Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial
Thanks, Brian, and good morning, everyone. Synchrony's fourth quarter results demonstrate the power of our differentiated business and financial model performing as designed. Our diversified sales platform and spend categories enabled record purchase volume growth as our disciplined underwriting and credit management kept credit performance in line with our expectations.
Our retail share arrangements ensured alignment of economic interests between Synchrony and our partners. As credit normalized towards historical pre-pandemic levels and funding costs increased from higher benchmark rates, our RSA payments were lower, providing a partial buffer to the economic environment and enabling Synchrony the delivery of consistent attractive risk-adjusted returns. And our strong balance sheet provides the flexibility to return capital to shareholders while investing in opportunities to achieve our longer-term strategic goals, all while delivering for our customers and partners and their evolving needs today.
Overall, our prudent business management and differentiated financial model have positioned Synchrony to deliver sustainable outcomes for our customers, partners and shareholders through an uncertain macroeconomic backdrop this past year and as we move forward in 2024.
Now let's turn to our fourth quarter results. Purchase volume increased 3% versus last year and reflected the breadth and depth of our sales platforms and the compelling value our products offer combined with a resilient consumer. In Health & Wellness, purchase volume increased 10% reflecting broad-based growth in active accounts, led by dental, pet and cosmetic verticals. Digital purchase volume increased 5% with growth in average active accounts and strong customer engagement. Diversified value purchase volume increased 4%, reflecting a higher in- and out-of-partner spend. Lifestyle purchase volume increased 3% with stronger average transaction values in outdoor and luxury.
In our Home & Auto, purchase volume decreased 4% as lower customer traffic, fewer large ticket purchases and lower gas prices more than offset growth in home specialty, auto network and commercial. Purchase volume across Synchrony dual and co-branded cards grew 9% and represented 43% of total purchase volume for the quarter, reflecting the broad utility and value that these products deliver for our customers.
As we've discussed in the past, our out-of-partner spend is split roughly evenly between discretionary and non-discretionary categories. And this trend held steady throughout the year. In the fourth-quarter, we saw assumptions in categories, as consumers shifted from travel spend to clothing, for instance, and from gasoline and automobiles towards a spend at grocery and discount stores, but we've not seen any meaningful changes in the overall composition between discretionary and non-discretionary spend.
The combination of broad-based purchase volume growth and approximately 110 basis point decrease in payment rates drove ending loan receivables growth of 11.4%. Our fourth quarter payment rate of 15.9% still remains approximately 115 basis points higher than our five-year pre-pandemic historical average. Net interest income increased 9% to $4.5 billion, driven by 16% growth in interest and fees. The increase in interest and fees reflected the combined impact of higher loan receivables and benchmark rates, as well as a lower payment rate. Our net interest margin of 15.10% declined 48 basis points compared to the prior year. The decrease largely reflected higher interest-bearing liability costs, which increased 169 basis points to 4.55% and reduced net interest margin by 138 basis points. This impact was partially offset by 66 basis points of growth in loan receivables yields, which contributed 55 basis points to net interest margin. Higher liquidity portfolio yield added 29 basis points to net interest margin. And our loan receivables growth improved the mix of interest-earning assets contributing 6 basis points to net interest margin.
RSAs of $878 million in the fourth quarter were 3.49% of average loan receivables, a reduction of $165 million versus the prior year, reflecting higher net charge-offs, partially offset by higher net interest income. Provision for credit losses increased to $1.8 billion, reflecting higher net charge-offs and a $402 million reserve bill, which largely reflected the growth in loan receivables.
Other expenses grew 14% to $1.3 billion. The increase primarily reflected growth-related items as we continue to see strong growth in volumes as well as a return of operational losses to pre-pandemic average levels as a percent of our purchase volume. Expenses in the quarter also included several notable items including: $43 million in employee costs related to a voluntary early retirement program; $9 million in real-estate-related restructuring charges as we continue to adjust our physical footprint in favor of a hybrid working environment; $9 million for the FDIC special assessment; $7 million of preparatory expenses in anticipation of a potential late fee rule change; and $5 million of transaction-related expenses related to the sale of Pets Best.
Our efficiency ratio for the fourth quarter improved by approximately 120 basis points compared to last year to 36%. Excluding the impact of the notable items in the quarter, our efficiency ratio would have been approximately 200 basis points lower in the fourth quarter. All in, Synchrony generated net earnings of $440 million or $1.03 per diluted share, a return on average assets of 1.5% and a return on tangible common equity of 14.7%.
Next, I'll cover our key credit trends on Slide 10. Overall, we see the consumer remaining resilient as he manage through inflation and higher interest rates. The external deposit data we monitor also supports this yield as it shows average savings account balances returned closer to pre-pandemic levels during 2023 and remained relatively steady through the third and fourth quarters. At year end, average industry savings balances remained approximately 9% above levels from 2020.
Our disciplined through-cycle underwriting and active credit management has positioned us well as we entered 2024. Our delinquency ratios finished the year slightly above average levels from 2017 to 2019 prior to the pandemic. At year end, our 30-plus delinquency rate was 4.74% compared to 3.65% in the prior year and 12 basis points above our average for the fourth quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.28% versus 1.69% last year and 4 basis points above our average for the fourth quarters of 2017 to 2019. And consistent with our expectations, Synchrony's net charge-offs reached 5.58% in the fourth quarter compared to 3.48% in the prior year and an average of 5.49% in the fourth quarters of 2017, 2018 and 2019. We continue to monitor our portfolio and implement actions as necessary to proactively position our business for 2024 and beyond.
Moving to reserves. Our allowance for credit losses as a percent of loan receivables was 10.26%, down 14 basis points from 10.40% in the third quarter. The reserve build of $402 million in the quarter was largely driven by receivables growth.
Turning to Slide 12. Synchrony's balance sheet continues to be a source of flexibility and strength. Our consumer bank offerings continued to resonate with customers in the fourth quarter, driving over $3 billion of growth in total deposits in the quarter or 13% compared to the prior year. At quarter end, deposits represented 84% of our total funding, while securitized debt comprised 7% and unsecured funding 9%. Total liquid assets and undrawn credit facilities were $19.8 billion, up $2.6 billion from last year and at quarter end represented 16.8% of total assets, up 42 basis points from last year.
Moving on to our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony will continue to make its annual transitional adjustments to our regulatory capital metrics of approximately 50 basis points each January until 2025. The impact of CECL has already been recognized in our income statement and balance sheet.
Additionally, in the fourth quarter, Synchrony made a change to its balance sheet presentation of contractual amounts related to our retailer partner agreements. At year end, assets of approximately $500 million, which were previously classified as intangible assets, were reclassified to other assets and prior periods were reclassified to conform to this presentation. This change in presentation had a corresponding impact to each of our regulatory capital metrics that resulted in an increase of approximately 50 basis points to our capital ratios in both the current and prior years.
Under the CECL transition rules and including this balance sheet change, we ended the fourth quarter with a CET1 ratio of 12.2%, 110 basis points lower than last year's 13.3%. The Tier 1 capital ratio was 12.9% compared to 14.1% last year. The total capital ratio decreased 60 basis points to 14.9%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 22.1% compared to 22.8% last year.
During the fourth quarter, we returned $353 million to shareholders, consisting of $250 million of share repurchases and $103 million of common stock dividends. At the end of the quarter, we had $600 million remaining in our share repurchase authorization. We remain well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. We will also continue to seek opportunities to complete the development of our capital structure through the issuance of additional preferred stock as conditions allow.
Synchrony remains committed to our capital allocation framework which prioritize investment in organic growth and payment of our regular dividends followed by share repurchases and investments in inorganic growth opportunities where the rates of return meet or exceed that of our other potential uses of capital.
To that end, as Brian mentioned, Synchrony announced the acquisition of the Ally Lending point-of-sale financing business, which we view as a great opportunity to expand our leadership position in the home improvement and health and wellness verticals, while leveraging our industry expertise and scale to unlock still greater value. We've agreed to purchase approximately $2.2 billion of loan receivables at a discount. Upon closing of the transaction and subject to the completion of purchase accounting, we expect our CET1 ratio to be reduced by approximately 50 basis points inclusive of provision for credit losses of approximately $200 million relating to the initial reserve builds. Synchrony expects this acquisition to be accretive to full year 2024 earnings per share, excluding the impact of the initial reserve build for credit losses. Upon integration of our business, conversion to our prism underwriting model and execution of our strategy, we expect to achieve attractive internal rate of return with approximately three and a half year tangible book value earn-back.
Additionally, the sale of our Pets Best business will result in approximately $750 million gain net of tax in 2024, which will contribute to an approximately 80 basis point increase to our CET1 ratio, inclusive of the capital required to be held on a minority interest in IPH. Excluding the gain on sale, we expect the transaction to be neutral to earnings. We're excited about the opportunities we identified to continue to drive consistent growth at appropriate risk-adjusted returns and have established a long track record of execution across both strategic and financial objectives.
During 2023, we drove strong growth in purchase volume, which combined with the payment rate moderation to deliver solid growth in loan receivables. We were opportunistic in funding that growth and continue to expand our deposit franchise and, in turn, delivering attractive net interest income. Credit normalized in line with our expectations and our RSA functioned as designed. And finally, we fulfilled our commitment to deliver positive operating leverage.
Turning to Slide 14. Let's review our outlook for 2024. Our baseline assumptions for this discussion include: a stable macroeconomic environment; full year GDP growth of approximately 1.7%; a year-end 2024 unemployment rate of 4.0%; and an ending Fed funds rate of 4.75% with cuts beginning in the second half of 2024. This outlook also assumes the closing of our Pets Best and Ally Lending transactions in the first quarter of 2024. And, given the uncertainty of timing and implementation of a potential final rule regarding late fees, we've not assumed any related impact to our 2024 financial outlook. In the event that a final late fee rule is published, we will provide an update with the associated impact to our financial guidance.
Starting with loan receivables, we expect our compelling value propositions and the broad utility of our products will continue to drive purchase volume growth. We also expect payment rates to continue to moderate although we anticipate they will remain above pre-pandemic levels through 2024. Together, these dynamics should deliver ending loan receivables growth of 6% to 8%.
We expect full year net interest income of $17.5 billion to $18.5 billion. Net interest income should follow typical seasonal trends through the year, adjusted for several impacts. One, higher interest-bearing liabilities expense as our fixed-rate debt reprices with higher benchmark rates. Two, the impact of competition for retail deposits and pace of deposit repricing once rate cuts begin. Our expectation is for betas to trend near 30% as rates begin to decline later in the year, thereby reducing the impact to interest expense during 2024. And three, interest and fee yield growth, partially offset by higher income reversals.
We expect net charge-offs of 5.75% to 6% within our targeted underwriting range of 5.5% to 6%. Losses are expected to peak in the first half before returning to pre-pandemic seasonal trends, following the normalization of delinquency metrics in 2023.
We expect RSAs of 3.5% to 3.75% of average loan receivables for the full year. This reflects the impact of continued credit normalization, higher interest expense and the mix of our loan receivables growth, partially offset by purchase volume growth. The reduction in RSA demonstrate the functional design of the RSA and the continued alignment of our interest with partners.
And finally, we expect to reach an operating efficiency ratio of 32.5% to 33.5% for the year, driven primarily by the optimization of our loan yields as credit normalization occurs. This outlook excludes the impact of the Pets Best gain on sale, which we recognized in other income. We remain committed to delivering operating leverage for the full year and continuing to invest in the long-term success of our business.
As demonstrated again this past year, Synchrony's purpose-built business and financial model is performing as designed. Through an evolving backdrop, our diversified portfolio of products and platforms continue to drive growth. Our leading credit management ensures attractive risk-adjusted returns. Our RSA provides a buffer against changes in economic performance and our stable balance sheet creates opportunity.
Taken together, our business continued to deliver value for each of our stakeholders in 2023 and is positioned well for 2024.
I'll now turn the call back over to Brian for his closing thoughts.
