Synchrony (SYF) Q2 Earnings Beat on Growing Interest Income
Synchrony Financial SYF reported second-quarter 2023 adjusted earnings per share of $1.32, which beat the Zacks Consensus Estimate of $1.22. However, the bottom line plunged 17.5% year over year.
Net interest income improved 8.4% year over year to $4,120 million, beating the consensus mark by 0.6%.
It reported better-than-expected second-quarter results 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.
Synchrony Financial Price, Consensus and EPS Surprise
Synchrony Financial price-consensus-eps-surprise-chart | Synchrony Financial Quote
Q2 Results in Detail
Other income of Synchrony Financial amounted to $61 million, which dropped 69.2% year over year in the second quarter and missed our estimate by 59.9% due to lower gains. In the year-ago quarter, the company registered a $120 million gain on portfolio sales.
Total loan receivables of SYF grew 14.7% year over year to $94.8 billion and surpassed our estimate of $94.1 billion in the quarter under review.
Total deposits came in at $75.8 billion, which rose 17.1% year over year. Provision for credit losses jumped 91% year over year to $1,383 million due to increased net charge-offs and a reserve build.
The purchase volume of Synchrony Financial advanced 0.1% year over year to $47,276 million in the second quarter. However, the figure lagged our estimate by 6.6%.
Interest and fees on loans of $4,812 million improved 19.1% year over year and outpaced our estimate by 5.8% on the back of a growing average loan receivables portfolio and increased benchmark rates, partly offset by divested portfolios in the year-ago period. Net interest margin deteriorated 66 basis points (bps) year over year to 14.94%.
New accounts of 5.9 million slipped 1% year over year. Average active accounts increased 1% year over year to 69.5 million in the second quarter.
Total other expenses of SYF amounted to $1,169 million, up 7.9% year over year and 3.7% higher than our estimate, due to increased employee costs, professional fees and information processing costs. The efficiency ratio of 35.5% improved 220 bps year over year in the quarter under review.
Individual Sales Platforms' Update
Home & Auto period-end loan receivables climbed 10.5% year over year to $30,926 million on the back of lower payment rates. Purchase volume of $12,853 million decreased 0.3% year over year in the second quarter. Interest and fees on loans grew 15.1% year over year to $1,275 million, beating our estimate of $1,238.8 million on the back of growth in loan receivables and increased benchmark rates.
Digital period-end loan receivables of $25,758 million rose 17.9% year over year in the quarter under review, on lower payment rates and higher purchase volume. Purchase volume came in at $13,472 million, up 8.1% year over year on the back of growing average active accounts. Interest and fees on loans climbed 34.4% year over year to $1,422 million, beating our estimate by 9.3%, driven by growth in loan receivables, higher benchmark rates and maturing newer programs.
Diversified & Value period-end loan receivables grew 14% year over year to $18,329 million in the second quarter on higher purchase volume and decreased payment rates. Purchase volume of $15,356 million improved 6.7% year over year, attributable to solid out-of-partner spending, impressive retailer performance and penetration growth. Interest and fees on loans advanced 32.1% year over year to $1,091 million, beating our estimate by 8.3% on higher loan receivables and benchmark rates.
Health & Wellness period-end loan receivables of $13,327 million rose 21.9% year over year in the quarter under review, on increased promotional purchase volume and reduction in payment rates. Purchase volume climbed 16.6% year over year to $4,015 million, on the back of strong active accounts growth and solid customer engagement. Interest and fees on loans improved 22% year over year to $786 million, which outpaced our estimate of $782.6 million on higher volume and loan receivables.
Lifestyle period-end loan receivables advanced 13% year over year to $6,280 million in the second quarter, on growing purchase volume and reduced payment rates. Purchase volume of $1,580 million grew 10.4% year over year, thanks to higher transaction values in Outdoor and Luxury. Interest and fees on loans climbed 19.6% year over year to $232 million, beating our estimate by 6.7% on higher loan receivables and increased benchmark rates.
Financial Position (as of Jun 30, 2023)
Synchrony Financial exited the second quarter with cash and equivalents of $12,706 million, which increased from $10,294 million at 2022-end.
Total assets of $108.7 billion rose from $104.6 billion at 2022-end. Total borrowings advanced to $14,231 million from $14,191 million at the end of last year.
Total equity of $13,380 million increased from $12,873 million at the end of 2022.
SYF’s balance sheet was consistently strong in the reported quarter, with total liquidity of $19,398 million accounting for 17.9% of its total assets.
Return on assets of 2.2% deteriorated 130 bps year over year in the second quarter, while return on equity contracted 700 bps year over year to 17% in the same time frame.
Capital Deployment
Synchrony Financial returned capital worth $399 million through share buybacks of $300 million and paid common stock dividends of $99 million in the second quarter. It had a leftover share buyback capacity of $1 billion at the end of June 2023.
2023 Guidance
The company continues to expect loan receivables growth to be greater than 10% 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 within 15-15.15%, 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 in the range of 4.75-4.90%, 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 SYF 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.
Zacks Rank & Other Key Picks
Synchrony Financial currently has a Zacks Rank #2 (Buy). Investors interested in the broader finance space can also check other top-ranked companies like Burford Capital Limited BUR, Houlihan Lokey, Inc. HLI and NerdWallet, Inc. NRDS, each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Based in Saint Peter Port, Guernsey, Burford Capital offers legal finance products and services around the world. The Zacks Consensus Estimate for BUR’s current-year bottom line is pegged at $2.16 per share, indicating a massive jump from 14 cents a year ago.
Los Angeles-based Houlihan Lokey is an investment banking company. The Zacks Consensus Estimate for HLI’s current-year earnings implies 6.6% year-over-year growth. Houlihan Lokey beat earnings estimates in all the last four quarters, with an average of 16.8%.
Headquartered in San Francisco, NerdWallet is an operator of a digital platform that provides consumers with personal finance information among many other products. The Zacks Consensus Estimate for NRDS’s current year earnings indicates a 142.9% year-over-year improvement. It beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 42.1%.
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