Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial
Thanks, Brian, and good morning, everyone. Synchrony's strong fourth quarter results demonstrate the power of Synchrony's purpose-built business model at work. The diversification of our portfolio across industries and spend categories supported by sophisticated underwriting and disciplined credit management enabled continued purchase volume growth that surpassed last year's record level.
In addition, the alignment of economic interest between Synchrony and our partners through our retailer share arrangements is performing as intended. Excluding the impact of portfolio sales, our RSA declined as credit losses continue to normalize and funding costs began to rise, enabling Synchrony's delivery of consistent, attractive risk-adjusted returns as we have done for many years. The scalability and efficiency of our dynamic technology platform is enabling operating leverage even as we invest in our business. And Synchrony's strong balance sheet continue to support our customers and partners as their own needs evolve. In combination, these business drivers have continued to uniquely position Synchrony in our ability to deliver sustainable outcomes for our customers and our partners and consistent returns to our shareholders even as market conditions change.
Let's now discuss Synchrony's fourth quarter financial results in greater detail. Purchase volume grew 2% to $47.9 billion, reflecting a 3% higher spend per account versus last year. On a core basis, purchase line grew 11%. This continued strength in purchase volume was broad-based across our portfolio, demonstrating the breadth and depth of our five sales platforms, the compelling value propositions we offer and continued consumer demand.
At the platform level, Synchrony achieved double-digit growth in our diversified value, health and wellness and digital platforms and single-digit growth in our home and auto and lifestyle platforms. More specifically, in diversified value, purchase volume increased 15% driven by higher out-of-partner spend in addition to partner performance and penetration growth. The 10% year-over-year increase in digital purchase volume reflected the growth in average active accounts and greater customer engagement. Health and wellness purchase volume grew 15% compared to last year as we experienced broad-based growth in active accounts as well as higher spend per active account. In-home and auto, purchase volume increased 9%, generally reflecting strong spend in home and higher prices in furniture. And in lifestyle, purchase volume was 2% higher, driven by higher at our partner spends.
Turning to Synchrony's dual and co-branded cards where we continue to experience strong growth. Core purchase volume on these products grew 21% versus last year and represented approximately 40% of our total purchase volume for the quarter. As we've discussed in the past, our customers derive great value from our dual and co-branded cards because they combine best-in-class rewards with broad utility. Generally speaking, approximately half of our auto partners spend is comprised of nondiscretionary spend by billpay, discount store, drugstore, health care, grocery and auto and gas.
And while we observed some minor category shifts during December, for example, from T&E related spend towards more clothing and other retail as well as a reduction in auto and gas-related spend towards more grocery and discount spend, Synchrony's relative mix of discretionary and nondiscretionary at a partner spend has remained essentially unchanged. Consistently strong consumer spend, coupled with some moderation in payment rate contributed 10% higher average balances per account versus last year and 15% growth in any receivables. Our dual and co-branded cards accounted for 24% of core receivables and increased 28% from the prior year.
Net interest income increased 7% to $4.1 billion, primarily reflecting a 13% increase in interest and fees due to higher average loan receivables and higher loan receivable yields, partially offset by the impacts of the portfolio sold during the second quarter of 2022. On a core basis, interest and fees increased 21%. Payment rate for the fourth quarter, when normalizing for the prior year impact of the portfolios recently sold, was 17%, approximately 75 basis points lower than last year and approximately 160 basis points higher than our five-year historical average.
The net interest margin was 15.58% in the fourth quarter, a year-over-year decrease of 19 basis points. The primary driver of the decrease was higher interest-bearing liability costs, which increased 168 basis points to 2.86% and reduced net interest margin by 136 basis points. The mix of interest-earning assets also reduced net interest margin by roughly 6 basis points. These headwinds were partially offset by a 92 basis point improvement in loan yields, which contributed 79 basis points to net interest margin, and our liquidity portfolio yields, which contributed 44 basis points. RSAs were $1 billion in the fourth quarter and 4.68% of average loan receivables. The $224 million year-over-year decrease was primarily driven by the impact of portfolios sold in the second quarter of 2022 and higher net charge-offs, partially offset by higher net interest income.
Provision for credit losses were $1.2 billion for the quarter. The year-over-year increase reflected the impact of a growth driven $425 million reserve build and higher net charge-offs. Other income decreased $137 million, primarily reflecting the impacts of the prior year's venture investment gain and the current quarter's higher loyalty costs driven by our strong purchase volume. Other expenses increased 3% to $1.2 billion, primarily driven by higher employee costs, technology investments and transaction volume, partially offset by $75 million of asset impairments and certain incremental marketing investments recognized in the prior period.
The fourth quarter employee cost included certain additional compensation items of $21 million, higher stock-based compensation and higher headcount driven by growth and in-sourcing. Total other expense included $12 million of additional marketing and growth reinvestment from second quarter's $120 million gain on sale proceeds. As detailed in the appendix of our presentation, the $120 million gain on sale and reinvestment made in the second, third and fourth quarters of this year were EPS neutral for the full year 2022. Our efficiency ratio for the fourth quarter was 37.2% compared to 41.1% last year. Putting it all together, Synchrony generated fourth quarter net earnings of $577 million or $1.26 per diluted shares. We also generated a return on average assets of 2.2% and return on tangible common equity of 22.1%.
Next, I'll cover our key credit trends on Slide 10. The external deposit data we monitor continues to reflect a slow reduction in consumer savings. Average deposit balances at the end of December were down approximately 5% from their peak in March of 2022, but still approximately 1% higher than 2021's average and 12% higher than 2020's average. On an annualized trend basis, the savings decline that began around that March 2022 peak appears to have started to slow in December, primarily in terms of its intensity.
Turning to Synchrony's portfolio, credit normalization continued as expected during the fourth quarter. Vintages are still performing better than 2018 and delinquency entry rates remain lower than the historical average at approximately 80% of their pre-pandemic levels. That said, as consumer savings rates has decreased, borrower payment behavior is reverting towards pre-pandemic levels with normalizing entry rates into delinquency and higher roll rates in early delinquency stages following the charge-offs. This trend continued in the fourth quarter as payment rate normalization trends expanded from the nonprime segments of our portfolio into the prime and super prime segments, where the average outstanding balances tend to be larger.
Relative to period-end receivables, our 30-plus delinquency rate was 3.65% compared to 2.62% last year and our 90-plus delinquency rate was 1.69% versus 1.17% in the prior year. And our fourth quarter net charge-off rate increased to 3.48% from 2.37% last year, still remaining well below our underwriting target of 5.5% to 6%, at which point portfolio credit risk is better optimized relative to profitability. Our allowance for credit losses as a percent of loan receivables was 10.30%, down 28 basis points from the 10.58% in the third quarter, primarily reflecting the impact of an asset growth driven reserve builds, which was more than offset by the impact of receivables growth in the denominator.
Moving to another source of Synchrony's strength, our capital, liquidity and funding. Deposits at the end of the fourth quarter reached $71.7 billion, an increase of $9.4 billion compared to last year. Our securitized and unsecured funding sources decreased by $316 million. Altogether, deposits represented 84% of our funding, while securitized and unsecured debt represented 7% and 9%, respectively, at quarter end.
Total liquidity, including undrawn credit facilities, was $17.2 billion or 16.4% of our total assets, consistent with last year. We maintain a diversified approach to both our deposit base and our secured and unsecured debt issuances and prioritize a strong and efficient funding foundation of at least 80% deposits. We expect to continue to grow our deposits to fund our growth, and we'll maintain an opportunistic approach to secured and unsecured issuances when market conditions are supportive of efficient funding.
We manage our balance sheet to be interest-rate neutral. That said, as we continue to grow our deposit base, and given the level of interest rates, consumers are actively rotating from savings to CDs. This has had the effect of extending our deposit duration while making our balance sheet slightly liability sensitive. We will continue to manage interest rate risk through term maturities. It's also important to note through its mutual alignment of economic interest and delivery of a minimum return on assets at the partner program level, Synchrony's RSA will provide some offsetting support to the impact of rising interest rates on our business.
Moving on to discuss Synchrony's capital position. Note that we previously elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. As a result, starting this past January of 2022, and continuing in January of 2023, Synchrony makes an annual transition adjustment of approximately 60 basis points to our regulatory capital metrics until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet.
It should also be noted that the FASB CECL update for the accounting of TDRs becomes effective for Synchrony as of January 2023. This accounting standard update eliminates the separate recognition and measurement guidance for TDRs, which previously followed a separate process using a discounted cash flow methodology to quantify the TDR-specific reserve requirement. Synchrony is adopting this update on a modified retrospective basis as of January 1, 2023. Based on our current estimate, the adoption will result in approximately $300 million reduction to our reserve balance, which we recognize net of tax and equity. The net impact of the adoption will contribute approximately 25 basis point increase to our capital ratios.
From a capital metric perspective, we ended the quarter at 12.8% CET1 under the CECL transition rules, 280 basis points lower than last year's level of 15.6%. The Tier 1 capital ratio was 13.6% of the CECL transition rules compared to 16.5% last year. The total capital ratio decreased 280 basis points to 15%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 22.4% compared to 24.4% last year. Synchrony continued our track record of robust capital returns in the fourth quarter. In total, we returned $803 million to shareholders through $700 million of share repurchases and $103 million of common stock dividends. As of quarter end, our total remaining share repurchase authorization for the period ending June 2023 was $700 million. Synchrony remains well-positioned to continue to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. As we make further progress toward our targeted capital levels, we look to develop our capital structure through the issuance of additional preferred stock and the issuance of subordinated debt.
Finally, let's turn to our 2023 outlook for the full year, which is summarized on Slide 13 of our presentation. We expect strong consumer demand for the wide variety of products and services we finance to support continued broad-based purchase line growth. As excess consumer savings continue to decline, year-over-year purchase line growth rates should slow. Payment rates should also continue to moderate, but we're still expected to remain above pre-pandemic levels throughout 2023. Together, these dynamics should contribute to ending receivables growth between 8% and 10%.
We expect our net interest margin to be between 15% and 15.25% for the full year and follow typical seasonal trends. This outlook is based on a peak Fed funds rate of 5.25% and incorporates the following five impacts during 2023. One, the increase in interest-bearing liabilities cost due to higher benchmark rates and the potential competitive pressures or higher retail deposit betas to address funding needs. Two, higher interest and fee yields, partially offset by higher income reversals as delinquency and charge-offs continue to normalize. Three, an increase in our liquidity portfolio yields, primarily reflecting the higher benchmark rates. Four, the fluctuation of mix of average loan receivables relative to average interest-earning assets as driven by the seasonal growth trends and timing of our funding. And five, the full year impact of the portfolios sold during second quarter 2022.
Before we turn to our credit outlook, it's important to note there are a number of uncertainties that could change our expectations and the trajectory of credit normalization. We have greater visibility for the first half of this year and any significant changes in the medium-term macroeconomic backdrop would more likely impact portfolio credit trends in 2024. With regard to our portfolio's credit trajectory in 2023, we expect most of the portfolio delinquency metrics to have reached normalized levels or equivalent to pre-pandemic levels by midyear. Accordingly, the associated charge-offs will reach pre-pandemic levels approximately six months later.
The seasonal impact of tax refunds and bonuses in the first half and the third quarter's acceleration of receivables growth will likely lead to a decline in net charge-off rate for Q3 before credit losses rise and continue the normalization path through the fourth quarter. Given our expectation that delinquency metrics will reach their pre-pandemic levels by midyear, we expect net charge-offs to be between 4.75% to 5% for the full year, still considerably below our pre-pandemic annual loss rate target of 5.5% to 6%. We run multiple economic scenarios to inform our credit outlook as part of our normal business process. Our baseline reserve assumptions include an unemployment rate of approximately 4.2% by year-end. We have qualitative overlays for the current uncertainty and possibility of a mild recession.
In this scenario, we'd expect the unemployment level closer to 5%. This is reflected in our fourth quarter 2022 reserve rate, which is still higher than our day 1 CECL rate. Barring any significant changes in the macroeconomic environment, we do not expect our portfolio to reflect our fully normalized annual loss rate target until 2024. Accordingly, we continue to expect reserve builds in 2023 to be generally asset-driven and that the reserve rate will gradually migrate towards approximately 10% as credit normalization brings our portfolio net charge-offs back to that mean annual loss rate to which we've been underwriting.
RSA expense will continue to serve as a functional alignment of economic interest with our partners, reflecting the strength of our program performance and purchase volume growth, offset by rising net charge-offs. As a result, we expect RSA as a percent of average loan receivables to be between 4% and 4.25%. Should credit normalize at a slower rate than we expect, RSAs will likely come closer into the high end of that range. And the extent that funding costs or net charge-off rise to the high end or beyond of our current assumptions, we expect the RSA to come into the low end or lower than this range.
In terms of other expense, we remain committed to delivering operating leverage such that expenses grow at a slower rate than net interest income. Our full year expectation that expenses will run approximately $1.125 billion per quarter to the extent that receivables or revenue growth is not tracking ahead of expense growth for the full year, we will moderate our spending where appropriate while still prioritizing the best long-term prospects for our business.
As we demonstrated throughout this past year, Synchrony's business and financial models are performing as it's designed to do. Our proprietary data and analytics, diversified product suite and dynamic tech stack allow us to reach and improve more customers for the same level of risk while leveraging low customer acquisition costs and driving greater customer lifetime value. Our retailer share ranges are effectively aligning our partners' economic interest with our own. And in doing so enabling Synchrony to deliver consistent risk-adjusted returns through changing market conditions. And our robust balance sheet is providing funding flexibility as we seek to provide continuity to our customers and partners when they need it most.
In short, Synchrony is uniquely positioned to deliver sustainable growth and resilient risk-adjusted returns even as market conditions change and the needs of our customers and partners evolve. We remain on track to achieve our long-term financial operating targets as market conditions stabilize.
I'll now turn the call back over to Brian for his closing thoughts.
