Synchrony Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Synchrony Financial Second 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 a listen only mode. The call will be opened up for your questions following the conclusion of the management's prepared remarks.

Operator

I will now turn the call over to Catherine Miller, Senior Vice President of Investor Relations. Thank you. You may begin.

Speaker 1

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. Access.

Speaker 1

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. Access. 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.

Speaker 1

During the call, we will refer to non GAAP financial measures in discussing the company's performance. AXIS. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not acts of action. Thank you, access.

Speaker 1

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.

Speaker 2

Thanks, Catherine, and good morning, everyone. In the Q2, Synchrony delivered strong financial results, including net earnings of $569,000,000 or $1.32 per diluted share, access. Synchrony continues to demonstrate strong growth and financial performance as consumer behavior reverts to pre pandemic norms During the Q2, we opened 5,900,000 new accounts and grew average active accounts by 7% on a core basis. These strong sales continue to demonstrate the value of our diversified products and platforms. Health and wellness purchase volume grew 17% compared to last year, reflecting broad based growth in active accounts along with higher spend per active account.

Speaker 2

The 8% growth in digital purchase volume was driven by higher average active accounts and reflected continued momentum in several of our new programs. In diversified in value, purchase volume increased 7%, Lifestyle purchase volume increased 10%, reflecting growth in average transaction values in outdoor and luxury. And in home and auto, purchase volume was largely unchanged versus last year as the benefit of higher average transaction values Dual and co branded cards accounted for 41% of total purchase volume in the quarter and increased 14% on a core basis, AXE, with several of our newer value propositions continuing to drive elevated growth. Our view into the consumer, A deeper dive into our auto partner spend shows continued stability in key discretionary categories such as restaurants and entertainment as well as in non discretionary categories like grocery and discount stores. The reduction in average values was noted even among our highest credit quality borrowers, which was also accompanied by some modest slowing in transaction frequency.

Speaker 2

Following the trend from previous quarters, our younger borrowers access, as well as those in lower credit grades continue to reduce the pace of spend. This quarter, given the seasonal impact of tax refunds, We saw a small sequential increase in our payment rates, largely driven by higher credit quality segments. Year over year, however, payment rates continue to decline across age and credit bands. Meanwhile, the external deposit data we track shows that the average consumer savings balances AXA. Declined approximately 2% from the Q1, but remain approximately 7% above 20 20's average level.

Speaker 2

So taken together, the payment spend and savings trends we're watching suggest that consumers continue to be well supported by the constructive labor market acts and relatively healthy balance sheets as they gradually revert to their pre pandemic norms. And as we continue to closely monitor the health of our consumers, One of our key priorities is the continued expansion of our multi product strategy across partners, distribution channels and markets, allowing us to meet our customers how and where they want to be met and with a variety of financing solutions that address their specific financing needs actions. We recognize that our customers' needs change over time, and Synchrony can and should be their financing partner of choice acts throughout life stages. Whether applying in person, online or through an app, we leverage our data and advanced analytics through our digital ecosystem to deliver fast, seamless offers designed to responsibly support each customer's particular purchase. For customers who appreciate the simplicity of installment loan with flexible terms and payment schedules, Synchrony's buy now pay later solutions have become popular options AXA with over 95% of the sales coming from new customers.

Speaker 2

These solutions conveniently integrated into our broader axillary. Partner relationships and product offerings and match with our deep insights into the consumer, clearly expand our reach beyond our traditional set of customers and offer our partners another effective tool for engaging with their most loyal shoppers. Most recently, we announced that our partner At Home selected Acx. Synchrony is its exclusive buy now, pay later provider, integrating this installment product with its existing suite of payment options. Customers can select Synchrony Pay Later at checkout, online and in store.

Speaker 2

And thanks to our integrated data and leading underwriting capabilities, partners, providers and merchants that now utilize Synchrony's installment suite in the form of our Pay Later, Allegro and secured installment loans. As Synchrony continues to broaden our product suite and empower these offerings with our dynamic decision capabilities, we are better able to acquire helping partners build lifelong customers. In campaigns across various portfolios, we have seen a 20% of private label cardholders with nearly double the purchase volume and 1.6 times the lifetime value to Synchrony. For our partners, these deeper relationships translates into more loyal, better engaged shoppers. And so ultimately, this successful execution of our multi product strategy As we head into the second half of twenty twenty three, Synchrony is well positioned to capitalize on these and other new opportunities, AXA, while continuing to consistently deliver for our customers, our partners and our shareholders.

Speaker 2

And with that, I'll turn the call over to Brian.

Speaker 3

Thanks, Brian, and good morning, everyone. Synchrony's 2nd quarter results demonstrate the power of our differentiated model. Our broad reach across industries and verticals and the compelling value propositions offered on our products were key drivers of our resilient purchase volume. These core Synchrony strengths AXA. Combined with our disciplined approach to underwriting, our diverse funding model and our RSA arrangements continue to provide effective offsets changes in the macroeconomic environment.

Speaker 3

On a core basis, ending receivables grew 15% versus last year. This was driven by a combination of approximately 130 basis points decrease in payment rate and a 6% growth in core purchase volume. Net interest income increased 8% to $4,100,000,000 reflecting 19% growth in interest and fees from higher loan receivables On a core basis, interest and fees grew 25%, driven by loan receivables growth, higher benchmark rates a lower payment rate as credit continues to normalize towards pre pandemic levels. Our net interest margin of 14.94% declined 66 basis points as higher funding costs more than offset the benefit of strong loan yields. More specifically, Loan receivable yields grew 145 basis points and contributed 124 basis points to net interest margin.

Speaker 3

Higher liquidity portfolio yield contributed an additional 53 basis points to net interest margin. Access. Offsetting these improvements was higher interest bearing liability costs, which increased 263 basis points to 4.04% reduced net interest margin by approximately 28 basis points as continued deposit inflows allowed us to build liquidity and prefund anticipated receivables growth the second half of this year. RSEs of $887,000,000 in the 2nd quarter were 3.85 percent of average loan receivables. The $240,000,000 decline from the prior year reflected higher net charge offs and the impact of portfolios sold in the prior year, actions, partially offset by higher net interest income.

Speaker 3

The RSA continues to provide critical alignment with our partners and stability in Synchrony's risk adjusted returns as demonstrated through this period of credit normalization and higher funding costs. Provision for credit losses increased to $1,400,000,000 reflecting higher net charge offs and a $287,000,000 reserve build, which was largely driven by growth in loan receivables. The decline in other income was driven by $120,000,000 gain on portfolio sales acts recorded in the prior year period. Other expenses increased 8% to $1,200,000,000 primarily driven by growth related items as well as operational losses and technology investments. Our efficiency ratio for the 2nd quarter improved by approximately 220 basis points 21.7%.

Speaker 3

Next, I'll cover our key credit trends on Slide 8. As payment behavior continues to revert towards pre pandemic historical averages, our delinquency and net charge off rates continue to normalize towards pre pandemic performance. Our 30 plus delinquency rate was 3.84% compared to 2.74% last year, which is approximately 60 basis points lower than the Q2 of 2019. Our 90 plus delinquency rate was 1.77% AXE versus 1.22% in the prior year, which is approximately 40 basis points lower than the Q2 of 2019. 100 basis points below the midpoint of our underwriting target of 5.5% to 6%, where Synchrony's risk adjusted returns are more fully optimized.

Speaker 3

While credit continues to normalize in line with our expectations, we're actively monitoring our portfolio These actions have been focused on certain types of inactive accounts as well as segments of the portfolio where we are seeing significant score migration into non prime was largely driven by receivables growth. Our provision did not include any material changes in our qualitative reserves or significant changes in our macroeconomic assumptions. Turning to Slide 10. Funding, capital and liquidity continue to be highlights of Synchrony's performance. During the Q2, our consumer bank offerings continue to resonate with customers.

Speaker 3

We experienced positive net flows each week, culminating in direct AXE deposit growth of $2,300,000,000 in the Q1, which was partially offset by lower broker deposits. Deposits at quarter end represented 84% of our total funding. The remainder of our funding stack is comprised of securitized and unsecured debt at 6% and 10% of our funding, respectively. We remain focused on being active issuers in both markets as conditions allow. Total liquidity, including undrawn credit facilities, was $19,400,000,000 up $521,000,000 from last year.

Speaker 3

AXE. As a percent of total assets, liquidity represented 17.9%, down 198 basis points from last year as we manage our liquidity portfolio and fund strong loan receivables growth. Focusing on our capital ratios. Access. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies.

Speaker 3

Synchrony made its annual transitional adjustment of approximately 60 basis points in January and will continue to make annual adjustments of approximately 60 basis points each year until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Access. Under the CECL transition rules, we ended the 2nd quarter with a CET1 ratio of 12.3%, 2.90 basis points lower than last year's levels of 15.2%. The Tier 1 capital ratio was 13.1% under the CECL transition rules compared to 16.1% last year.

Speaker 3

The total capital ratio decreased 220 basis points to 15.2%. And the Tier 1 capital plus reserves ratio on a fully phased in basis decreased to 22.4% Synchrony announced approval of an incremental $1,000,000,000 share repurchase authorization through June of 2024, in addition to the $300,000,000 remaining on the prior authorization. We also announced our intention to increase the company's common stock dividend by 9% to $0.25 per share shareholders, reflecting $300,000,000 of share repurchases and $99,000,000 in common stock dividends. At the end of the quarter, we had $1,000,000,000 remaining in our share repurchase authorization. Synchrony will continue to execute on our capital plan acts guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan.

Speaker 3

We We have a strong history of capital generation and management, which is empowered by our resilient business model. Given the uncertainties in both the macroeconomic environment and the financial services industry. Synchrony remains focused on actively managing the assets we originate and prudently managing the capital we generate our presentation for more detail on our full year 2023 outlook. We expect our ending loan receivables to grow by 10% or more for 2020 access, reflecting the combined impact of the payment rate moderation and purchase volume growth. We continue to expect payment rates to normalize, accretive, but remain above pre pandemic levels through the remainder of this year.

Speaker 3

We now expect our net interest margin within a range of 15% accretion. Due to stronger than anticipated deposit flows and receivables growth prefunding. Deposit beta is also trending better than expected in the first half, We have since seen growing competition for deposits. Our revised full year outlook incorporates these first half trends as well as the anticipated impacts of further interest rate increases by the Federal Reserve and the possibility of higher deposit betas in the second half of the year. AXE.

Speaker 3

As a reminder, we expect our net interest margin to fluctuate quarter to quarter, driven by higher liquidity as we pre fund growth, Turning to our credit outlook, we now expect delinquencies to reach pre pandemic levels during the second half of twenty twenty three versus our previous expectation of an approaching peak in midyear. Net charge offs should follow similar but lag progression through the year. Generally speaking, lost dollars will not reach a fully normalized level until approximately 6 months following the peak in delinquencies. Given the slightly more moderate pace of delinquency normalization, we now expect net charge offs to trend towards the lower end of our prior outlook between 4.75% 4.90 percent. We continue to anticipate losses reaching fully normalized levels on an annual basis in 2024.

Speaker 3

We expect the RSA to trend below our prior outlook and be between 3.95% and 4.10% of average loan receivables for the full year. This improved range reflects the impact of continued credit normalization, lower net interest margin and the mix of our loan receivables growth. And given our higher than anticipated growth in the first half, we now anticipate quarterly operating expenses to trend at approximately $1,150,000,000 for 2023. We remain committed to delivering operating leverage for the full year. Taken together, Acx.

Speaker 3

Synchrony's differentiated model continues to power resilient financial results through a range of environments, and we look forward to delivering on our commitments as we close out second half of twenty twenty three. I'll now turn the call back over to Brian for his closing thoughts. Thanks, Brian.

Speaker 2

Synchrony's differentiated model has positioned the company well through evolving environments. We consistently power best in class experiences for our customers strong outcomes for our partners even as their needs change. Our business generates strong capital. We are adept at putting that capital to work in an effective, Ac's prudent manner to deliver sustainable longer term growth at attractive risk adjusted returns. As I look ahead to the remainder of this year, I am confident our ability to execute on our strategic priorities and deliver value to our many stakeholders.

Speaker 2

With that, I'll turn the call back to Catherine to open the Q and A.

Speaker 1

Actions. The Investor Relations team will be available after the call. Operator, please start the Q and A session.

Operator

We'll take our first question from Arren Cyganovich with Citi.

Speaker 2

With your payment rates still normalizing and AXE. Purchase volumes relatively stable, what's going to drive the somewhat a bit of a deceleration in your growth

Speaker 3

anticipate the payment rate continuing to moderate as we move in the back end, but be elevated versus the pre pandemic period. And we do continue to expect to see on a dollar basis strong purchase volume growth. I think when you look back at the acceleration last year AXE. Coming out of Omicron and the pandemic period, there was an acceleration beginning in the Q2 through the end of the year, which AXA. So I think when you look at it on a fee basis and the asset build as payment rate really came off its high last year, It's just a more difficult comp.

Speaker 3

I think when you think about the volume we're going to put up here in the Q2 all the way through the end of the year, I think it's going to be AXE. Strong when you look at that performance across all of our sales platforms.

Speaker 2

Thanks. And then in the digital and health and wellness platforms, But both of those are showing continued really strong growth there. Can you provide a little color about within those segments, what's driving the strong growth there? Yes, sure. Look, I would say we're very pleased with the growth that we're seeing across all of our platforms.

Speaker 2

You look at receivables, Up 15% for the company, health and wellness leading the charge at 22%, digital up 18%. But Even home and auto up 10% is a really good result and really pacing ahead of our expectations so far this year. Ax. We've talked about in the past, health and wellness is one of the platforms where we've made incremental investments in marketing and products. And so I think you're seeing those investments pay off.

Speaker 2

Digital, you've obviously got the benefit of the new programs that sit inside of digital, all of which are performing really well. So We would continue to expect to over index in those two platforms. Thanks Aaron. Thanks Aaron.

Operator

We'll take our next question from Don Fandetti with Wells Fargo.

Speaker 4

Hi, good morning. I was wondering if you could dig in a little bit more on what you're seeing in terms of consumer behavior. I know in the past you've ask about customer call ins and what you're hearing in terms of slower wage or working less hours. Has there been any change there?

Speaker 2

Yes, I'll start on this one. I think, look, the consumer is still strong. I think there's obviously still spending. Excess savings are coming down a bit, but they're still trending above 2020 levels. So AXE.

Speaker 2

When you look at having a pretty strong labor market, the one surprise I'd say so far this year is how resilient the consumer has been. AX. You certainly see that on the growth side. We just reported our 2nd quarter was a record in terms of purchase volume. Credit is very much in line with our expectations maybe a touch better.

Speaker 2

We're still operating below 2019 levels. We're below our long term target of 5.5% to 6%. AXE. Everything we're seeing on the consumer is still pretty positive. With that said, we're still operating AXE cautiously.

Speaker 2

We're monitoring this every hour, every day. We're listening to the calls. I wouldn't say we're hearing anything abnormal. It really is kind of in line with our expectations. And as expected, credit will continue to normalize through the balance of this year and into next.

Speaker 4

AX. And on the allowance rate, are you still thinking that it's sort of steady to maybe improving a bit?

Speaker 3

Yes. Thanks for that, Don. The first half of the year, I think when we look at the reserve provisioning, they've really been growth acquisitions, I think $285,000,000 $286,000,000 respectively for the Q1 and the Q2. Again, we continue to expect that migration back ax. Down towards CECL Day 1, I think the delinquency formation that we have seen has been in line with our expectations.

Speaker 3

So again, that will trend out over time. I think the one shift why we haven't changed our macroeconomic assumptions or really things around student loans, they've just been a little bit slower, which is why I think You see us today talking about getting back to that pre pandemic levels of delinquency in mid second half of this year. So Again, it will migrate continue to migrate down as long as we believe the macro backdrop comes in line with our expectations.

Speaker 2

Access. Thank you. Thank you, Tommy.

Operator

Thank you. We'll take our next question from nagir fathiya with Bank of America.

Speaker 5

AXA. Maybe to start, I think the first question I had was just on the regulatory front, Specifically thinking around the CSCB's late fee rules and also the inquiry into the deferred interest medical cards. Maybe just talk about your perspective on those issues where things are shaking out and if there's any updates to

Speaker 3

share and how you're just preparing

Speaker 2

Yes, sure. So let me start on late fees. Active conversations with our partners around different offsets. I would tell you that they clearly understand that this is an issue that the entire industry has to deal with. It's likely going to resolve new pricing models and pricing actions across all issuers.

Speaker 2

So, we've had those discussions with our partners. I'd say no real surprises that they expected to see the things that we're proposing like higher APRs, different types of fees, penalty pricing. And we've also been having a good dialogue around underwriting. And I think they fully appreciate that without some of these pricing offsets that a fairly significant portion of AX customers that we underwrite today might lose access to credit. And just to be clear, that's something that we don't want.

Speaker 2

It's something that they don't want. So our interests are very much aligned on that point. Look, at the end of the day, our goal is to protect the partners. We want to offset the impact here and continue to underwrite the customers that we do today. And then lastly, I'd just say, look, there's a lot still to be decided here.

Speaker 2

X. We expect to see a final rule sometime in Q4. It's likely to be litigated. That's I think the consensus at least what we're hearing. But we've had teams focused on this for a while.

Speaker 2

We're as prepared as we could be. And so we'll just continue to play through and give you updates as we learn more. And then what was your second question?

Speaker 5

It was just on the medical, if there's anything to

Speaker 2

credit products that we offer. In our view, CareCredit is not a medical credit card. The vast majority of what we do there is elective health and wellness spend. So 70% of the business is actually dental and pet care. We work very hard to industry leading.

Speaker 2

So one positive outcome would be just to level the playing field and bring other issuers kind of up to the standards and the things that we do every day. So again, very proud of the product. It's actually one of the products that we get the absolute best feedback on from customers.

Speaker 5

And then just if I could switch here to the credit side, right? Your guidance for delinquency rates, and I think you've talked about consumer being resilient, delinquencies taking a little while to get back to pre pandemic levels, which obviously is a good thing. But Your guidance talks about it approaching pre pandemic levels here in the next, I guess, 6 months. What happens after that? I mean, your charge off comments 2024 suggests you think delinquencies will stabilize at those pre pandemic levels.

Speaker 5

So maybe just talk about what gives you confidence that that will happen versus going through those

Speaker 2

AXE. Thank you.

Speaker 3

Yes. Thanks, Mihir. So I think the way We think about it and we watch vintage performance. We watch how the roles kind of come into delinquency. I just want to focus where we are today, right?

Speaker 3

When you look at AXE. Average delinquency in the pre pandemic period compared to the apply that to the balances today are 30 plus or 90 plus or 87% 82 action of historical levels, and that's just been moving up slightly as we step through each of the quarters. I think translating that, that's about 60 basis points lower than 2019 for 30 plus, 40 basis points lower for 90 plus. So I think different than a lot of issuers, We are not at that pre pandemic delinquency formation yet, albeit we are continuing to move closer to that In a very measured approach. And I think when you think about the loss rate, what's flowing to loss now were at 82% of our midpoint of our underwriting average.

Speaker 3

So we look at the formation today and say we feel good about where that is. When we look at the vintages performances, if I go back to 'eighteen and 'nineteen, we're not seeing real significant deterioration in those vintages. They're through their peak loss periods. When we start looking at the pandemic level vintages, particularly in the 2021 and 2022 when a lot of issuers, I'd say, adjusted credit standards to kind of put it on. Those vintages for us are performing in line with our 2018 2019 vintages.

Speaker 3

So we don't see performance in the air or in the back book, If you call it that, that says we're going to be through our underwriting standards and target range for next year. I think we've also been for the first time this year, we did a little bit broader based actions and these were really around AXE? I'd say derisking the loss rate for next year and these are really around accounts that are either inactive or see significant score migration into non prime. So not significant. It's unlikely to have a material impact on sales or credit, but just taking some, what I'd say, more appropriate, prudent actions across the portfolio in addition to the idiosyncratic options that we're doing.

Speaker 3

So, we feel good with the actions we're taking. We feel good about Prism and the decision trees that are in Back towards the end of the year and give you updated guidance with regard to the full 2024 loss rate. Hopefully, that gives you some perspective on how we think about them here.

Speaker 5

Great. Thank

Speaker 2

you. Thank you.

Operator

Thank you. We'll take our next question from Ryan Nash with Goldman Sachs.

Speaker 2

AXA.

Speaker 6

So Brian, the second half net interest margin guide being in line with the first half, AXE. Maybe just talk about what is driving your updated expectations. I think you mentioned betas could be higher. I'm assuming now you no longer have rate cuts as per the AXA.

Speaker 3

Can you maybe just talk about

Speaker 6

what you're assuming for betas and how do you think about the puts and takes of the trajectory of the margin over an intermediate ax. If rates are going to stay higher for an extended period of time?

Speaker 3

Yes. Thanks, Ryan. So The betas we experienced in the first half of the year, if I make it broadly between savings and CDs, and the savings were mid-70s, We're low 90s in CDs. And I think as we step forward into the second half, the one thing We noticed in the competitive dynamics as we exited out of the second quarter, Ryan, was a little bit more price increases from competitors. And I think that comes from a couple of different places.

Speaker 3

You have certain of the regional banks that are experiencing outflows relative to commercial deposits. That's probably twofold. 1, them running a little tighter on cash. And 2, there's some, I'd say, risk mitigation strategies that some commercial firms are using. So they are becoming a little bit more competitive for deposits.

Speaker 3

You also see some of the big brick and mortar institutions who are trying to not have to raise their overall deposit rate but using an online in order to raise rates. That dynamic really emerged, I'd say, late in May into June. So AX. As we think about that mid-70s, low-90s, in our back half assumptions, we have it moving up, call it, roughly 10 percentage points. So you'd see savings in the mid-80s and you see CDs around 100%.

Speaker 3

I think as you think forward about deposits, generally speaking, assuming AXE. The market remains, what I'd say, rational, we would expect it to be fairly stable. And then hopefully, when you start to see rate decreases in the future that the betas will be in a similar type fashion and we can lower it. I think when we think about the back half broadly speaking about an interest margin, AXE. We should continue to see some tailwinds relative to the benchmark rates in the first half as they push through The floating portion of our portfolio in the back half, you continue to see revolve rate increases.

Speaker 3

Ax. Certainly, if you expect the delinquency and losses to kind of come in line, your evolve rate should push up. There will be a little bit of offset there from the reversals AXE as write offs kind of rise. But again, some tailwinds as we come through there. And then clearly, some of the liquidity we built up in The first half will get deployed.

Speaker 3

The second half will also be in fact, potentially how liquidity portfolio pays out and some of the wholesale funding That we're going to do in the second half, both in the secured and unsecured market. So hopefully that gives you a flavor for how we think about the betas and NIM in the second half, Ryan.

Speaker 6

Got it. And then Brian, we're obviously waiting on a handful of potential regulatory changes AXE in the coming months. Can you maybe just talk about what way, if any, you think this will impact the way that you think about managing both capital and liquidity on a go forward access. Thanks.

Speaker 3

Yes, Ryan. So again, Vice Chair of Barr has indicated they will put out proposed rules around capital, which again we'll have a comment period before our final rule is issued and then an implementation period a couple of years out axillary transition in. We've obviously been preparing and have run different scenarios relative to the different outcomes when you think about financial changes was the risk weighted think we've been contemplating that relative to our capital plans. We haven't taken definitive actions. I think it's manageable for us.

Speaker 3

I think if ax. The Fed decides to extend some of the long term debt or TLAC requirements based on the rules that exist today. We feel like we're in a good position. We're in surplus action. So I think we feel good about what potentially can come, but obviously we'll look at the rules, we'll evaluate it and we'll certainly will adapt our business AXE.

Speaker 3

And try to be smarter with regard to changes to the risk weighted assets and how we optimize it. But we haven't taken actions to date, But we'll be closely monitoring and we'll certainly be addressing as we move forward.

Speaker 5

Thanks for the color.

Speaker 2

Thanks, Ron.

Operator

Ax. We'll take our next question from Kevin Barker with Piper Sandler.

Speaker 7

Access. And obviously, loan growth is still fairly robust. I mean, do you expect or do you feel that there is a ax fundamental shift in consumer behavior right now relative to what you were experiencing in 2018, 2019, AXE. Just given that these payment rates remain very high and could remain elevated for an extended period of time. Just Give us an idea of if there was a shift in consumer behavior and what you're seeing today.

Speaker 3

Yes. Thanks, Kevin, for the question. So When we look inside payment rate for a second, there's a couple of different dynamics. Let me start with, we don't see something today You'll call it a year from now or so. When I look underneath and breaking into segments, what you've seen is a normalization back to pre pandemic levels for the nonprime and lower credit grades.

Speaker 3

And what's really kind of boosting the payment rate has been Prime customers and super prime customers who have built up excess liquidity during the last couple of years and they continue to pay at a higher rate And they did pre pandemic. So we expect those people ultimately to normalize back to, I'd say, the pre pandemic period. We're ax. A good thing for us. So we've had about 4 percentage point shift up to about 20% of the accounts paying on autopay.

Speaker 3

And there, that does help entry rate, does help delinquency. It does change a little bit of the dynamics on the payment rate, but that's not something that we think is going to have a material shift. So again, we think this is X continuing to be part of the K shape recovery and part of the exit out of the pandemic period for now. And until we get more clarity with regard to when the excess savings

Speaker 2

or

Speaker 3

money that's been accumulated during the pandemic totally burns off of those higher credits.

Speaker 7

Okay. And then maybe just a follow-up on the growth, 10% plus, right, implies maybe a slowdown from where we are. Do you anticipate an impact on spending and your sales volume due to the student loan restart AXE payments in October. I know you've already made quite a bit of comments on the credit side, but just give us an idea of your expected impact on the spending

Speaker 3

Yes, Kevin. So again, we understand the population of people who have student loans. We understand the magnitude AXE. Relative to the non loans that they have outstanding and what is in currently in forbearance and non forbearance, I think when we look at that population and the mix of that population, AXE? First of all, they're very close to the FICO range we have.

Speaker 3

I think they're about 10 points different on advantage score, excuse me, Difference. They're within 10 basis points of delinquency. So they look like the regular book. 46% of those people we have underwritten pre pandemic that were access. So we feel good about their ability to manage the financial situation.

Speaker 3

So I wouldn't anticipate an impact on that when we think about purchase volume as we move into the back half of the year and it's early next year. Again, I want to be clear, I tried to mention earlier on the call, Kevin, I don't think we see AXE. Just on a dollar basis, really decelerating. It just goes back into we have a really tough comp last year for everyone as you saw this acceleration coming out of the backside of the pandemic, AXI, which was pent up spending and demand both for goods and services. So we feel good about the volume.

Speaker 3

Brian highlighted health and wellness and

Operator

Our next question will come from Rick Shane with JPMorgan. Actions. Kevin really covered my primary topic, but I'd love to discuss a little bit in terms of funding. You've alluded to the fact that in the second half of the year, you're going to look to the secured and unsecured markets. I'm just curious, Realizing that you guys have not faced the issues that some financial institutions have had related to deposits, whether the events of this year

Speaker 3

Thanks, Rick. So no, we have not altered our intended targets for the funding stack. We feel very confident and very proud of our deposit franchise, which I believe provides 84% of our funding. As we look at the first half performance of this year, we are positive on net flows every week, including the weeks where there was the bank turmoil. So We feel good about our ability to attract deposits.

Speaker 3

And those deposits, when you look at the vintages, we've grown the vintages in the first half of the year back. So customers are sticking with us. We continue to have a high retention rate with regard to CDs. So the stickiness of having essentially 99% AXE. Retail deposits are really helping us as we move forward.

Speaker 3

Our willingness and desire to tap the wholesale markets It's a very important part of our funding sources. And I think to some degree, when you go longer periods without being into those two markets, it becomes more costly for people to ax. So having a presence in those markets and continuing to be active over time, particularly when we have Debt maturities is going to be important. We also have some maturities in the back half of the year relative to CDs and things like that. So to try to manage the betas, accessing the wholesale market in certain increments makes a lot of intuitive sense for us.

Speaker 3

So again, we feel good about the deposit franchise and that will be Again, 80 plus percent of our funding stack as we continue to move forward is our goal.

Operator

Great. Hey, Brian, that's very helpful. As you think about wholesale market. Can you talk a little bit in this rate environment and supply and demand? Is there what is a potential arbitrage in terms of funding versus the deposit market.

Speaker 3

Yes. Rick, for us, it's really about axess. I mean, obviously, credit spreads are a little bit wider than we would like given some of the uncertainty and then we'll certainly given some people's where benchmark rates may go even after the Fed meeting later this month. So we less look at it as an arbitrage more as how do I create steady foundation and have the proper mix going forward. And we think to some degree, we continue to drive what we think is very good performance in the business, acts.

Speaker 3

Show the credit performance here and show our ability to manage the regulatory environment that the credit spreads will tighten in over time. But we don't look at it as an arbitrage. AXE. We more look at it as how do I get a balanced funding need in order to really protect the balance sheet of the company and provide the appropriate liquidity under all situations.

Operator

Question from Sanjay Sakhrani with KBW.

Speaker 8

Thanks. Good morning. There's some news out there that there's at least one large portfolio out there for RFP, big technology company and obviously Walmart still remains in flux. I'm curious, Brian Doubles if you could give us a sense of sort of where Synchrony might stand for any larger portfolios or any other deals that might be out there?

Speaker 2

Yes, sure Sanjay. Look, I would say with a couple exceptions, most of what's in our BD pipeline right now are smaller start up kind of de novo opportunities, which we're really excited about, but obviously take more time to grow. I think on larger opportunities, obviously, we're very active there as well. But I would also say that's where we're extremely disciplined as well. In terms of risk return, making sure we've got the right balance, the right alignment with partners, I think that's just absolutely critical.

Speaker 2

So I think you're always going to see us steer a little bit more on small to midsize deals because we just the higher deals to or the bigger deals to a higher level of scrutiny in terms of risk and return and alignment with the partner.

Speaker 8

I appreciate that. And then I guess follow-up on some of the late fee regulation commentary. I guess what I seem to be hearing is like there might not be a a lot of move on the Safe Harbor amount that was proposed. And I'm just curious like as we think about how the adjustments acts. It's a pretty significant decline in that rate.

Speaker 8

I guess, what is your operating assumption as you move forward, as you talk to your partners. I mean, is it as low as the safe harbor that's been proposed?

Speaker 2

Yes. So look, we clearly think that this proposal has a lot of unintended consequences to consumers, Even the small businesses who rely on credit. So we don't agree with $8 We think that $8 is not a deterrent. It's not an incentive to pay on And so we're very active with the rest of the industry in the comment letter process and we would certainly welcome higher amount than the $8 But with that said, we have to prepare for the $8 to go into effect as written right now. And so that's kind of our base operating assumption.

Speaker 2

We do think that if the cost calculation We're designed differently. We could certainly substantiate a cost higher than $8 and so that's another angle that we're pursuing here. But we need to have revenue offsets that we're ready to put in place to offset that because again our goal is to protect our partners here and continue to underwrite their customers just like we do today. And so those are the discussions that are ongoing and those That's really where we've been focused for the last 10 to 12 months.

Speaker 8

Okay, great. Well, thank you so much for the color.

Speaker 2

Axt.

Operator

We'll take our next question from John Pancari with Evercore ISI.

Speaker 4

Regarding

Speaker 2

the credit accident that you've mentioned you're taking into 2024 given some migration On the non prime side, can you give us more color on what portfolios you're seeing this migration and AXE, what actions you're taking, if you can give us a little more detail on that front. Thanks.

Speaker 3

Yes. Thanks, John. Obviously, we can't get into access. With regard to portfolios, I think broader based, if you had a credit that was in the, call it, 700 range and you saw a migration of 50 or 60 basis points into non prime. We would look at that account.

Speaker 3

Before we used to wait and kind of look at it. Now we look at it in combination of other factors and decide immediately whether or not we want to reduce the exposure down to the balance, so a credit line decrease or 2. If it has other attributes that we may be more uncomfortable with, we do a credit line closure account closure on that account. We do the same thing effectively in our inactive portfolio. So these are what I'd say, and this way, it's not it's unlikely to have a material effect next year It's because these are significant movements into non prime just because they're not performing the way they would and they had a very significant movement at the time.

Speaker 3

So again, Not broad based. We only draw the fact, to be honest with you, John, because we said all our actions have been idiosyncratic. These are, what I'd say, minor refinements that But again, we are more broader based. If we see it anywhere in the portfolio, we're going to take action. Again, it's really more to derisk next year a little bit, but not It's likely to have a material effect.

Speaker 2

Got it. All right. Thank you. And then separately on the expense front, can you give us a little bit more color on your updated expense outlook. I know you bumped that up a bit and you're mentioning growth in operating losses.

Speaker 2

So Maybe could you help give us more color there, maybe break it out and kind of set out what drove the revision?

Speaker 3

AXA? Sure. So when we look at growth, I mean, obviously, the growth for us, we raised the guide from the beginning part of the year. We are seeing opportunities to invest The portfolio Brian highlighted, particularly in the Health and Development and CareCredit, the ability for us to lean into that segment a little bit more, AXE. We saw opportunities really to kind of grow with our Allegro product or others that made sense for us to grow the portfolio.

Speaker 3

So we are seeing growth. We've added some incremental resources around that, which we think drive it. Overall purchase volume has been a little bit stronger in the first half. But again, we AXA. We expect to have some variable cost increases as you think about more active accounts in the back half of the year as we service those accounts.

Speaker 3

So from a growth standpoint, Those are some of the attributes and again, ones in which we're going to be if we find a good risk adjusted return, we want to lean into in this environment ax from a growth standpoint. The operational losses, we the whole industry really benefited the last couple of years as a lot of Act. Fraud migrated to some of the buy now pay later and other people who may not have had as robust fraud strategies in place. So we saw abnormally low and again this is industry wide fraud relative access. That is migrating back to what I'd say is a more historical level.

Speaker 3

This quarter, we did have one particular incident from a partner who had an exposure, which drove the cost up here a little bit, but there's an RSA offset to it. So again, we just see more normal migration Back to what would be in the pre pandemic period. It's not something that we look at and say, this is going to become a challenge the industry or for us individually, just more the migration back to more normalized levels.

Speaker 2

I think the only thing I'd add to that is we're clearly getting operating leverage and you saw a pretty good year over year improvement in the efficiency ratio. So that's a key measure for us that obviously we're very focused on.

Operator

Question from Betsy Graseck with Morgan Stanley.

Speaker 8

Hi, good morning. This is Jeff Allison on for Betsy.

Speaker 3

I was just wondering if

Speaker 8

you could talk a little And what maybe is taking that lower in the 2023 guide with the NCOs going lower as well? Does that reflect something where maybe your retail partners are a little

Speaker 3

access. And so expenses would flow through to our partners as well as what's really impacting now is again some of the pressure you saw in the net margin from interest bearing liabilities cost, they flow through the partner as well. So, I think you combine that with accredit normalization and you really get the effect that we have. Again, the 4% to 4.25% where we started the year, now the 3.90% to 4.15 Is that the lower end of our long term guide? I think again long term guide has a slightly higher net charge off rate by higher margin where you share.

Speaker 3

But again, we look at the RSA and when you look at the performance when obviously we had much lower net charge offs Sorry, higher expenses. The RCA is performing like it should and it's designed to where it's a little bit lower than expectation. Again, AXE. We updated the guidance to be $3.90 to $4.15 and we believe that that is for this year a good estimate of what the performance is going to be And we'll be back. But again, we feel good about the long term guide and there hasn't been any fundamental shifts in the sharing of economics with our partners.

Speaker 8

Wondering if we could get an update on any incremental actions you've taken over the last 3 months. And I know you already Give an update on the student loan repayment side of things. Just wondering if that factors into how you're underwriting people today and maybe what you're hearing from your Folks who are calling in on that, that repayment starting?

Speaker 3

Yes, Jeff. We haven't taken any broad based actions with regard to account acquisition. We really look there at performance against risk adjusted margin and probability defaults on a partner channel basis. So we've been making more access there, but not broad based action. So we feel good about it.

Speaker 3

You got to remember us as an issuer, we get selected for versus others who do mailings and choose people to apply for credit. So we have to be hopefully smarter at a time of that decision in which we can gather more data, use data from our partners, use unique data attributes, bringing it to make that smarter decision. So The other important point I'd say is during the pandemic period, we really don't open and close the acquisition lever. We make small adjustments as we see fit relative to line assignments, but we try to be consistent with our partners and really manage the exposure through line. So again, AXE.

Speaker 3

No significant changes on account acquisition. I think you can see that in the consistency of our new account origination both last year and through the first half of this year.

Speaker 8

Great. Thanks for taking my question.

Speaker 3

Thanks, Jeff.

Operator

Thank you. Our next question comes from John Hecht with Jefferies.

Speaker 9

Good morning, guys, and thanks for taking my questions. How are you guys? First one is Brian Doubles. I think you gave a

Speaker 6

little bit more

Speaker 9

acts. The usage of BNPL and I guess the increased usage of the BNPL product in your portfolio. It sounds like you're emphasizing it in a sense as maybe a customer acquisition tool for some of your counterparties. I'm just wondering with respect to that, is it I guess how does it is that the point now where it affects volumes overall and fee structures and margins overall? And if so, How does the impact of the BNPL product impact those metrics?

Speaker 2

AXE. Yes, sure, John. So I think just to take a step back, I think the just to reiterate, what we think is this long term strategy here is the Axty product. And there's real benefits there that our partners are fully realizing now in terms of how these products can complement each other, Right. They don't cannibalize.

Speaker 2

They actually complement each other. And they provide choice to both our partner and their customers. And I think that's really important. So in some partners, this may be a customer acquisition tool, right, where we bring them in on a buy now, pay later product AXA. And then we upgrade them over time and do our revolving products and a dual card.

Speaker 2

And when we look at the lifetime value of that customer, we can make that work. We can make the economics work. So, I think that's kind of the power of this model is that you can make this more attractive to both us and our partners from an economic standpoint. One of the things that we've talked about is we've seen a little bit of a shift AXE. In that, through the pandemic, you saw partners engaging in buyout, pay later because they need to drive sales.

Speaker 2

They want to bring in new And then they took a little bit of a step back in a higher interest rate environment. So, a lot of these products are actually really expensive. AXE. And maybe there's a different model here. And that's really the model that we're employing, which is for some customers and some purchases, ax.

Speaker 2

An installment loan makes sense. For some purchases, a revolving product makes more sense. And so it really is AXA. Partner by partner in terms of the strategy that we're employing. But the good news is that we can customize that completely for the partner given the economic sharing and the arrangements that we have with them.

Speaker 2

So we can really make this work in a number of different ways and customize it in a way that is X, economically attractive for the partner, but also helps us balance the risk and the return.

Speaker 9

Okay. That's very helpful access. And then Brian Wenzel, I think you touched on this, so apologize for any redundancy, but maybe quick color on the seasonality of Q3 and Q4 NIM, anything to consider there?

Speaker 3

Yes. Thanks, John, for the question. I think as you think about net interest margin, Again, some of the liquidity is deployed as we begin to build assets going into the back half of the year plus some of the tailwinds relative to some of the benchmark rate increase. You should see that net interest margin tick up a little bit in the 3rd quarter And then kind of flatten out on 4th. So but again, I think short term, you think you'll see a little bit of benefit from where we exit out of 2Q.

Operator

We have time for one more a question from Dominick Gabriele at Oppenheimer.

Speaker 9

Hey, great. Thanks so much for taking my question. I was just curious about the debt collection fees. They seem to be going up a little bit. And I was wondering if there's anything we should read into within that line, not just for Synchrony, but for the general industry

Speaker 2

when we think about net charge offs moving forward?

Speaker 3

AXE. First of all, I'm not sure I can comment for the industry. I think when we look at it, what this represents, we primarily originate this through digital channels. And I see as we push more into digital channels, you see a little bit more sign up as people have the ability to really understand the product, its terms and conditions and sign up for number 1. And 2, I think as you see average balances increasing, you then get AXE.

Speaker 3

The rate

Speaker 4

impact

Speaker 3

on the higher balance that's being protected. So again, a product that we feel good about the benefits that we offer to our consumers, And we do it in a way that's transparent to the digital channels, which obviously we pushed into in the last couple of years a little bit more heavily.

Speaker 9

Great. Thank you. And if we just talk about expenses a little bit, the incremental expenses access between the guidance numbers. Could you just talk about where you're kind of putting on the gas pedal? Is it marketing?

Speaker 9

Is it customer acquisition or is it Tech Advancement? How do we think about the incremental spend that drove the increase access and run rate of expenses. Yes.

Speaker 3

Thanks for the question. So I think when you think about where we're putting on expenses, 1st is going to be in some of the employee costs as we look to people to drive strategic initiatives inside our health and wellness platform and inside Really, our marketplace is some of the places where we're engaging with the consumer and products. So some of that requires AXE headcount in order to drive some of the technology that's in there. There clearly is a technology component that leans in there as we have Actors who are building capabilities that really enhance our customers' experience. And then you are seeing a little bit on the marketing lines.

Speaker 3

We axe. We continue to lean into some of the direct to consumer businesses inside of health and wellness as we try to promote the product AXE to really drive the experience and manage what is a very difficult health care environment for folks as more costs are shifting towards them. So It's really across those three levers, employee cost as well as technology and marketing. And you will see that again that normalization acts of operational losses as we move forward.

Speaker 2

And we've got a very disciplined approach on that. We make sure that we're getting the right return action on those investments. You're seeing that come through on the top line growth. You're seeing the net effect of that operating leverage and the efficiency ratios I mentioned earlier.

Operator

Perfect. Thank you.

Speaker 2

Thank you. Thank you.

Operator

This concludes Synchrony's earnings conference call. You may disconnect your line at this time and have a wonderful day. Thank you so much.

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Earnings Conference Call
Synchrony Financial Q2 2023
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