Synchrony (SYF) Up 7.2% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Synchrony (SYF). Shares have added about 7.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Synchrony due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Synchrony Q3 Earnings Beat on Growing Purchase Volume
Synchrony Financial reported third-quarter 2023 adjusted earnings per share of $1.48, which beat the Zacks Consensus Estimate by 2.8%. The bottom line rose 0.7% year over year.
Net interest income improved 11% year over year to $4,362 million, beating the consensus mark by 1.6%.
Synchrony Financial’s strong third-quarter results benefited on the back of higher interest earned, thanks to a high-interest rate environment, expanding average loan receivables and elevated benchmark rates. However, increased expenses and provision for credit losses partially offset the upside.
Q3 Results in Detail
Other income of Synchrony Financial amounted to $92 million, which surged 109.1% year over year in the third quarter and beat our estimate by more than one-fold due to higher interchange revenues and debt cancelation fees.
Total loan receivables of Synchrony Financial grew 14% year over year to $97.9 billion but lagged behind our estimate of $98.1 billion in the quarter under review.
Total deposits came in at $78.1 billion, which rose 14% year over year. Provision for credit losses increased 60.2% year over year to $1,488 million due to increased net charge-offs and a reserve build.
The purchase volume of Synchrony Financial advanced 5% year over year to $47,006 million in the third quarter. However, the figure lagged our estimate by 5.2%.
Interest and fees on loans of $5,151 million improved 21% year over year, which outpaced our estimate by 3.2% on the back of a growing average loan receivables portfolio, increased benchmark rates and lower payment rates. Net interest margin deteriorated 16 basis points (bps) year over year to 15.36%.
New accounts of 5.7 million slipped 2% year over year. Average active accounts increased 6% year over year to 70.3 million in the third quarter.
Total other expenses of Synchrony Financial amounted to $1,154 million, up 8.5% year over year but 0.1% lower than our estimate due to investments in technology and operational losses. The efficiency ratio of 33.2% improved 330 bps year over year in the quarter under review.
Individual Sales Platforms' Update
Home & Auto period-end loan receivables climbed 9.1% year over year to $31,648 million on the back of lower payment rates. Purchase volume of $12,273 million remained flat year over year in the third quarter. Interest and fees on loans grew 13% year over year to $1,367 million, beating our estimate of $1,315 million on the back of growth in loan receivables and increased benchmark rates.
Digital period-end loan receivables of $26,685 million rose 16.4% year over year in the quarter under review on lower payment rates and higher purchase volume. Purchase volume came in at $13,808 million, up 6.7% year over year on the back of growing average active accounts. Interest and fees on loans climbed 27.8% year over year to $1,530 million, beating our estimate by 4.8%, driven by growth in loan receivables, higher benchmark rates and maturing newer programs.
Diversified & Value period-end loan receivables grew 13.9% year over year to $18,865 million in the third quarter on higher purchase volume and decreased payment rates. Purchase volume of $15,445 million improved 6.9% year over year, attributable to solid out-of-partner spending, impressive retailer performance and penetration growth. Interest and fees on loans advanced 24.9% year over year to $1,168 million, beating our estimate by 5.3% on higher loan receivables and benchmark rates.
Health & Wellness period-end loan receivables of $14,019 million rose 21% year over year in the quarter under review on increased promotional purchase volume and reduction in payment rates. Purchase volume climbed 13.5% year over year to $3,990 million on the back of strong active accounts growth, mainly in Dental, Pet and Cosmetic. Interest and fees on loans improved 19.5% year over year to $844 million, which outpaced our estimate of $799.6 million on higher volume and loan receivables.
Lifestyle period-end loan receivables advanced 14% year over year to $6,483 million in the third quarter on growing purchase volume and reduced payment rates. Purchase volume of $1,490 million grew 8.4% year over year, thanks to higher transaction values in Outdoor and Luxury. Interest and fees on loans climbed 19.7% year over year to $249 million, which lagged our estimate by 18%.
Financial Position (as of Sep 30, 2023)
Synchrony Financial exited the third quarter with cash and equivalents of $15,643 million, which increased from $10,294 million at 2022-end.
Total assets of $112.9 billion rose from $104.6 billion at 2022-end. Total borrowings advanced to $15,231 million from $14,191 million at the end of 2022.
Total equity of $13,767 million increased from $12,873 million at the end of 2022.
Synchrony Financial’s balance sheet was consistently strong in the reported quarter, with total liquidity of $20.5 billion accounting for 18.2% of its total assets.
Return on assets of 2.3% deteriorated 50 bps year over year in the third quarter, while return on equity contracted 300 bps year over year to 18.1% in the same time frame.
Capital Deployment
Synchrony Financial returned capital worth $254 million through share buybacks of $150 million and paid common stock dividends of $104 million in the third quarter. It had a leftover share buyback capacity of $850 million at the end of September 2023.
2023 Guidance
The company continues to expect loan receivables growth to be around 11% for this year. In 2022, loan receivables registered 14.5% year-over-year growth. The company anticipates payment rate moderation to continue but stay above the pre-pandemic levels.
Net interest margin is now anticipated to be around 15.15%, indicating a deterioration from the 2022 reported figure of 15.63%. The company expects the metric to remain consistent with the first-half levels. It expects interest and fees to grow going ahead.
Net charge-offs are now projected to be around 4.85%, which indicates an increase from the 2022 reported figure of 3.00%. The company expects net charge-offs to keep increasing but not reach pre-pandemic levels before 2024.
Management expects quarterly operating expenses of $1,150 million for 2023.
Even though the continuous high-interest rate environment is helping companies like Synchrony Financial earn higher interest income, it will likely affect consumers’ spending levels. Losses are expected to build up on cards as well as office real estate.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
The consensus estimate has shifted 11.29% due to these changes.
VGM Scores
Currently, Synchrony has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Synchrony has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Synchrony is part of the Zacks Financial - Miscellaneous Services industry. Over the past month, Euronet Worldwide (EEFT), a stock from the same industry, has gained 11.7%. The company reported its results for the quarter ended September 2023 more than a month ago.
Euronet Worldwide reported revenues of $1 billion in the last reported quarter, representing a year-over-year change of +7.8%. EPS of $2.72 for the same period compares with $2.74 a year ago.
Euronet Worldwide is expected to post earnings of $1.75 per share for the current quarter, representing a year-over-year change of +25.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.5%.
Euronet Worldwide has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.
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