Synchrony Financial (NYSE:SYF) Q4 2023 Earnings Call Transcript
Synchrony Financial (NYSE:SYF) Q4 2023 Earnings Call Transcript January 23, 2024
Synchrony Financial beats earnings expectations. Reported EPS is $1.03, expectations were $0.96. Synchrony Financial isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Synchrony Financial Fourth Quarter 2023 Earnings Conference Call. Please refer to the company's Investor Relations website for access to their earnings materials. Please be advised that today’s conference call is being recorded. Currently, all callers have been placed in listen-only mode. The call will be opened up for your questions following the conclusion of management's prepared remarks. [Operator Instructions] I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. You may begin.
Kathryn Miller: 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.
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 continue 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, 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.
Brian Wenzel: 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 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 on Slide 10. 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 slide 12, Synchrony's balance sheet continues to be a source of flexibility and strength. 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 Slide 14, let's review 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 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. And 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.
Brian Doubles: 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.
Kathryn Miller: 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, Investor Relations team will be available after the call. Operator, please start the Q&A session.
See also Morgan Stanley is Recommending These 13 Stocks for 2024 and 11 Hyper-Growth Stocks Billionaires Are Loading Up On.
To continue reading the Q&A session, please click here.
