Synchrony Financial (SYF) — Q1 2024 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 want 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, 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, and good morning, everyone. Today Synchrony reported strong first-quarter results, including the successful completion of two previously announced transactions: the sale of our Pets Best insurance business, which generated an $802 million after-tax gain in the quarter, and the acquisition of Ally Lending's $2.2 billion point-of-sale financing business. Together, these transactions expand Synchrony's differentiated offerings in the market and strengthen our position as the partner of choice as we drive long-term value for our many stakeholders. Excluding the impact of the Pets Best gain on sale, Synchrony delivered adjusted first-quarter net earnings of $491 million or $1.18 per diluted share, a return on average assets of 1.7%, and a return on tangible common equity of 16.8%. This performance highlights the resiliency of Synchrony's earnings power over time as we deliver results while positioning the business for strong risk-adjusted growth ahead. Our differentiated model enables us to assess and react quickly through cycles and environments as our broad product suite, compelling value propositions, and innovative technology continue to resonate with both our consumers and partners. We opened 4.8 million new accounts in the first quarter and grew average active accounts by 3%. Our products and value propositions drove $42 billion in first-quarter purchase volume, 2% above the prior year, marking our highest ever first quarter performance. Health & Wellness purchase volume increased by 8%, led by pet, dental, and cosmetic categories, reflecting broad-based growth in active accounts. Digital purchase volume grew by 3%, demonstrating continued consumer engagement through the increase in average active accounts. In home and auto, purchase volume decreased by 3% due to lower customer traffic and fewer large ticket purchases, while lifestyle purchase volume decreased by 4%. Dual and co-branded cards accounted for 42% of total purchase volume for the quarter, representing a 6% increase as our value propositions continue to drive increased engagement and growth. Overall, consumers focused on more nondiscretionary spending in the quarter and shifted out of certain discretionary categories like home furnishings, travel, and entertainment. Despite the change, we still see broad-based growth in many discretionary and nondiscretionary areas. Across the business, Synchrony continues to notice that nonprime borrower spending has slowed, and our portfolio's purchase volume growth remains driven by higher credit grade consumers. Average transaction values among super prime borrowers are increasing, reinforcing our view that consumers are becoming more selective in their purchases and aligning their cash flows. Portfolio payment rates have moderated and reached 15.8% for the first quarter, about 90 basis points lower than last year. The normalization and recent stabilization of our delinquency performance has occurred at a more gradual pace than the majority of our industry peers. We're encouraged by these trends and continue to expect our portfolio's net charge-offs to peak in the first half of this year. Synchrony added or renewed more than 25 partners in the first quarter, including BRP, and formed new technology partnerships with Adit practice management software and ServiceTitan. We're excited about our partnership with BRP, which will enable their U.S. dealers to offer secured installment loan products for their well-known line of powersports products. Synchrony will deliver financing offers with flexible terms through their online or in-dealership application process. To that end, Synchrony added or renewed more than 25 partners in the first quarter. Our partnership with Adit, an industry-leading dental practice management software provider, will expand CareCredit access to dental practices nationwide, ensuring seamless experiences for both patients and practitioners. Similarly, Synchrony will integrate with ServiceTitan, a leading software platform designed for trades businesses, which will allow contractors to offer home improvement financing through our direct-to-device application process. So whether we are building new relationships or supporting and enhancing existing ones, Synchrony deeply understands what our customers need and expect, as well as what our partners and providers are seeking to achieve. Our ability to deliver for these stakeholders and consistently achieve strong outcomes through varying conditions demonstrates the strength of Synchrony's business model.

Thanks, Brian, and good morning, everyone. Synchrony's first-quarter results reflected the combination of our differentiated business model and a resilient consumer in an evolving macroeconomic environment. We generated $1.3 billion in net earnings or $3.14 per diluted share on a reported basis. Excluding the $802 million after-tax gain from the sale of our Pets Best business, we generated $491 million in net earnings or $1.18 per diluted share. Ending loan receivables grew 12% to $102 billion, reflecting the impacts of continued purchase volume growth and the completion of our Ally Lending acquisition. Net revenue increased by $1.6 billion or 50%, driven by the Pets Best gain on sale of approximately $1.1 billion, which was reported through other income. Excluding the Pets Best gain on sale, net revenue increased by $530 million or 17%. Net interest income rose by 9% to $4.4 billion, driven by higher interest and fees, partially offset by higher interest expenses. Provision for credit losses increased to $1.9 billion, reflecting higher net charge-offs and a $299 million reserve build, which included a $190 million build related to the Ally Lending acquisition. Our efficiency ratio for the quarter, excluding the impact of the gain on sale, was 32.3%, an improvement of approximately 270 basis points versus last year. At quarter end, our 30-plus delinquency rate was 4.74% compared to 3.81% in the prior year. Our net charge-off rate was 6.31% in the first quarter compared to 4.49% in the prior year. Our allowance for credit losses as a percent of loan receivables was 10.72%, up 46 basis points from the previous quarter, primarily reflecting seasonal trends. Overall credit performance has been consistent with our expectations. Our capital ratios reflect strong foundations. As of March 31, 2024, we returned $402 million to shareholders. We have $300 million remaining in our share repurchase authorization. Synchrony is focused on leveraging our core strengths to optimize our business position. Our depth of consumer lending experience informs our go-to-market strategies. The company anticipates completing changes to our products and pricing process over the next few months. We'll maintain our current quarterly dividend as well and remain well-positioned to return capital to shareholders while optimizing our portfolio’s positioning for the future. In conclusion, Synchrony is leveraging its core strengths to grow and build long-term value. I’ll now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. Synchrony's first-quarter results were driven by our differentiated business model and our commitment to delivering sustainable results. We are leveraging our proprietary industry and consumer insights to provide access to responsible financing solutions. We believe we are operating from a position of strength as we navigate the year ahead and are excited about opportunities to drive considerable long-term value.

That concludes our prepared remarks. Please start the Q&A session.

So it seems like charge-offs are coming in a little bit higher than expected, but we've now seen delinquencies potentially inflect and starting to follow seasonal patterns. Can you maybe talk about what this means for the full year loss rate?

Yes. Thanks for the question, Ryan. We believe charge-offs will peak in the first half of the year, and we feel confident about that. The seasoning of the credit actions we took last year should lead to a decrease in charge-off rates as we go through the year.

Got it. And then as a follow-up, can you just talk about how you're thinking about the RSA for '24? Do you think the new normal for this is below the 4% to 4.25% that you've outlined in the past?

Yes, Ryan, as I look at the RSA trend, the first quarter was impacted by higher net charge-offs. However, we should see an upward bias in RSA as we move through the remaining quarters of the year.

I guess my first question is on purchase volume. Obviously, that continues to remain weak. Could we just talk about how we get it back to a baseline that accelerates?

Sanjay, we're pretty pleased with the growth that we're seeing in the business. The consumer is still in good shape, and we're optimistic about future spending.

When you consider that we're comping off a strong quarter last year, a 2% increase is quite substantial. Our core home specialty business is performing well, showing double-digit growth.

We are seeing the consumer manage their spending prudently, and our transaction frequency is up even though transaction values are down.

Okay, very helpful. And I couldn't let you guys get away without a late fee question. Can you talk about how you're planning for a mid-May implementation and any observations on consumer behavior changes?

We're executing our plan for the changes we've identified. We're over 60% done with those, and the vast majority will be completed in the next two months.

I wanted to follow up on the product policy and pricing changes. What can we expect once those are fully phased in?

You should expect some initial impact in the second quarter, building into more significant impacts in the third quarter and beyond as we implement those changes.

What drove the margin decline this quarter relative to last year's first quarter?

The year-over-year net interest margin decline was primarily due to an increase in interest-bearing liability costs. However, we believe margin should improve as we move through the year.

Is your capital position strong enough to withstand potential changes from the CFPB?

Yes, we have excess capital and will continue to be disciplined with acquisitions that fit strategically within our business model.

Could you elaborate on how higher delinquencies might impact your reserve policies?

We will have to model the potential change in delinquency. We're preparing for various scenarios, but it's too early to tell the exact impact.

Can you talk about how consumer choices are affecting your market share?

We're pleased to see that we're gaining share among our partner programs. Our multiproduct strategy is proving beneficial. We're also focusing on small- and medium-sized businesses and health care providers, which have been an underappreciated part of our business.