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Synchrony Financial Has Some Questions to Answer

- By John Engle

Synchrony Financial (SYF) began life as a subsidiary of GE Capital, but was spun off by parent General Electric Co. (GE) in 2014 when it began unwinding its overgrown financial arm. Since then, the company has established itself as the largest provider of private label credit cards in the United States.

Business has been good to Synchrony of late, yet the market has barely reacted to its strong performance. The problem seems to lie in its high exposure to credit card debt, which, in the event of a serious downturn, could prove a big problem to the financial institution.

Overall, it seems as if the market is waiting for greater understanding of the credit risk Synchrony now faces. Let's take a look at the company and where it might be headed.

Latest earnings release bodes well

For the third quarter, Synchrony posted earnings of $671 million, or 91 cents on a per-share basis, up substantially year over year. An added boost to the company is the recent closure of a partnership with PayPal (PYPL).


In all, the latest quarterly report had much to say that was positive. In a statement, President and CEO Margaret Keane said:

"We generated strong results this quarter, adding a top new program with the completion of the acquisition of the U.S. PayPal Credit program, while also continuing to drive organic growth. In addition to renewing key partnerships, we won exciting new programs. We have also been expanding our valuable CareCredit network, entering more than 25 new markets over the last several quarters. We continue to invest in our digital capabilities and network, focusing on ease of card use across platforms, as well as card utility, enhancing our competitive position in the rapidly changing marketplace. We are also seeing other important elements of our business, such as credit quality, continue to perform in-line with our expectations."

All of that sounds solid, so why is the market not responding with excitement?

Market still worried

The big issue is the fact Synchrony has high exposure to credit card debt. Its deal with PayPal Credit has exacerbated this to a degree, since it paid $6.9 billion for $7.6 billion in PayPal receivables.

While Synchrony is expanding dramatically, the fear is that that expansion will simply result in a higher (perhaps unsustainable) proportion of bad debt. In the third quarter, Synchrony's loan loss provision was $1.45 billion.

Given the ballooned receivables from PayPal Credit and other expanded partnerships, this may prove insufficient. Given Synchrony's net income, it would not take all that much additional loss provision to erase any net income. One worrying sign is the 30-plus days past due figure, which has now risen above $4 billion. If that persists, an increased loss provision may be unavoidable. Add the risk of a downturn or tightening economy and the picture could get ugly very quickly.


Synchrony Financial is a difficult stock to judge. It is bringing in solid and growing earnings while engaging in creative and ambitious expansion. But the risk of bad debt is mounting and, in the current market cycle, it may be at greater risk. Buying the growth opportunity may prove a success, but it comes with considerable risk to the downside.

Disclosure: No positions.

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This article first appeared on GuruFocus.