frequency up a little bit, which means that as the consumers are making purchases, they are trying to be efficient with the dollars, but not really, really pulling back. So, as I look at it that, I don't see big overwhelming trends. I would tell you, for the first 20 days and I always put that as a frame of reference, sales have been a little bit softer than expectations as we entered into 2024, but that's only 20 days of data and if I talk to some of my retail rent, they would tell you whether did play a factor, you had several states that have been cold and significant storms. But there has been lower foot traffic generally across the board as we started 2024.

Great. Appreciate the color.

Thanks, John.

Thanks, John. Have a good day.

Good morning, and thank you for taking my questions. To begin, I would like to inquire about portfolio renewals and movements. I apologize for the two-part question. First, could you remind us of your renewal schedule? Are there any significant programs set for renewal in the upcoming 24 months? The second part concerns the current environment for renewals and RFPs as you communicate with retailers, especially given the recent credit normalization and the outstanding late fee rule. Are retailers looking for more certainty? I noticed the announcement about J.Crew and the acquisition of the Ally portfolio, but what is the status of other major retail programs? Can you provide some context for your pipeline in comparison to last year and previous years in a normal environment? Thank you.

Yeah, so I would say, first, I'll take the second part first, which is late fees and how that's impacting the pipeline. I do think it does make pricing new business, even renewals to some extent, a little more challenging. But we've been able to kind of work through that. You mentioned J.Crew. We're excited to announce that new program. But you've got to spend time. That's part of the negotiation, right? And there's speculation there and there's some uncertainty. And so you kind of got to try and cover yourself for those possible outcomes, which we believe we've done. So it does make, I think, pricing new business or renewals a little more challenging. I do think there'll be some clarity here in the next month or two, and that will clear that up and make things a little bit easier from that perspective. But it has influenced, I think, not only us, but other market participants. It's a big part of the conversation when she gets through. The way I think about the kind of the BD or the sales process, it's a lot about capabilities, technology, data analytics, data share, all those things. But then when you get to the financials, this is a big part of the discussion that's crept in there over the last 12 months just given the uncertainty. The other thing, just in terms of our pipeline for renewals, the vast majority of our programs are out there 2026 and beyond. With that said, if we have an opportunity, as always, if we have an opportunity to renew early, if there's something the partner wants to change in the deal or something we want to change, we'll get together and see if we can kick the term out a few years. So that's something we're always actively trying to work on with our partners.

Yeah, the only thing I'll answer is or just add, but you'll see in February, again, we'll continue to update the revenue that's under contract in ‘26 and beyond. So expect that in February.

Excellent. Thank you. And then just switching gears, in terms of the health of the consumer, it sounds like stable, still feel pretty good about it. So I was wondering about your underwriting posture here. Clearly, soft landing is becoming more of a consensus view. I know you aren't prone to big gyrations there, but how are you feeling about that underwriting posture? Maybe just talk about like what your standards look like today versus maybe one year ago or even 2019. Is this like 2024 like more of a normal year? Is it still a little on the tight side and the opportunity to loosen and drive growth? Just any comments there.

We are back in a familiar situation. There are numerous issues stemming from attempts to foster growth in the '21 and '22 vintages, and this is something people are currently facing the consequences of. Some label it as growth mass, while others see it as a loss of standards leading to decreased returns. We won't be relying on credit merely to drive growth; we are more established than we were a year ago. We've mentioned that we regularly monitor our partners and channels, not necessarily every day, but we certainly keep an eye on them. We implemented more comprehensive measures in both the second and third quarters in response to consumer trends and the actions of other underwriters. We felt a bit optimistic in the fourth quarter as we noticed other issuers beginning to adjust their credit practices, which should positively impact the industry toward the end of 2024. However, we will proceed with caution throughout the year, continuing to monitor consumer trends. We haven't observed any signs of consumers stretching their finances. The movement in payment rates by credit tier has remained steady, with the most significant changes occurring in the non-prime segment. Thus, we don't see consumers overspending or struggling financially, and we see no shifts in payment rates. We will keep an eye on the flow and delinquency rates. The entry rate is still better than it was in 2019, and as the entry rate decreases, the flow to loss typically worsens. Overall, we remain cautiously optimistic about credit, as indicated by our guidance of 5.75% to 6%.

Thank you.

Thanks, Mihir. Have a good day.

Thanks. Good morning. Brian Doubles, you were pretty active on the transactions front with the sale of the pet insurance business and part of the business and then the acquisition of the Ally Lending business. Could you just maybe a little bit more on what drove those decisions and then what the pipeline for other deals look like? I mean, I think there's one big fish at least out there in terms of a portfolio. So, can you just talk about what the positioning is there?

Let me start with Ally since it's the most recent transaction. We're really excited about this acquisition as it benefits both companies. JB and I began discussions earlier in 2023. While this wasn’t a scale business for Ally, it definitely represents a scale opportunity for us. This type of acquisition aligns perfectly with our strategy and involves industries we know well, including home improvement and health and wellness. We also realized that we share some partners in this space. Ally complements and accelerates our current strategy and has an attractive financial profile. It's expected to be EPS accretive, with a nice ROA that could meet or exceed our company average. We will gain 2,500 new merchants and 500,000 new customers, making this a compelling acquisition for both Home & Auto and Health & Wellness. Regarding Pets Best, this was more of an opportunistic move. We were not actively seeking to sell our pet insurance business as it has been quite successful for us, generating significant value in a short time. Since 2019, we have grown our pets in force more than fivefold and advanced to become the number four pet insurance provider in the US. When IPH approached us with a great offer, it was hard to pass up, giving us over 10 times our original investment and a nice after-tax gain. More importantly, it enables us to remain invested in the pet sector through a strong partner like IPH, who has the scale and expertise we need. We see this as not only a financial win but also a long-term strategic move that will benefit us. Overall, it’s a positive way to wrap up the year with two significant transactions.

Other deals? What else is out there?

Yeah. Look, we got a lot on our plate. I'd start with that. We got to get both of these transactions closed, which we hope to do in the first quarter. We got a lot going on in 2024, for sure. With that said, we typically get invited into most RFPs in this space and the things that are important to us haven't changed. We look for a good risk-adjusted return. We look for really good alignment with the partner. I think that's probably the most important thing, particularly when you're looking at large deals. You've got to make sure that both partners like the deal in good times and bad times, that our interests are aligned around marketing and credit and underwriting and really all aspects of the program. So we'll always be in the market for opportunities that fit that screen.

Got it. And just one follow-up. Brian Wenzel, what are you assuming for the unemployment rate for the year in your reserve coverage?

The unemployment rate as we exit out of 2024 is 4%.

Got it. All right, great. Thank you.

Thanks, Sanjay. Have a good day.

Hey, good morning. Thanks for taking my questions. Last year you ended up seeing your loan growth come in about the initial expectations of that kind of initial 8% to 10%. I guess I'm wondering if you think there's maybe some potential upside or a similar setup this year? And then more specifically, could you talk a little bit more about the specific drivers that you see getting you to the low end versus the high end of the range there in that 6% to 8% in terms of payment rate, consumer spend, new account growth, and maybe even how additive you think that this installment opportunity could be to your growth? It seems like you're maybe leaning in a little bit more here with the acquisition and the pre-qualification launch this year.

When I review the growth rate, Jeff, several factors could contribute to reaching the lower end of the range. First, a weaker consumer and a softer macroeconomic environment could impact us. Additionally, if the payment rates remain higher than we expected, we might find ourselves at the lower end of that range. If the credit actions we’ve implemented have a greater sales impact than we anticipate, that could also keep us below the range. On the other hand, reaching the higher end of the range could happen if payment rates decline more quickly than expected or if the economy shows more strength than projected, leading to increased spending. Regarding home specialty, that segment within Home & Auto has experienced solid growth and will continue to do so. However, it won't significantly affect the company average. While the acquisition will provide an initial boost and grow as we integrate our home specialty platform with the appealing Ally Lending point of sale platform, it shouldn't substantially alter the overall company performance.

Got it. And just to follow up on the new expense ratio guide, I know in the past you've given more of a quarterly dollar amount. It seems like you might be implying a pretty low single-digit type expense growth next year. Is that right and where do you think you're kind of gaining some efficiencies from here? Is it on marketing, lower comp, et cetera?

First of all, regarding the shift back to efficiency ratio, we had previously focused on efficiency ratio and guided accordingly for the long term. During the pandemic, we adjusted our approach due to revenue impacts and payment rate disruptions. Now, we are transitioning back to reporting efficiency ratios, which is in line with industry standards. When looking at expense dollars, particularly controllable expenses excluding operational losses, we are managing expenses at a slower growth rate, which indicates that we are achieving operational leverage. We do need to make some investments, as mentioned in our notable items, including a voluntary early retirement program and improvements to our facilities that will benefit us in 2024. Thus, from a controllable expense perspective, we will see positive operational levers. To address operational losses, we are implementing new tools and strategies, so we expect the growth rate to stabilize as we move from 2023 to 2024.

Great. Thank you.

Thanks, Jeff. Have a good day.

Good morning. I have a couple of follow-up questions regarding the late fee topic. Can you remind us what the primary method will be to offset the impact of the late fees? Is it through incremental fees or the underlying interest rates? Secondly, could you discuss the competition involved in negotiating these offsets? How intense is it? Are there competitors willing to absorb the costs? Is there a possibility that any relationships could change as a result of this?

Let me start with the second question first. I believe we're all in the same situation regarding the new late fee proposal. Whether it's for a renewal or new business, the effects are consistent. It boils down to the required rate of return for issuers and what factors matter to them. I don't expect it to change the competitive landscape significantly, as it affects everyone equally. It really depends on the type of portfolio, the priorities of the partners, and the aspects of sharing and alignment that I mentioned earlier. Therefore, I don't foresee a significant impact. Once we have clarity on a final rule, it will become even more apparent in terms of what to incorporate. Brian, could you elaborate on the APRs and fees?

Yeah. So, obviously, John, we have a set of pricing strategy changes that will come through, some of which come through with a faster cadence in 2024, which will be fee-oriented as well as some policy orientation. And then there will be APR increases that build with some of which you'll see in 2024 if the rule gets issued and then build into 2025. So we'll be back if the rule does get issued. We'll come back and probably provide a little bit more color with regard to how to think about that in the context of 2024. Some of these will have a bigger short-term impact, some of them will have a bigger long-term impact. And so, we'll be in a position to provide a little more clarity when we have a final rule and we start to roll out some of these actions.

Got it. Okay, great. Thank you. And then, secondly, just around your purchase volume, I appreciate the color you gave in terms of the drivers between the different verticals. Overall, as we're looking at 2024, what's your expectation for total card purchase volume or overall purchase volume as you look at the full year versus 2023, and the same for overall account growth? Thanks.

Yeah, so I'd say, we're not specifically guiding, John, on purchase volume. Obviously you've seen the rate of asset growth decline from 2023 to 2024, there was some impact last year really around that asset growth stemming from payment rates decline, which again, we don't think it will have as big an impact in 2024. So I think you're going to see something generally consistent with probably last year. I mean, a good benchmark is sit back and say, we do see GDP at 1.7%. We grow multiple of that. So again, probably generally consistent with the last year. You've got to remember, too, our purchase volume at $185 billion for 2023 was a record high for this company. So we are facing a difficult comp as we move into 2024. But again, we're proud of the sales platforms and the differentiation and diversification that's inside of those platforms.

Okay, great. Thank you.

Thanks, John. Have a good day.

Yeah, thanks. I wanted to ask about your thoughts around preferred equity issuance for this year. Brian, does that need to be additive to total capital levels or does it free you up to replace some of that with or return some common? Talk a little bit about potential timing, what you kind of need to see from a market perspective and also how much you might look to issue?

Yeah, thanks for the question, Mark. As we look at the capital stack, we fully developed our Tier 2. We have about 75 basis points, give or take, of capacity in Tier 1, which puts the max amount you probably can do just to reach the target level for Tier 1 of about $700 million to $750 million, ultimately that you'd want to do. We don't necessarily think of that relative to common equity as more as we want to develop, most certainly the most cost-effective capital structure that we want, the timing of which is going to depend upon market conditions. Rates throughout 2023 were incredibly high and wasn't necessarily the best time to kind of issue it. We'll look at how the markets develop in 2024 and whether or not there's desire to invest or demand for the products. And we'll also look at the structure of whether or not that's a more retail-oriented preferred stock or not. So there's a number of different factors that go in. It just really goes into how do I fully develop all the levels of the capital stack from a regulatory standpoint.

Okay, great. And then just to follow up on kind of your updated thoughts on plans for how to deploy the capital created by the Pets Best sale.

Yeah, I don't think our priorities change. We generated some capital in ‘23 by making some adjustments. We'll spend about 50 basis points of capital on the Ally transaction. We'll generate about 80 basis points on the Pets Best sale and net of the investment that we're taking back in IPH. So I think that kind of goes on the pie. We will look to the priorities of organic growth, number one, maintaining the dividend, two, and then three, we'll look either at share repurchases or if there's other inorganic opportunities. Again, I think we're very focused when it comes to inorganic opportunities. It has to be the right thing. It has to be priced incredibly well, which we feel we got with Ally Lending. And so we'll be prudent when it comes to deploying that capital. But again, we're not changing the strategy or the cadence because of the Pets Best transaction.

Got it. Thank you.

Thanks, Mark. Have a good day.