Synchrony Financial (SYF) — Q2 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 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, and good morning everyone. Today Synchrony reported strong second quarter results, including net earnings of $643 million, or $1.55 per diluted share, a return on average assets of 2.2% and a return on tangible common equity of 20.2%. This performance is a testament to our differentiated business model. We continue to leverage our diversified portfolio of products and sales platforms, disciplined approach to credit underwriting and management, and innovative digital capabilities to further progress on our strategic objectives and to deliver sustainable, risk-adjusted growth and returns over the long term. Customer demand for Synchrony's product and value propositions remained strong during the second quarter as Synchrony added 5.1 million new accounts, grew average active accounts by 2%, generated $47 billion of purchase volume and delivered ending receivables growth of 8% compared to last year. Synchrony's proprietary data and analytics, in combination with our flexible financing solutions and dynamic technology platform, have been core drivers of our performance through evolving market conditions, particularly as we seek to responsibly address the needs of our customers and partners. And while our credit trends relative to pre-pandemic levels have outperformed most of the industry today, we have leveraged these strengths to take action in our portfolio where we have seen indications of higher probability of default. These credit actions, along with a more selectively spending consumer, have contributed to lower new account and purchase volume growth in the second quarter, but have also improved our recent delinquency trends and should strengthen our portfolio's credit trajectory in 2024 and beyond. At the platform level, purchase volume and receivables trends were generally consistent in the second quarter. Purchase volume growth ranged from up 2% to down 3% year-over-year, broadly reflecting lower consumer spend on bigger ticket items, particularly in categories like furniture, jewelry and vision, as well as the impact of the credit actions. Meanwhile, receivables growth across the platforms ranged from 6% to 15% higher versus last year, driven primarily by payment rate moderation. Dual and co-branded cards accounted for 42% of total purchase volume for the quarter and increased 2%. Synchrony's out-of-partner spend gives us deeper insight into recent customer trends as the broad utility of our offerings and compelling value propositions attract purchases across a range of categories, industries and products. Our customers continue to be discerning in their discretionary purchases, particularly in larger ticket categories such as home furnishings, travel and entertainment. They have been spending more at restaurants, though, and continue to spend at the pharmacy and on health and wellness needs, contributing to non-discretionary spend growth more broadly. That said, our customers are spending slightly less per transaction across most categories and credit grades, as average transaction values declined about 2% versus last year. Only our top credit segment saw growth in average ticket values during the second quarter. Customers across credit grades are transacting more frequently, however, which has generally offset most of the impact of lower transaction values. Altogether, we view these spend behaviors as appropriate and consistent with the payment rate normalization that began in our portfolio in 2023 and has continued since. Over the first six months of 2024, however, the pace of this payment rate moderation has decelerated across credit grades. And according to the external deposit data we monitor, there continues to be relative stability in savings balances compared to the rapid tapering that occurred through the middle of last year. When taken together, we believe these spend, payment and savings trends support our view that consumers are making healthy decisions to actively manage their cash flows. And these trends, coupled with the impact of our credit actions, give us confidence that Synchrony's net charge-off rate should be lower in the second half of this year than in the first half. As we continue to monitor the health of the consumer, our portfolio credit performance and that of the broader industry, Synchrony is also utilizing our proprietary insights and lending expertise to position our business for sustainable, risk-adjusted growth for many years to come. During the second quarter, we added or renewed more than 15 partners, including a program expansion and extension with Verizon and the addition of Virgin Red. We are excited about our continued partnership with Verizon and the opportunity we see to deliver maximum customer value on purchases made at Verizon. We are also proud to be the exclusive issuer of Virgin Red's multi-category travel card, the first ever Virgin Red Rewards World Elite Mastercard, which will connect members across the Virgin family from flights to cruises, hotels and experiences with points that never expire. Cardholders will earn Virgin points on all of their Virgin Red Rewards card spend, which can be used for a range of gifts and rewards, all while enjoying a first-rate digital experience from application to servicing. And as Synchrony continues to extend our reach and further optimize outcomes for both our customers and partners, we are incorporating strategic and technology-oriented partnerships to power more seamless digital experiences. Synchrony selectively works with second-look financing solutions to enhance the customer experience and our partner relationships. We recently announced an expanded relationship that will utilize a fully integrated solution spanning the full customer, apply and buy experience across all points of sale. Synchrony will own the point-of-sale platform and connect to the second source provider in a way that's seamless to both the partner and the customer that's applying. This collaboration will utilize our innovative technology and data to responsibly expand access to credit to more consumers, while also driving stronger loyalty and sales for the many small businesses, healthcare providers and retail partners we serve. Meanwhile, Synchrony launched our partnership with Installation Made Easy, a leading enterprise software and services company that supports retail-based home improvement programs. This partnership will enable Floor & Decor cardholders to use their Synchrony-issued credit card to finance both the materials and the installation service required for their home improvement projects through one streamlined process. We're excited about the opportunity we see to strengthen our position in the home improvement market and plan to scale this capability to additional retailers over time. So whether it's through the continued expansion of our distribution networks, the addition and renewal of programs that span most consumer spend categories, or the enhanced functionality at point of sale, Synchrony is leveraging our proprietary data and analytics, our diverse product suite, and our innovative technology to drive greater access, flexibility and utility for both our customers and partners. 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 second quarter results continue to demonstrate the resilience of our differentiated business model through an evolving environment. While consumers are managing their cash flows and consumption and the impact of our credit actions are beginning to season, we remain focused on driving sustainable, risk-adjusted growth. Turning to our financial performance. Ending loan receivables grew 7.9% to $102 billion in the second quarter, benefiting from an approximately 80 basis point decrease in the payment rate and reflecting growth across each of our sales platforms. Net revenue increased 13% to $3.7 billion, reflecting higher interest and fees, lower RSA and an increase in other income. Net interest income increased 7% to $4.4 billion as interest and fees grew 10%, primarily reflecting growth in average loan receivables. Our loan receivable yield grew 14 basis points, benefiting from product repricing actions and lower payment rates, partially offset by higher reversals as our net charge-offs increased. RSAs of $810 million in the second quarter were 3.21% of average loan receivables, down $77 million versus the prior year, driven by higher net charge-offs partially offset by higher net interest income. And the increase in other income primarily reflected a $51 million gain related to the exchange of our Visa B-1 shares, as well as initial fee-related impact of our product, pricing and policy changes, or PPPCs. These benefits were partially offset by the impact of the Pets Best disposition. Provision for credit losses increased to $1.7 billion, reflecting higher net charge-offs and a $70 million reserve build. Other expenses grew 1% to $1.2 billion, which was driven by technology investments, preparatory expenses related to late fee rule change and servicing costs related to newly acquired businesses, partially offset by the operational losses and cost discipline resulting from lower employee and marketing costs. The preparatory expenses related to the late fee rule changes reflected $23 million of incremental costs related to both the execution of our PPPCs and the implementation of the rule itself, should it become effective. Even with these incremental costs, Synchrony's efficiency ratio was 31.7% for the second quarter, an improvement of approximately 380 basis points versus last year. In sum, Synchrony generated net earnings of $643 million, or $1.55 per diluted share. This produced a return on average assets of 2.2% and a return on tangible common equity of 20.2%. Next, I'll cover our key credit trends on Slide 9. At quarter end, our 30-plus delinquency rate was 4.47% versus 3.84% in the prior year and 19 basis points above our historical average from the second quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.19% versus 1.77% last year and 18 basis points above our historical average from the second quarters of 2017 to 2019. And our net charge-off rate was 6.42% in the second quarter compared to 4.75% in the prior year and 62 basis points above our historical average from the second quarters of 2017 to 2019. Our allowance for credit losses as a percent of loan receivables was 10.74%, up 2 basis points from 10.72% in the first quarter. The reserve build in the quarter primarily reflected loan receivable growth. As shown on Slide 10, the credit actions we've taken thus far are improving our delinquency trajectory as the rate of year-over-year growth continues to decelerate. We will continue to closely monitor our portfolio performance and the credit trends for the broader industry given our share consumer and we will take additional credit actions as necessary. While these actions are reducing new account and purchase volume growth in the short term, we expect they will strengthen our portfolio's positioning as we exit 2024 and support our ability to deliver our targeted risk-adjusted returns over the long term. Turning to Slide 11, Synchrony's funding, capital and liquidity remain a source of strength. We grew our direct deposits in the quarter as consumers responded to our strong offerings while reducing our broker deposits. Deposits represented 84% of our total funding at quarter end and secured and unsecured debt each represented 8% of total funding. Total liquid assets and undrawn credit facilities were $23 billion, up $3.6 billion from last year, and represented 19.1% of total assets, up 124 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 make a final transitional adjustment to our regulatory capital metrics of approximately 50 basis points in January 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Under CECL transition rules, we end the second quarter with a CET1 ratio of 12.6%, 20 basis points lower than last year's 12.8%. Our Tier 1 capital ratio was 13.8%, 20 basis points above last year. Our total capital ratio increased 10 basis points to 15.8%, and our Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 23.9% compared to 22.8% last year. During the second quarter, we returned $400 million to shareholders consisting of $300 million of share repurchases and $100 million of common stock dividends. As of quarter end, we had $1 billion remaining of our share repurchase authorization for the period ending June 30th, 2025. Synchrony remains well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. Combining those results, Synchronon delivered a second quarter performance largely within our expectations. We remain focused on taking appropriate actions to prepare our business for years to come, including our ability to deliver our long-term targeted loss rate between 5.5% and 6% and average return on assets of at least 2.5% on average over time. We've been closely monitoring our performance and taking prudent credit actions in support of these objectives. And in preparation for the pending new rule on late fees and our desire to offset the impact on our business as soon as possible, Synchrony has completed the first phase of our PPPCs. Most of these actions will begin to go into effect in the second half of 2024, and we'll continue to track their financial and operational impact on our customers, partners and portfolio to determine alongside our partners whether any refinements to our strategies are warranted to achieve our shared objective. As a reminder, specifically related to the framework around the pending late fee rules and our PPPCs, there continues to be uncertainty regarding the timing and outcome of late fee-related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of late fee rule changes, and any potential changes in consumer behavior in response to the PPPCs we implement as a result of the new rule. Outcomes and actual performance related to these uncertainties could impact our outlook. With that framework, let's turn to the outlook for the second half of 2024. We expect the consumer to continue to manage their cash flows and consumption, which, when combined with our credit actions, should result in flat to low-single-digit decline in purchase volume. We continue to expect payment rates to moderate, which, when combined with our purchase volume expectations, should contribute to more moderate loan receivable growth in the second half. Excluding the impact of late fee rule implementation, we expect net interest income and other income to progressively grow in the third and fourth quarters as our PPPCs take effect. From a credit perspective, delinquencies should continue to trend in line with or better than seasonality. We expect our net charge-off rate to be lower in the second half of this year than the first half. Our reserve coverage ratio at the end of 2024 is expected to be generally in line with our year-end 2023 reserve rate. RSA will continue to align with program and company performance. And finally, we expect other expenses to trend in line with the first-half average on a dollar basis. When you combine these factors and include the impact of the late fee rule assuming an implementation date of October 1st, 2024, along with the various offsets from the implementation of our PPPCs and the $1.96 per share gain on the sale of our Pets Best business in 1Q '24, Synchrony expects to deliver fully diluted earnings per share between $7.60 and $7.80 for the full year. This consolidated and updated EPS range is at the upper end of our prior guidance and reflects Synchrony's dedication to delivering optimized outcomes for our many stakeholders, including strong risk-adjusted returns for our shareholders. I will now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. Synchrony continues to execute at a high level in an evolving environment. We are leveraging our scale, our data analytics and credit management tools, our advanced digital capabilities, and our deep lending expertise to remain nimble and responsive while powering still better experiences and greater value to the customers, partners, providers and small businesses we serve. We are consistently driving compelling results for our many stakeholders, and that momentum is increasingly attracting new and deepening existing opportunities for continued risk-adjusted growth, further embedding Synchrony at the heart of American commerce. 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.

Good morning. Thank you for taking my question. I wanted to start with just the health of the consumer. It sounds like the consumer is coming in a little weaker than you had maybe anticipated between purchase volume being lower, reserve rate a little higher. First, I guess, is that a fair statement? And if so, can you just comment on what other changes that is driving? Is it signaling that you need to tighten underwriting? Are you continuing to tighten underwriting? Is that broad-based? Is it about tweaking around the edges? Just how are you thinking of the consumer heading into the back-to-school season here? And just trying to understand your view on the consumer -

Yes. No, thanks for the question. I think, well, generally, I think in the aggregate the consumer is still in pretty good shape. I think the trends that we're seeing are pretty similar across the industry. Obviously labor market is strong. That's definitely helping. I think most of the indicators so far are largely in line with what we expected to see. With that said, as you kind of dig into the portfolio, there are clearly some differences as well, as you look at different customer cohorts. The more affluent higher-income segments are still spending. They're not really as impacted by inflation. On the other end of the spectrum, you are starting to see the lower-income consumer pull back a bit. They're rotating into non-discretionary categories. So it's clear that they're feeling the effects of inflation and they're managing to a budget. And so while you're seeing that impact, purchase volume of the debt, new accounts, we think that's actually a positive from a credit perspective. People are being disciplined. That's a good thing. We don't see people overextending. So they're managing their spend and their cash flows, which again, I think is a positive from a credit perspective.

Staying on the topic of credit, regarding the reserve rate guidance, it seems that you're now indicating it will align with 2023 by the end of 2024, whereas previously it was projected to be slightly better than 2023. You noted that the delinquency rate is performing in line with or better than seasonal expectations. Were you anticipating greater improvement than what has materialized? I'm trying to grasp the reasons behind the higher guidance on the reserve rate and whether this suggests that net charge-offs for 2025 will be comparable to those in 2024.

Thank you for the question, Mihir. At the beginning of the year, everyone had their expectations about how the economy would evolve, how inflation might change, and how interest rates could decrease. As Brian pointed out, consumers are managing their finances, but the prolonged period of high costs, especially for those with lower to medium incomes, presents certain risks. Now, as we reach the middle of the year, we had hoped for more progress toward our inflation target, despite recognizing that the situation is complex. Initially, we anticipated three rate decreases for the latter half of the year, but we now expect only one. This indicates a shift in our outlook. We are adopting a more cautious approach regarding macroeconomic forecasts until we observe clear signs that inflation is easing and that consumers are receiving some relief. Our overall stance is not dramatically different, but it is somewhat more conservative in balancing our quantitative and qualitative reserves.

Thank you for taking my question.

Thanks, Mihir.

Hi. Thanks. Good morning. Based on the rollout of your PPPCs, is the $650 million to $700 million range still appropriate to consider for the second half? Additionally, can you quantify how that range might change if the late fee cap is not implemented this year?

Thank you for the question, Terry. I'll begin with your last point. Currently, there are ongoing activities in the Texas courts, and as both Brian and I have mentioned, the situation remains uncertain. Our best estimate for an implementation date is October 1st. However, until we receive more concrete information about whether the rule will be effective on that date or another, we don’t have an update on its potential impact if it does not go forward. Once we have more clarity regarding the implementation date, we will certainly provide an update. Regarding the impact of the PPPCs, we have provided updated guidance today. If you consider the midpoint of both the core and late fees based on the assumed October 1st implementation date, and add in the Pets Best, you’re looking at the midpoint to high end of the EPS range, which reflects our perspective on both the core business and the actions we are taking concerning the potential change in late fees.

Got it. Okay. That's helpful. And then in terms of the RSA, how should we think about that, how that would trend in the second half, as you were kind of that again start rolling in?

Certainly. A way to approach this, Terry, is to consider the elements that will be involved. We have already mentioned that the loss rate in the second half will be lower than in the first half, which positively influences the RSA percentage. In the third quarter, you can expect some of the PPPC initiatives to have an effect, leading to a further increase in the RSA. However, in the fourth quarter, this might change with the implementation of late fees on October 1st. Additionally, the RSA will likely align with growth in net interest income, which may benefit from a modest decline in purchase volume. There will be various factors at play, with some acting as challenges and others providing support.

Yes. Got it. Thank you.

Thanks, Terry.

Yes, thank you. I understand there are many factors affecting the net interest margin for the second half of the year, considering the implementation of certain programs and the potential impact of late fees. Could you, Brian, provide some insight into these factors and your expectations for the net interest margin in the latter half of the year?

Sure. Thanks for the question, Mark. So here's a framework how I think about some of the moving pieces you got to take into consideration, right? Number one, as we talked about, net charge-offs being lower in the second half versus the first half, you'll get a benefit to the net interest margin, right, relative to lower reversals. So that's a positive to the net interest margin. I think when you look at the net funding costs, so the interest expense and the investment income, that's probably going to be flattish to the back half of the year. You will pick up and there'll be a benefit into the net interest margin relative to the mix between average loan receivables and average interest-earning assets. So that will be a positive to NIM. You will pick up and you should see it in the third quarter some of the PPPC actions that are yield-related. So again, some of the things that were strictly APR related, some of the practices related to how interest was assessed and a little bit related to some promotional fees that roll into place. And you should see, again, hopefully a little bit benefit on the interest and fee line. So, generally there should be a positive trend up from where we move here into the back half of the year.

Okay. That's helpful. And are there any contemplated PPPC measures that you've yet to put in place and are waiting for either to see how the consumer behaves or for actual implementation of the changes to the late fee rules?

Yes. What our team has gone through, the first wave that we've executed against that are ones that we have fully vetted internally with ourselves and then with our partners. So they are fully executed. There are other things down the road that are probably a little bit longer tail and we're still continuing to evaluate some around product configuration and other types of products for different segments inside the portfolio. So that's not necessarily part of the initial solve, but that may be a reaction that we come back with over time but wasn't necessarily critical to us to try to achieve the goal of being ROA neutral with the same level of sales.

Got it. Thank you.

Thanks, Mark. Have a good day.

Thanks, Mark.

Great. Thanks. Just continuing on that idea of the pricing changes. I know it's early, but have there been kind of impact on the consumer side that you can kind of see or talk about positive or negative from the pricing changes that you've put in place?

Thank you, Moshe, for the question. We have a comprehensive monitoring dashboard that tracks various metrics. It starts with purchase active rate and sales per account, and also includes voluntary closure rates, call volume, complaint volume, and other measures relevant to this area. It's important to note that the first wave is complete now, with only the CITs mailed in December having a full quarter. When we review the dashboard as a whole, it aligns generally with our expectations. As we move into the third quarter, we anticipate gaining a clearer perspective on consumer adoption. We have observed some positive trends regarding e-bill adoption, among other things. We closely monitor these metrics, and the dashboard is shared with a broad range of individuals within the organization as we assess it and share insights with our partners.

Got it. Thanks. And Brian, you talked a little bit about the delinquency and loss rates relative to the 2017 to 2019 averages. Given that you've kind of said and reaffirmed that they will continue to improve and be lower in the second half and possibly better than seasonals, I guess, how do you see that? Assuming employment levels are stable here, how would you see that kind of trending towards those averages? How close could they get? And what is it that would then kind of get you to the point where you could think about neutralizing or reversing some of those tightening efforts?

Yes, I think it's important to take a step back. First, we've lagged the industry when it comes to normalization. Looking at how much we exceed our 2017 to 2019 range, aside from maybe one or two issuers, we are actually performing quite well. Our 30-plus delinquencies are 19 basis points higher than the historical average, and our 90-plus delinquencies are 18 basis points above the historical average. Regarding the second quarter, on a 30-plus basis, we're a few basis points better than seasonal expectations, and for 90-plus, we were 1 to 2 basis points below, which aligns with or is slightly better than seasonality. We will be monitoring how the macro environment evolves. Currently, consumers are managing, and as they begin to see relief, we will reassess the situation. However, I do not anticipate any adjustments to those refinements in the near term until we have more clarity on the broader environment.

Okay. Thank you.

Thanks, Moshe. Have a good day.

Hi, good morning, everyone.

Hi, Ryan.

Morning, Ryan.

Maybe sticking with the late fee topic. Given the range of things that have been added, APRs, paper statements, trailing interest and the like, obviously markets have become hopeful that the rule could get delayed or may roll in favor of the industry. And I'm just curious, in a scenario, in a positive outcome for the industry, when you think about the range of changes you've made, what changes do you foresee sticking versus others that there's the potential you may pare back over time?

Yes. First of all, good morning, Ryan. The first thing I think we have to have certainty, right, relative to whether or not the late fee rule, if it is delayed or ultimately overturned by the courts, whether or not the CFPB would continue down the path of pursuing some type of limitation on late fees. So I think you have to have some level of certainty beyond that. I think when you think about the pricing change, first and foremost, we're going to look at consumer behavior and whether or not consumer behavior changes here and whether or not changes would be warranted. I think when you step beyond that, there's probably two buckets, Ryan. The first bucket is one that involves our partners and RSAs. And there we would go and share the data with our partners and have a discussion with regard to pricing and make some decisions with their input. And then bucket B is things that are inside our brand and control. So you think about our Synchrony Mastercard, our Home & Auto cards, things like that, that we would control, but obviously we do that. It's fair to say not everything would ever get rolled back. But to be honest with you, Ryan, we have not spent a lot of time as a team going through this scenario. Right now, we're really focused on implementing the PPPCs and following the developments in the court being prepared, I think, for the outcome that the late fee rule goes into effect.

Got it. And then if you look at how new accounts have progressed, obviously they're down a decent amount year-over-year, which makes sense given the discussion regarding tighter underwriting. But as you look ahead, given the tightness that it doesn't sound like we're going to be rolled back right now, you also have some payment rate normalization. How do you think about the pace of loan growth over an intermediate time frame?

Yes. So first, let me just focus for a little bit on new accounts, the 14%. There's probably two big buckets there, Ryan. The first is, we are seeing, and Brian talked about this with discretionary spend and some of the things where the consumer is managing their spend levels. We are seeing lower foot traffic and lower retail traffic, both in a physical footprint as well as in a digital orientation. So the through-the-door population most certainly is limiting some of the opportunities to generate new accounts. And then obviously you've had a modest impact from credit actions with regard to doing that. That will impact growth more so in '25 than it does really in '24, right? So you think about an account build that probably takes about 12 months or so to kind of get to a average balance per account that's more mature. So I think you're going to feel a little bit of pressure here. I do think given our position with most of our partners, you would see probably something above GDP level and will continue to grow. Most certainly, when you look at the platforms, we're excited about the Health & Wellness growth we continue to experience, even though there's some pullback there in cosmetic and LASIK, for example. But that is a strength for us. We continue to have strength in some of the other platforms, like our Home Specialty business and Home & Auto. So, again, we're not going to necessarily give guidance, but I think there are some positive things inside of the sales platforms that will hopefully bridge us into a better economic period.

I think the other thing I would add, Ryan, the active account growth that we're seeing, we actually probably watch that even more than new account growth because we've been making big investments in lifecycle marketing and figuring out across all of our platforms, how do you engage that customer in the second and third, fourth purchase. And so just seeing that positive inflection year-over-year I think is a positive. And then, look, the consumer is still in a good spot, but we are seeing lower store traffic and some pullback there. And then we're obviously proactively making some credit actions that'll improve the trajectory into next year. So overall, we feel pretty good about the trends that we're seeing.

Awesome. Appreciate the color.

Yes. Thanks, Ryan.

Thanks, Ryan.

Thank you. Good morning. I would like to follow up on some of the questions regarding credit quality. Brian Wenzel, I've heard you discuss some of the changes made to refine underwriting in the past. Are we seeing the benefits of that now, indicating potential improvement in delinquency rates? Additionally, considering previous questions, shouldn't the combination of tighter underwriting and slower loan growth enhance credit quality? Is this just a cautious approach in your credit outlook, or is there another reason for the flat reserve rate this year? Thank you.

Good morning, Sanjay. Thank you for your question. We began our credit actions in the second quarter of last year and continued into the third quarter, with further initiatives starting in the latter part of the first quarter of this year. You can see the impact of these actions reflected in the moderation of year-over-year delinquencies, as shown on Page 10 of our earnings presentation. This impact is evident in current delinquency trends, but it will take time for the full effects to be realized. Therefore, you can expect the benefits of these measures to continue to develop. The actions implemented in the second quarter of this year might have a slightly diminished impact this year, with more significant effects expected as we transition from 2024 to 2025. Overall, we are not taking broad-based actions at this time; we are prepared to do so if circumstances worsen. For now, we are focusing on our usual refinements, which are more specific to our partner portfolio, product, and channel levels.

Okay. And I have a question for Brian Doubles' follow-up. Maybe you could just talk about the state of potential partnership opportunities or deals for portfolios. Anything changed relative to the previous quarter? Thanks.

Yes, Sanjay. I believe we have a strong pipeline of opportunities that remains consistent. We are set apart from our competitors through our technology investments, partnerships, and integrations, which appeals to both our current partners and new prospects. I feel optimistic about this. In the current uncertain environment, we see more rational pricing and greater discipline in the industry, which is beneficial. During the more volatile periods of 2021 and 2022, pricing could become irrational at historically low loss rates. We always adjust our pricing through market cycles, and we will keep doing that. Right now, the industry environment and competitive landscape seem quite rational. I'm confident in our position and our good pipeline of opportunities.

Great. Thank you.

Yes. Thanks, Sanjay.

Thanks, Sanjay.

Good morning, everybody, and thanks for taking my questions.

Hi, Rick.

Thanks, Rick.

Look, I'd love to talk a little bit, you've moved guidance to sort of the upper end of your prior range, and I'm curious how much of that is a function of timing, favorable timing with PPPC implementation versus late fee, how much is a function potentially of slower loan growth into the second half of the year and a favorable impact on reserves and whatever other fundamental factors might be driving that.

Thank you for your question, Rick. From my perspective, I don’t see any significant issues with the timing of our execution. We have successfully met all our deliverables. Considering the complexities involved, we have adhered to our timelines, and everything is progressing as scheduled. There aren’t any major timing concerns. I believe our movement toward the mid to higher end of the range reflects overall business performance. While purchase volume may be slightly below expectations, consumers appear to be managing well without stress. As we evaluate different factors, funding costs have stabilized moving into the latter half of the year. Our expenses, which we haven’t discussed much, are only up 1%, including a $23 million cost related to changes in execution that could have otherwise resulted in a decrease, which I see as a positive outlook. The business remains focused on our goals this year, including managing the core business, rolling out PPPC changes, integrating Ally Lending, and addressing Pets Best. The team's commitment to execution is what has led us to the mid to higher end of our range.

Great. Brian, thank you very much. It's incredibly helpful.

Thanks, Rick.

Thanks. Good morning, everyone. I wanted to ask about capital. So in contrast to many banks that are still dealing with large AOCI marks, you guys appear to have greater clarity on the level of capital that you're going to need to run with. And therefore, it seemed like you may be in a better position to perhaps return the capital in excess of your target a little bit more aggressively relative to those who are still accreting capital to sort of plug that AOCI hole. Can you speak to that dynamic and how we should think about like the trajectory of that excess capital position relative to the 11% target you've talked about historically?

Yes. Thanks, Bill, for the question. We've been on a journey. You've heard me talk about this a number of times. When we separated from our former parent, we started out and got to a peak of CET1 of 18%. And then there's been a journey down where today we're at 12.6%. We have an excess relative to the target. We're continuing on the path, right? But our first priority is always going to be organic RWA growth. Our second is going to be the dividend. And then third will be what we do with share repurchases or inorganic. And Brian talks about the discipline we have around inorganic growth. So we have the ability to do that. I think we're going to be prudent with regard to the way in which we return it back to shareholders. We're not going to just drop it tomorrow because obviously, we have many stakeholders here who would not necessarily agree with that action. But we are on a trajectory and moving towards our target, which has always been our long-term goal.

Thanks. Thanks, Brian. That's helpful. And then I guess as a follow-up on your expectation of a stable reserve rate at the end of '24 versus '23. It seems like your expectation of a more favorable loss trajectory in your reasonable and supportable forecast period under CECL would be supportive of reserve releases, all else equal. So is the takeaway that your outlook is essentially de-risked and now embeds greater conservatism? Just trying to get a sense for when you'd feel comfortable getting that reserve rate back to the day one level and whether we should be thinking of that more as a 2025 event.

Yes, most certainly it's not going to be 2024 event, right? As I said, it's flattish to last year. It really goes back to when do we have greater clarity. Across the industry, everyone has greater clarity with regard to the macroeconomic. When are we going to get back to a more normalized interest rate environment, more normalized inflation environment, which makes the everyday cost for our consumers, a shared consumer across the industry much more manageable? It's that uncertainty that I think will give people pauses in how they run the different scenarios and have their qualitative assessments. That's probably the largest wildcard. Obviously, you're going to have to watch how your portfolio delinquencies develop and mix, but it's really getting clarity on that environment. So again, I think being prudent now is a better course.

Understood. That makes a lot of sense. Thanks again for taking my questions.

Thanks, Bill. Have a good day.

Hi, good morning, guys.

Morning.

By the time we get to October the 1st, will you guys have implemented your PPPC at substantially all of your partners at that point or is there a segment that opted to wait on those until the rule actually takes effect? And how large is that segment, if you have a sense?

Yes. Look, as Brian said, we've completed the first phase that covers a substantial part of the business. We do have one or two partners where we've largely agreed on what we would do, but we are waiting for the rule to be effective. Again, that doesn't change our view that we will fully offset this. We'll get back to pre-late fee ROAs, and we'll still support the customers and underwrite the customers that we do today.

The only thing I'd add, Dave, is there is a tail, right, with regard to this, right? Because accounts that we originated in the back half of last year, we wouldn't give them a change in terms six months after we just originated account or three months after we originated the account. So there will be a tail that goes on here for a long period of time as well as the number of inactive accounts that become active. Once they become active, they'll get a CIT. So it takes a long time to get to 100% under any scenario, but this will go on. That's part of normal course. And any time we do a CIT, that is kind of a regular course of action.

Got it. That makes a lot of sense. Appreciate that. And then to follow up on Ryan's question from earlier, in the scenario where the late fee rule is shot down regarding the changes that stick. I know you haven't given us a ton of thought yet, and that's understandable. But based on your early assessment of consumer reactions so far and your dialogue with your partners and the fact that there's a good amount of expense associated with implementing those changes, is there any reason you've seen so far to indicate you would want to unwind the APR changes, or would those be the easiest changes to leave in place? Thanks.

Yes. As Brian mentioned earlier, we will have discussions with our partners regarding the portion of the book that we manage. We'll examine changes in consumer behavior, although it's still quite early in the process. The CITs are just beginning to be integrated into the statements, and we're only starting to observe very minor shifts in customer behavior, which we need to keep an eye on. As Brian pointed out, we are attentive to this and will make adjustments if necessary. However, we're not anticipating a situation where the rule won't be implemented. We need to focus on the factors we can control, such as pricing and policy changes, which we have already addressed. We believe we have a strong case regarding the litigation of the rule, but there is still uncertainty. Therefore, our focus will remain on what we can manage effectively.

Great. Thanks, guys.

Yes. Thanks.

Thanks, Dave. Have a good day.

Good morning, everyone, and thank you for addressing my question. I believe all my queries have been answered, but I have one additional question. You renewed your contract with Verizon this quarter and also brought on Virgin. Considering the ongoing uncertainty surrounding the late fee issue, have there been any changes in how you approach negotiations for new contracts?

Yes. So let me start and I'll ask Brian to comment. Look, first, we're very excited to launch what we think is a very unique, one-of-a-kind program with Virgin Red. It'll span air travel, hotel, cruises. We're tapping into a very strong, loyal customer base. So we could not be more excited to partner with Virgin Red on this new product. Equally as excited to renew Verizon. It's been a strong program for us, great relationship, and so we're really excited about that as well. Certainly, the late fee issue has crept its way into negotiations, new business, renewals, unsurprisingly, but there are ways to structure around this. So we have certainly contemplated an $8 late fee in every program that we've renewed since the rule was published, as well as anything that we've extended.

Yes. The only thing I'd add is that in structuring our pricing, we are factoring in an $8 late fee. While we have protections in place for potential increases, there could be elements that work in our favor with our partners. Even when we consider the portfolio we acquired in the second quarter from another issuer, we are relatively safeguarded with the $8 late fee. We are simply taking a more cautious approach to pricing. Despite our optimism about the industry's chances against the rule, we are not relying on that when pricing long-term deals that span seven to ten years.

Great. Appreciate the color, guys. Thanks very much.

Thanks, John.

Thanks, John. Have a good day.

Yes. Can you talk a little bit about the '23 vintage, just how that's performing? You've got another quarter under your belt relative to your expectations, and maybe '22. And I know you haven't had as much sort of volatility versus general purpose.

Yes. Thank you for the question, Don. To provide some context, I want to compare our performance against the industry. If you look at data from the credit bureaus and examine the industry vintage curves, you'll see that our portfolios are performing better than the industry averages in terms of delinquency rates and cumulative net charge-offs. However, we have noted that there is a shared consumer base, and we are experiencing the impact of actions taken by other issuers as they adjusted their credit criteria after the pandemic and issued some of the highest volumes in credit card history. Looking at the specifics, delinquencies from the second half of 2021 through the first half of 2023 are performing slightly worse than the 2018 vintage. The 2019 data is somewhat skewed due to the pandemic. For the second half of 2023, although it is early to draw conclusions, early indications for 2024 show improved performance compared to the first half of 2023, thanks to the credit actions we've implemented. From a charge-off perspective, the second half of 2023 and the first half of 2024 are performing better than the 2018 figures. The modifications we've made in our credit actions seem to be supporting the vintages. There is some shared consumer behavior from late 2021 into early 2023 that has caused trends above our historical delinquency rates, but overall, we are optimistic about how the vintages are progressing.

Thanks, Brian.

Great. Thank you.