There are some good values in banking right now, as the sector was one of 2018's worst-performing parts of the stock market. However, one that looks particularly compelling is store credit card issuer and online bank Synchrony Financial (NYSE: SYF).
Not only did Synchrony's fourth quarter reinforce all of the reasons I love Synchrony's business model, but the bank removed some pretty big question marks that had been concerning investors.
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Synchrony just delivered an excellent fourth quarter
Synchrony recently announced its fourth-quarter 2018 earnings, and to put it mildly, the company's growth continues to be impressive. Net interest income grew by 11% year over year, and loan balances are up by 14%.
On the banking side of the business, Synchrony's deposit base grew by $7.5 billion over the past year, which is significant because deposits are a low-cost source of funding for the company's store credit card operations. Deposits now make up 73% of the bank's funding, and since it has one of the best savings account APYs in the industry, it's not hard to see why Synchrony has been successful at attracting capital in this way.
Furthermore, Synchrony renewed some of its most important store credit card partnerships, including Amazon, and added a few new ones.
The business still looks strong, despite worries about an increase in defaults. Synchrony's net charge-off rate is actually lower than it was in the fourth quarter of 2017, and delinquency rates aren't meaningfully higher than they were a year ago. Synchrony remains a highly profitable and efficient business. Its net interest margin of about 16% is well above that of its credit card-issuing peers, and its 30.4% efficiency ratio is one of the best in the entire banking industry.
Synchrony's biggest uncertainty has been resolved -- in investors' favor
The biggest question mark in investors' minds has been the status of the ending Walmart (NYSE: WMT) partnership. In 2018, not only did Walmart decide to end its relationship with Synchrony in favor of Capital One (NYSE: COF), but Walmart also decided to file an $800 million lawsuit against Synchrony. There was also the question of whether Synchrony's partnership with Walmart-owned Sam's Club would disappear as well.
Now all of these questions have been answered. Here's a rundown of what we just learned:
- Walmart dropped its lawsuit, so Synchrony won't have to pay anything to the retail giant.
- Synchrony is selling its roughly $9 billion of Walmart credit card loan balances to Capital One.
- Synchrony is releasing about $500 million of loss reserves as a result of getting rid of its Walmart portfolio.
- Synchrony will continue to be Sam's Club's credit card partner.
A highly profitable business model
To be clear, I'm not saying that Synchrony is without risk. Quite the opposite is true. Store credit cards already have higher-than-average default rates, and it could get far worse if the economy turns sour.
However, Synchrony's fantastic profit margins should keep its earnings well in the green no matter what the economy throws at it, and now that the Walmart saga is in the rear view, the risk-reward profile of Synchrony just got a whole lot more compelling.
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