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Synchrony Financial Q1 2023 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Kathryn Miller
    Senior Vice President of Investor Relations
  • Brian Doubles
    President & Chief Executive Officer
  • Brian Wenzel
    Executive Vice President and Chief Financial Officer

Presentation

Operator

Good morning, and welcome to the Synchrony Financial First 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 for your questions following the conclusion of management's prepared remarks.[ Operator Instructions ].

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

Kathryn Miller
Senior Vice President of Investor Relations at Synchrony Financial

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. 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. 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.

During the call we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast 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.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Thanks Kathryn. Good morning, everyone. Today Synchrony reported strong first quarter results, including net earnings of $601 million or $1.35 per diluted share, a return on average assets of 2.3% and a return on tangible common equity of 23.2%. Once again, the power of Synchrony is differentiated business model match with the continued health of the consumers we serve delivered consistent growth across our diversified set of partners and products. On a core basis we opened 5.2 million new accounts. Grew average active accounts by 8%, and drove 42 billion in purchase volume, the highest ever for a first quarter. This milestone was achieved with the results across each of Synchrony's five platforms, highlighting the strength of our diversified model. Health and wellness purchase volume grew 19% compared to last year reflecting broad based growth in active accounts and higher spend per active account. In diversified and value purchase volume increased 16%, driven by strong outer partner spend, strong retailer performance and penetration growth.

The 10% growth in digital purchase volume was broad based reflecting growth in active accounts and strong customer engagement. In lifestyle purchase volume increased 9% reflecting higher transaction values primarily in outdoor and luxury. And in home and auto purchase volume increased 6%, the strength in our commercial products and higher transaction values in furniture and home specialty. Dual and co-branded cards accounted for 41% of total purchase volume and increased 22% on a core basis, reflecting continued strong response to several new value proposition. Synchrony's record first quarter purchase volume growth is a testament to the utility of our flexible financing solutions, the compelling value propositions we offer and the continued resilience of our customers as they navigate the impacts of inflation and higher interest rates. We regularly monitor our customers' needs and their financial health to our billions of real time transaction data.

Our insights continue to show only minor variations in average transaction value and frequency across spend categories. At a high level, average transaction values and frequency increased in the quarter across both in-store and outer partner spend, reflecting the continued impact from ongoing inflationary pressure. However, growth in average transaction value slowed in March, possibly, reflecting the early impact of lower tax refunds. More broadly, the data suggests that our customers are actively managing and budgets as the macro backdrop evolves. We also continue to see some minor seasonal category shifts within our audit partner spend. So the relative mix of discretionary and nondiscretionary spend remains essentially unchanged. Meanwhile, across the spectrum of credit segments we serve, our highest credit grade borrowers continue to shop more frequently and spend more when they do. And the sign of their relative health, the transaction frequency of super prime customers in certain platforms grew at rates lasting during the summer of 2022. Lower credit grade borrowers are shopping somewhat less often.

This trend has remained relatively stable since the fourth quarter and follows apparent behaviors of this credit segment, which migrated toward pre-pandemic levels in the second half of last year. In terms of payment behavior, we also continue to see normalizing payment rates across age cohorts and credit bands, which is to be expected as consumer spend or accumulated savings and begin the revolver balances. Based on the external deposit data we monitor, consumer savings levels continued to decline through March 31, though at a slower pace than we saw through most of 2022. Average consumer deposit balances declined 2% this quarter, though they remain 10% above 2020. As accumulated savings continue to decline at this modest pace, we expect our payment revolve trends to further normalize. This in turn will drive continued growth in our interest bearing loan balances. The return of delinquency and credit loss metrics to pre-pandemic levels, and better optimize risk adjusted margins for our business. Synchrony's business model is designed to support our customers and partners through changing macro conditions and in particular, a more normalized operating environment than we've seen since the start of the pandemic. As this progression back to historical levels continues, we are managing the business prudently for the long-term, while watching trends. With that view and given the stable labor markets and the relative strength of the consumers' balance sheet, we remain positive on the state of the consumer today. Our confidence comes from our decades of experience managing through economic cycles. This experience delivers a model that sustainably serves all of our stakeholders.

At the crux of it all is our diversified partner portfolio and product suite, which gives us the tools to deliver consistent, high quality products and results throughout varying environments. We continue to build on the strength in the first quarter, as highlighted by our recently announced product launch and the addition of renewal of more than 15 partners. In particular, we launched the Synchrony outdoors cards, which was in direct response to customer and partner demand in our powersports business. Serving as an example of how our platform realignment is enabling Synchrony to rethink how we deliver for partners and customers. Synchrony has long provided valuable installment lending solutions for powersports equipment. However, in this market, which is projected to reach $131 billion by 2028, there are significant purchases that occur after the initial purchase, such as accessories, parts, garments, fuel, service and warranties that were not served by the instalment lending model we've traditionally offered in powersports.

Our dedicated platform team with combined experience across partners and products identified this opportunity to meet our customers' demand and drive still greater loyalty for dealers. Turning to our health and wellness platform, Synchrony extended relationships with the largest and second largest dental associations this quarter solidifying CareCredit as the dental financing solution of choice. More specifically, we announced a 10 year partnership extension with the American Dental Association distinguishing CareCredit as the only ADA endorsed patient financing solution. This endorsement, which dates back to 2001, includes special features and offers for more than a 159,000 dentists members and their patients. We also extended our 20 year relationship with the Academy of general dentistry remaining the exclusive patient financing solution for the benefits program of the academy's more than 35,000 member dentists. These continued long standing partnerships underscore the unique value that our integrated CareCredit offering delivers to both the providers and patients we support.

And finally, we announced renewals across an array of partners this quarter in our home and auto platform including Havertys and Lovesac. Synchrony's ability to grow and win new partners as well as diversify our products, programs and markets enables us to drive greater flexibility, utility and value for our customers and partners alike, while also enhancing the resiliency of our business. In summary, I'm proud of the many ways in which Synchrony continues to meet our customer wherever they are looking to make a purchase, a payment or a deposit. As their needs and priorities continue to evolve, Synchrony is ready. Ready to deliver flexibility, value and seamless experiences to more solutions and more locations, along with our industry leading partners.

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

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Thanks, Brian and good morning, everyone. Synchrony's first quarter performance highlighted the continued strength of the consumer here with the power of our diversified sales platforms, compelling value propositions and prudent financial position. Consumers continue to deepen their engagement with our products. On a core basis, ending loan receivables growth of 16% was fueled by 11% stronger purchase volume along with 3% higher spend per active account. Net interest income increased 7% to $4.1 billion as the growth in loan receivables and an increase in loan receivable yields drove 15% higher interest and fees. This was partially offset by the impact of the portfolio sold during the second quarter of 2022. On a core basis, interest and fees increased 23%, reflecting the impact of credit normalization as payment behavior trends toward pre-pandemic levels. Pay rate for the first quarter when adjusting for last year portfolio sales was 16.7%, approximately 85 basis-points lower than last year and approximately 150 basis-points higher than our five year pre-pandemic historical average.

First quarter net interest margin of 15.2% declined 58 basis-points primarily reflecting the higher impact of interest rates in our funding cost, partially offset by better yield trends. Loan receivables yield climbed 97 basis-points and contributed 83 basis-points to the net interest margin. Incremental liquidity portfolio yields also contributed an additional 54 basis-points. These gains were more than offset by higher interest-bearing liability costs, which increased 219 basis points to 3.43% and reduced net interest margin by by 179 basis-points. And our mix of interest earning assets reduced net interest margin by approximately 16 basis-points as we built liquidity to fund anticipated growth. RSAs of $917 million in the first quarter were 4.10% of average loan receivables. The $187 million decline from the prior year reflected the impact of the portfolio, sold in the second quarter of 2022 and higher net charge offs, partially offset by higher net interest income. Honestly provide important in line with our partners and continue to function as designed by providing a buffer to the financial results of the company and supporting greater stability in our returns. This was highlighted in the first quarter as RSA provide a buffer to increased net charge-offs and higher funding costs, provision for credit losses was $1.3 billion for the quarter, which reflected higher net charge-offs and $285 million reserve built. To build, including consideration for the potential macroeconomic effects of industry credit contraction and the potential impact on consumers. So we do not see any related impacts in our delinquency performance today. Other income decreased $43 million, driven primarily by higher loyalty costs as well as the impact from investment gains and losses, partially offset by higher debt cancellation income. Other expenses increased 8% to $1.1 billion, primarily driven by higher employee costs, operational losses and technology investments. Our efficiency ratio for the first quarter was 35% compared to 37.2% last year. In total, Synchrony generated first quarter net earnings of $601 million or $1.35 per diluted share, delivering a return on average assets of 2.3% and return on tangible common equity of 23.2%.

Next, I'll cover our key credit trends on Slide 8. We continue to see credit metrics performing in line with or better than 2019 performance as credit normalization continues at a measured pace. Delinquency rates remain at approximately 80% of pre-pandemic levels in recent vintages continue to perform better than those of 2018 or 2019. The continued tapering of accumulating consumer savings is contributing to a slow moderation of payment behavior towards pre-pandemic levels. As we noted last quarter, the trend normalization has gradually shifted into higher credit grades balances tend to be larger. As a result, we saw penal rate declines versus prior quarter of approximately 30 basis-points while delinquencies and losses increased in line with our expectation. Our 30 plus delinquency rate was 3.81% compared to 2.78% last year, were 4.92% in the first quarter of 2019. Our 90 plus delinquency rate was 1.87% versus 1.30% in the prior year or 2.51% in the first-quarter of 2019. And our net charge off rate increased to 4.49% from 2.73% last year, still approximately 100 basis-points below our underwriting target of 5.5% to 6%.

Our allowance for credit losses as a percent of loan receivables was 10.44%, up 14 basis-points from 10.30% in the fourth quarter. The sequential increase in the reserve rate primarily reflected the impact of the additional reserve discussed earlier and seasonally lower receivables, the allowance reflects a previously announced $294 million reduction of reserves for troubled debt restructurings recorded through equity as we adopted updated accounting guidance. This guidance reduced our reserve coverage rate by approximately 30 basis-points for the quarter. In the quarter, Synchrony's management of funding, capital and liquidity remained a source of strength. We said maintaining appropriate target levels of common equity, liquidity and reserves. We generally manage our funding strategy, interest rate neutral to minimize duration risk. And the vast majority of our liquidity portfolio is in cash and short-term US treasuries largely maturing in under one year. So as depositors across the country navigate the uncertainty of several bank failures and pronounced deposit flows during mid March, Synchrony Bank was well positioned as a reliable source of stability for both our customers and our business.

Our stable direct to consumer deposit base is largely insured with no concentrations in geographic areas or high balance accounts. Our average depositor has banked with us for approximately five years and nearly 80% of our deposit balances are more than three years old. The foundation of this loyalty is Synchrony Bank's award winning platform and industry leading customer satisfaction scores. Depositors are attracted to our seamless digital first experience as well as our competitive rates. In fact, as customers sought to either balanced exposure to their banks or remix their balances to take advantage of available FDIC insurance limits during the last three weeks of March, Synchrony Bank saw a net deposit inflows of nearly $700 million as we generate double digit account growth sequentially. This contributed to first quarter deposit growth of 17% versus last year and $2.7 billion sequentially to reach $74.4 billion. At quarter end, over 91% of Synchrony Bank direct deposits were fully insured. And then looking at April trends Synchrony Bank activity has returned to more seasonal flows powered by continued growth in new accounts and deposits.

Our deposit base provides a strong foundation for our business, representing 83% of our total funding as complemented by our securitized and unsecured debt, which represented 7% and 10% of our funding respectively and increased by $1.7 billion versus the prior year. This increase include the issuance of 10 year subordinated debt, an important milestone as we continue to more fully develop our capital stack and target capital levels. Total liquidity, including undrawn credit facilities was $21.7 billion or 20.2% of our total assets, up 148 basis-points from last year as we grew deposits and pre-funded our projected loan receivables growth.

Moving on to discuss Synchrony's capital position. As we've previously elected to take the benefit of the CECL transition rules issued by the joint banking agencies, Synchrony made its annual transitional adjustment of approximately 60 basis-points for regulatory capital metrics In January and we will continue each year until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Further, the TDR reserve reduction mentioned earlier was recognized net of tax in equity adding approximately 25 basis-points to our capital ratios. We ended the first quarter at 12.5% CET1 under the CECL transition rules, 250 basis-points lower than last year's level of 15%. The Tier 1 capital ratio was 13.3% of the CECL transition rules, compared to 15.9% last year. The total capital ratio decreased 180 basis-points to 15.4% and the Tier 1 capital plus reserves ratio on a fully phased-in basis decreased to 22.5% compared to 24.5% last year. Synchrony continued our track record of robust capital returns in the first quarter. In total, we returned $500 million to shareholders to $400 million of share repurchases and $100 million of common stock dividends. As of quarter end, our remaining share repurchase authorization for the period ending June 2023 was $300 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. We'll also continue to seek opportunities to complete our fully developed capital structure through the issuance of additional preferred stock.

Finally, please refer to Slide 12 of our presentation for more detail on our full year 2023 outlook. Overall, first quarter purchase volume came in ahead of our expectations, which when combined with slightly faster payment rate normalization than anticipated deliver stronger receivables growth for the quarter. As a result, we now expect end receivables to grow by 10% or more by year end. Although we anticipate payment rates ending the year well above pre-pandemic levels. We continue to expect net interest margin of 15% to 15.52%. This outlook reflects the benefit of favorable trends in our deposit betas and payment rate during the first quarter, balanced by anticipated impact of the broader market uncertainty. These potential impacts include holding higher liquidity levels in anticipation of growth funding needs as well as competitive dynamics within the industry that could lead to higher betas. Meanwhile, credit normalization continues on track in line with our expectations in terms of both our delinquency and loss trends. As a reminder, we expect delinquencies to continue to rise, and approach pre-pandemic levels by mid year.

Net charge-offs should follow a similar but lag progression relative to normalization in delinquencies. Lost hours will rise through 2023, but will now reach fully normalized levels, still approximately six months following the peak in delinquencies. As such, we continue to expect the net charge-off rate for the full year 2023, of 4.75% to to 5% and then our portfolio will now reach to Daniel underwriting loss target range of 5.5% to 6% until 2024. Given our unchanged outlook for net interest margin and net charge-offs, the RSA remains unchanged between 4% and 4.25% of average loan receivables. We remain committed to delivering operating efficiency for the full year with the target of approximately $1.125 billion in operating expenses per quarter. In sum, Synchrony's model is built for sustainable performance at strong risk adjusted returns, as we grow to meet the needs of our customers, our partners and our shareholders. As conditions normalize, we remain on track to achieve our long-term financial operating targets.

I'll now turn the call back over to Brian for his closing thoughts.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Thanks, Brian. Synchrony's track record of execution reflects our differentiated approach to serving our customers and our partners and the consistency that generates for our stakeholders. Over decades and through economic cycles and waves of innovation, we prioritized strategies that deliver sustainable, long-term growth at attractive risk adjusted returns. So as I look-forward, I'm confident in our ability to continue to adapt and deliver across environments and I'm excited for the opportunities we see to deliver on our objectives in the year ahead.

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

Kathryn Miller
Senior Vice President of Investor Relations at Synchrony Financial

That concludes our prepared remarks, we will now begin the Q&A session, so that we can accommodate as many of you as possible. I'd like to ask the participants to please limit yourself to one primary and one follow-up question, if you have additional questions, Investor Relations team will be available after the call. Operator, please start the Q&A session.

Questions and Answers

Operator

At this time if you would, if you wish to ask a question [Operator instructions] As a reminder, please limit yourself to one primary question and one follow-up question. We'll take our first question from Moshe Orenbuch. With Credit Suisse. Please go ahead.

Moshe Orenbuch
Analyst at Credit Suisse Group

Great. Thanks and thanks, Brian and Brian. The -- I guess the first question I'd like to ask is, given that you're now seeing this normalization of profitability as you're going through this process of both losses normalizing and you do have the current economic outlook with the variability around. Could you just talk a little bit about how you're thinking about growth in new accounts and the discussions that you're having with your partners both about your ability to continue to grow and and their, how they're thinking about the RSA that they receive.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Good morning, Moshe. So the conversation with the partners, they are most certainly looking to us to help drive them new customers and grow sales. The competitive retail environment is very difficult for them right now and I think the ability for us to bring a multiproduct facet to them is already facing now, we just continue to work with them about what the right placement is of products and when we think about the profitability we are returning back to normal levels, we'll certainly, the funding cost is higher than what we traditionally have seen historically and they understand and they-- the conversations around the RSA. They do recognize that they benefited over the last couple of years with the downside of the market and they want to participate. That's the economic arrangement we've had and then really pushing back. They will certainly are cautious and want to understand how for us developing where that we're going to take actions at some point, which may impact our sales. But for the most part they've been supportive and really looking for us to continue to drive volume for them and new customers. I know Brian, do you want to add anything to that.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes. I would just add, Moshe. We've talked about this in the past that. I think, in periods of uncertainty and clearly we're in a somewhat uncertain period right now, this is when we see our partners engage even more in the card programs. And that's great for us, the level of engagement I would say across big partners and small partners has never been higher than it is right now. They're very engaged. They are working with us on really trying to understand what the consumer is doing, how they're going to behave over the next 12 to 24 months. And we're seeing great engagement in the multi product strategy as well. That's something that we anchored on a couple of years ago, a lot of momentum across the business on it, and I think as partners are kind of taken a step back and trying to figure out the macroeconomic environment and the consumer trends. They are also rethinking the financial products that they offer and kind of rationalizing their point of sale and I think that definitely plays plays to our strength.

Moshe Orenbuch
Analyst at Credit Suisse Group

Great. Thanks and. Brian Wenzel, you said that your margin outlook. You talked, considered an industry environment that could it could lead to higher betas. It seems like from the actions that you've taken and others and the deposit you know kind of inflows that it seems like the opposite is happening. I guess maybe you could just talk a little bit in more detail about what you're actually seeing and what it would take for things to either get better or worse from a deposit beta standpoint from here.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Yes. Thanks, Moshe. So as we entered the year, we anticipated our betas to rise from last year. You know there was a shift in the end of last year. We've got highly competitive, particularly with some of the regional bank. So when you looked at our betas, at the end of last year, they were roughly low to mid 70s on high yield savings and around 80% on CDs. As we came into 2023, we anticipated probably a 10 to 15 point beta rise in high yield savings and probably a 20 based, 20 basis-points of growth essentially 100% or more beta on CDs. Right, that's how we came into the year. I'd say the market for the most part, since the third week of December through the end of the first quarter was very rational and the betas performed better than our expectation, right. So you look betas now, they're probably mid 70s on savings and about 90 and CDs. Our outlook though, Moshe is what's baked into the NIM guidance is that we still go back to those original points where you're going to be mid 80s on high-yield savings and over 100 on CDs, just because of the fact that there may be other banks would have seen deposit outflows may get more aggressive. Again, we haven't seen that yet, but that's what's in the outlook. So hopefully that doesn't develop, which will give us some potential upside.

Moshe Orenbuch
Analyst at Credit Suisse Group

Great. Thanks so much.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Thanks, Moshe, have good day.

Operator

Thank you. Our next question comes from Ryan Nash with Goldman Sachs.

Ryan Nash
Analyst at The Goldman Sachs Group

Hey, good morning guys.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Hi Ryan.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Hi Ryan.

Ryan Nash
Analyst at The Goldman Sachs Group

Brian, maybe just start on the allowance. Given the accounting change. Can you maybe just remind us what's included from a macro perspective. And then second, you talked about normalization still being 20% below and you gave us a nice progression on the charge-offs, but I guess, given the backdrop, plus the amount of growth you're anticipating. How do you think about delinquencies and charge-offs leveling-off versus the risk of overshoot and just given the impact of growth math and the softening macro backdrop. Thank you.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Let me try to unpack that question Ryan goods to talk to you this morning. So first, when you think about the TDR accounting change. This is one where we like many others have chose retroactive treatment. So there was a reduction to the reserves, they went net of tax through equity on January 1. As we came into the quarter, the reserve is fundamentally two things, one the seasonal pay down and purchase -- seasonal pay-down was lower than our expected, lower than expectations and then purchase volume was higher than our expectations, which gave us greater asset position at the end of the quarter, which led to the growth driven reserve provision. When you think about the components of what's in the reserve from a macroeconomic standpoint, effectively well we have when you look all the way through the baseline model through the qualitative reserves, our unemployment effectively 6% so isn't this reasonable for forecastable period. If unemployment stays below 6%, we should not have rate-driven reserve revisions.

Again during this quarter, though given the Bank in turmoil and the potential contraction of credit, we did add to the macroeconomic overlay to deal with the potential fall through effects to consumer. As I think about it stepping forward, what I'd say is we expect really generally growth driven reserves, I mean given provision increases and that should be in-line with what we thought about. That said, we still believe that we're going to trend downward over time as we move out through the end of the year and into next year down to that adjusted CECL day one reserve post.

Ryan Nash
Analyst at The Goldman Sachs Group

Got it. Thank you for the color. And maybe just on capital, Brian, you noted that you're well positioned to continue to return capital to shareholders at 12.5, you obviously approaching the 11% target. Can you maybe just think about how you manage capital in this kind of environment given obviously pretty robust asset growth, but clearly the potential recession being on the horizon, plus getting closer to your targets. Maybe just talk about some of the puts and takes and how you're thinking about managing the capital base over an intermediate timeframe.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes. You know Ryan, the thing I try to get, I'm trying to convey is that when you run your last stress testing models under these severe and idiosyncratic events, unemployment is up to 10%. So in theory, you go through when you run those stresses. So we look at it, even if you had some form of recession that came about in the short-to-medium term. In theory, your part capital provision or buffers will be able to withstand that. So we don't necessarily look at that as something where we would sit back and say we should stop or curtail some of the repurchases at a level repurchases aren't safe. So the economic event is really baked into our capital forecast and our capital plan. As we think about the priorities you hit it right the first thing we think about as the organic growth of the company, second is dividends and third comes down to whether not we have inorganic opportunities and or share repurchases. So, some of the cadence that might come about over the next couple of years. Are there assets that come available that we wanted to deploy capital into. But right now, again we're going to continue to return to shareholders to, return capital to shareholders in line with what we've been doing historically. And started down towards the 11%. Again, I highlighted in my prepared remarks that we do have to finish development of our preferred stack, but that's not necessarily something we need to do to that. Thanks for the color. Thanks, Ryan. Have a good day.

Operator

Thank you. Our next question will come from Erika Najarian with UBS.

Erika Najarian
Analyst at UBS Group

Hi. Good morning. My first question is on the RSA. At 4.1% and the quarter, I think it was about 20 basis-points lower than workings seems hard and as we think about normalizing credit for the rest of the year, should we expect the rest of the year to be at the lower end of the range that you gave us Brian.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Good morning, Erika. So again, we gave you the range of 4 to 4.25, it's going to really depend upon how net interest margin plays out. So when you think about the funding cost of the business. Losses again is in that same range of 4.75 to 5. So it's really going to play a really on how the deposit betas play through and how that, the benchmark interest rates flow through to our partners, but we expect it to be in the 4 to 4.25.

Erika Najarian
Analyst at UBS Group

Got it. And I hate to ask about '24, but a lot of investors are now thinking about credit sensitive financial and trough earnings in a recession and expecting trough earnings to be occurring in 2024. So, as we think about the dynamics of your net charge-off dollars reaching pre-pandemic levels in 2024. The potential for Fed cuts, potentially supporting your margin as you reprice deposits down. How should your prospective and current investors think about the RSA in that environment, right, because they think that as investors think about the step-function higher in net charge-offs. Is there a way for them to easily say okay here's a step-function lower on RSA in a recessionary year. That's unique to your stock.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Yes. Thanks. Thanks for the question. So first, let me just talk about credit for a second. We ended the quarter, if you look-back at historical delinquency rates. We been trending about 10 basis-points a quarter upon the normalization curve and we ended fourth quarter of 2002 it at roughly 80%. We ended the first quarter '23 roughly between 75 and 77, so credit is normalizing in a way which we expected, and to stay on that trajectory. As you slide into '24, we expect the loss rate to move back to our underwriting target at 5.5 to 6. Year dynamics that play through, you're right, if you believe, you go back to that type of environment which would have a slightly normal higher or more normalized unemployment rate. You're then going to see your payment rate come back-in line, which should give you a tailwind relative to interest and fees. But then we also expect the prime rate and the interest-bearing liabilities cost to come down. Those are all kind of work you have two effective tailwinds, headwind with net charge-offs. That goes all goes almost back through the RSA. So when you think about that, you have pluses and minuses there could be a period of time which we dipped below 4% for a quarter or two and then you should come back-in line with what. I would think the longer-term financial framework, which we gave you, which is in that 4 to 4.25.

Erika Najarian
Analyst at UBS Group

Helpful. Thank you.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Thanks Erika, have a good day.

Operator

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

John Hecht
Analyst at Jeffries

Good morning, guys, thanks for taking my questions.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Hi John.

John Hecht
Analyst at Jeffries

Good morning. Thanks. Really want to, is just noticing that you've had a good migration towards more use of co-brand and dual card. Brian, you talked about kind of product expansion earlier in the call. I'm just wondering what -- given that migration, what are you seeing, are you seeing any changes in customer activity that are worth noting and is that tied to product expansion, or is there other sources of that.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes John, I'll start and then ask Brian to add some color. I think the dual card co-brand strategy has been one that we've leaned on heavily over the last decade. And what we really like about it is the ability to migrate our best customers and our partners' best customers into a product that has both spend capabilities and the way that they earn on that card, typically gives them a reason to go back into the partners stores. So we like, we like the synergies there and we are seeing above average growth in dual card and world sales, which is great for us. Great for our partners as well. Just taking a step back, as we think about the multiproduct strategy. It really is one that you could envision starting with at the kind of lower end of the spectrum, a secured card of buy now pay later. Shorter-term installment loan migrating into a revolving product VLCC and then ultimately into a dual card a co-brand card. We think that strategy is a winning one. We think that economically to us when we think about the risk and and return profile, that allows us to cater to a very wide cross section in terms of our partners, customers. And so that's where I think we've seen a real change just in the last two or three years as we've been engaging with our partners on the multiproduct strategy. A lot of engagement, a lot of momentum there and I think that over-time that's a winning strategy for us. And maybe Brian just color if there's any changes in terms of the.. Yes. So remember John as we always talk about the customers that CCAR cards out the most loyal customers of our partners, right. So they are they are engaged with that brand, wanted value back in that brand and when we look through to the categories of spend that we see particularly on the dual card. They're very consistent how they rank order and very sticky. So I got number one. We'll spend categories bill pay. You think about [indecipherable] grocery and there you have restaurants and there those are things in which our everyday type events. That are sticky and continuous they're earning benefits back into a brand and would say like, they're going to continue to do that. So we look at transaction values and frequencies. It's remained relatively consistent, which goes back to the point when we we talk about dual card. When you think about some of their brands that are in there that may not necessarily be dual card, but have wide utility. And so our digital partners, we have a broad swathe of this business that goes across multi set of categories.

John Hecht
Analyst at Jeffries

Okay. That's very helpful color. And then Brian Wenzel. I apologize if you gave some of this color and the prepared remarks, but any I know you kept your guidance for NIM for instance and RSAs, but is there any seasonal considerations we should think about those over the course of the next couple of quarters.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Yes. So again, there will be seasonal trends, obviously, I think about charge-off, you generally have a seasonal increase in the second quarter from charge-offs on the interest margin basis, you have some seasonality as we prefund some of the back-end of the year growth into the first quarter into the liquidity profile. So you may see that come down and backup and charge-off be a little bit higher in second quarter. But I think when you look at charge-offs and it's important to note the pace of acceleration that you highlighted just a couple of minutes ago, there were still 80% of our historical delinquency levels. And when you look at the delinquency increases third quarter to fourth quarter, and the fourth quarter first quarter, they have slowed. So, again, on a dollar basis, because volumes up, you'll see it and receivables at a seasonal low in the second quarter and then you'll see the receivables grow and the loss rate kind of flatten out to be down, back half of the year.

John Hecht
Analyst at Jeffries

And then anything with respect to NIM fluctuations. Just as a part of that question.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Yes. So I tried to hit on then I apologize, John. With regard, you'll see a little bit of downward pressure in the second quarter and then comes back, mainly for pre-funding for the growth in the back-half and the only thing is that it's back and say that could potentially be a tailwind is we're not at the betas that we're assuming do not come in the way we anticipate, so they're more favorable. So, funding costs don't go up as much that could be a tailwind.

John Hecht
Analyst at Jeffries

Thanks very much guys.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Thanks John.

Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial

Thank you John.

Operator

Thank you. Our next question comes rom Sanjay Sakhrani with KBW.

Sanjay Sakhrani
Analyst at KBW

Thanks. Good morning. Maybe to follow-up on Moshe as question previously. Obviously, the cycle is very different from previous ones. I'm just curious if the dislocation in the regional banking space and the implications of it working through the economy might be assisting in sort of rethinking how you guys are underwriting. I know you mentioned Brian Doubles, the slower spending in March and lower tax refunds. Could you just talk about those different dynamics and sort of how it's affecting the way you guys are thinking about underwriting.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes, sure, I'll start Sanjay so I think what's important and we talked about this a lot, is that through what was really the best credit environment in the history of financial services in the last two years. We didn't really take an opportunity to underwrite a lot deeper. And that's important for us because consistency is really important to our partners. So in times, really good times like we had the last couple of years we don't underwrite a lot deeper and that's really done in the hopes that when things get a little bit uncertain or a little bit worse that we don't have to pull back dramatically. That consistency is important to our partners and important to us. So, we're not at this point anticipating significant underwriting changes. We like how we're underwriting. Today, the consumer is still healthy. We're expecting charge-offs to normalize back into our target range next year. So what we're seeing right now is still pretty comfortable in terms of the consumer trends. So not anticipating anything significant at this point.

Sanjay Sakhrani
Analyst at KBW

Okay and then a follow-up is, it sounds like a former partner of yours might be looking for change. I'm just curious of your appetite to take on large portfolios, like that specific one. And obviously, the stock price is still very attractive here. I'm just considering thinking through the trade-offs here and sort of how you guys are looking at the outlook for portfolio acquisitions and such, thanks.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes, look, nothing to share specifically on that situation. I just don't want to speculate, there we're not. We're not party to that obviously. I would say that we've got a great relationship with Sam's Club, going back 25 plus years, great alignment, great engagement and momentum on that program. But nothing to really speculate on beyond that. I would say, just kind of more generally, we're always in the market for large portfolio acquisitions, start-up opportunities, we've got a very active BD process, big team working on it. And so that's always of interest to us. What's important there though is we talked about in the past is you got to have really good alignment, you got to have the right balance of risk and return. And I think that's important, particularly in an environment like this where you're kind of heading into a period of uncertainty. So we'll continue to stay very disciplined around risk and returns.

Sanjay Sakhrani
Analyst at KBW

Thank you. Thank you. Our next question comes from Betsy Graseck with Morgan Stanley.

Betsy Graseck
Analyst at Morgan Stanley

Hi. I just wanted to dig in a little bit more on NIM, I understand the expectation on the forward look as it's going to bounce around and. I guess that we're at the high-end of the range right now on NIM. But I did want to understand, A, what kind of rate outlook is baked into your NIM guide, and then B, if the mix-shift is going to materially change as you look through this year from what it was in 1Q.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Good morning, Betsy. So the answer to the first part of your question, we have a peak Fed funds rate of five and a quarter, so one more effective move from here. We do have some reductions again found the forward curve towards the latter part of the year, but that has. I'd say that's very small consequential effect on-net interest margin for the full year. With regard to your second point, as you kind of think about mix of the business. I don't think you'll see issues necessarily this year with regard to mix. In fact net interest margin. Well certainly over time, I think if you think about where the geography is the extent health and wellness continues to grow at a rapid pace and you see some of the businesses in a more promotional financing grow, you may see a shift in the revenue profitability exactly the same, but maybe a shift out of of NIM and the way it comes through our merchant discount. Merchant discount pricing, but that's not going to be a 2023 issue.

Betsy Graseck
Analyst at Morgan Stanley

Okay and then just as a follow-up, you spoke a little bit about loan growth and you did raise the guide from 8 to 10 to 10 plus. But at the same time you've got in the reserving discussion potential tighter lending standards from the industry. Could you just address how you're thinking about lending standards. And is that -- is the increase in the loan growth that you're looking for. I mean I would assume it's within the credit box that you've got, but maybe you could speak to what's driving that increase in loan growth and how your lending standards are playing into the outlook. Thanks.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes, so our underwriting today. Again, we're always making some level of refinement is really around partner channel performance and we're now we're hitting the right risk adjusted returns. So we're constantly looking at that and our credit team is focused on everyday. We're not taking any broad based actions because we do not see either our vintage level performance. The vintage is risen to before pandemic. They're performing better than 2018 and 2019, so they are performing well. Again, Brian talked about the consistency of our underwriting, so we didn't kind of come on and off the gap many other issuers do so when we look at the stuff that we've recently put on is performing at or better than what we saw pre-pandemic. The pre-pandemic book is performing consistent with how it kind of answered the pandemic. So we really don't see a broad-based deterioration. When you look at entry rates and flows, it's not something where we are taking, well I'd say broad-based actions opening remarks or closing remarks. Again, we don't use that as really a growth lever like some initial, but for us it's going to be much more consistent.

With regard to how you think about the loan growth being higher, there's two things. One, we are seeing greater utilization of our cards by consumers and we are seeing a slightly favorable payment rate. Those two things are driving, it was the growth in the first quarter and we expect that to continue somewhat through the back-half of or for the remainder of 2023. So, that's how I think about the loan growth being up. Again, which you may see if the economy does slow faster, which you should see or you may see is payment rate to slow faster and then you can see purchase volume taper down a little bit. Again, I think if you look at dollars here, because I think last year, you're going to start comping the post on the comp period, which is a tougher comp for all of us so. So again. I think about as being more adoption and utilization of our cards and two primarily driving the growth on underwriting.

Betsy Graseck
Analyst at Morgan Stanley

Okay. Thank you.

Operator

Thank you. Our next question comes from Pancari with Evercore.

John Pancari
Analyst at Evercore ISI

Good morning.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Good morning.

John Pancari
Analyst at Evercore ISI

O the charge-off expectation. I know you kept it unchanged at 4.75% to 5% and you don't expect it to reach the more normalized level until '24. Can you just give us a little more granularity on where you are seeing mounting stress. And in what product areas and vintages specifically is still the more recent vintages and continued expansion across income cohorts. I believe you mentioned that earlier, but just want to get a little more clarity on that. Thanks.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes. I wouldn't. I wouldn't use the term stresses, I don't think we're seeing stresses in there. I think what we're seeing is the return to more pre-pandemic levels and. I think we just started to see is in the credit grades of the prime and super-prime customers they were well below historical averages mainly because they benefited during the pandemic period whether they got stimulus, lower spending, lower ability to spend and now they are using up some of that accumulated savings. They are returning back to what I'd say pre-pandemic levels of performance that is on performance on payout rate, performance on spending, and performance as entry into delinquency and roll-through. So, I wouldn't say stress. I just sit there and say, you see these consumers migrating back to past behaviors and that's across the portfolio. That's not necessarily in one set of vintages or another. So that's how I kind of think about the credit development with regard to that. With regard to delinquency performance, again what you're seeing right now is a very favorable entry rate into delinquency. You're seeing fairly good front-end collections, the backend collections are pretty weak, because you don't have the normal flows through delinquency yet. What you would expect to see is interest rate rise a little bit. Your front NCEs to maybe deteriorate a little bit and the back NCEs to rise as you put more volume through the collection channels, but we had not start to see that we have not seen that yet in our performance. But that's what we expect to materialize over the coming remainder of 2023 and into 2024.

John Pancari
Analyst at Evercore ISI

Got it, okay. Thank you. And then just getting back to Ryan Nash's question on the reserve just to confirm again that. The addition this quarter was more growth driven and rate driven. And as you look at the outlook, if the unemployment rate remains as in your expectation that the below the 60% level you would expect migration lower in the reserve ratio from here. That's correct.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes. Sir the way just to be clear, the majority of the reserve for the quarter's growth driven and there was an addition to the macroeconomic overlay that surplus and new banking turmoil there could be a contraction of credit at some of these institutions, which will then have an effect in the economy and answer the consumer. So we provided for that begin majority of it was growth driven because the assets came in higher than our expectation. I think as long as we. continue to progress on the macroeconomic assumptions those qualitative reserves unwind and offset some of the growth driven provisions that we'll have. So but again, if we track to our macroeconomic assumptions there should not be rate driven provisioning going forward, just to be growth driven.

John Pancari
Analyst at Evercore ISI

Got it. All right. Thank you.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Thank you and good day.

Operator

Thank you. Our next question comes from Dominick Gabriele with Oppenheimer.

Dominick Gabriele
Analyst at Oppenheimer

Hey. Great. Thanks so much for taking my questions. I guess when you think about the pacing of net charge-offs, given what you've talked about and then your assumption on the reserve. If you think about timing of wherever your peak loss rate occurs and the potential for reserve releases. I know you've talked about this, but is there a period of time where you decide, hey, it's still cloudy out there, we can't release reserves just yet and charge-offs are rising or do you think you release reserves as charge-offs are rising, the entire time. I know it's a tough one. I've got a follow-up. Thanks.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Hey. Good morning Domin. What's interesting about CECL is in theory, what it tells you is, if you see your peak losses inside of your reasonable supportable period. In theory, you can begin to release reserves prior to peak license, which I think is very uncommon for the industry, but that's a byproduct of CECL. So there could be a situation where we release reserves even though we have not gotten to peak losses, I think it will hit the peak and then begin to come down in that forecasting period. We haven't seen that yet, we don't contemplate that and how we look at 2023 and love to get back to you as we think about 2024 and how delinquency plays out the remainder of this year.

Dominick Gabriele
Analyst at Oppenheimer

Great. Thank you so much. And then just we haven't talked about the efficiency ratio just yet on the call. And obviously, you guys are seeing some pretty hefty really nice core efficiency ratio gains year-over-year. I'm wondering about as you think about over the longer-term, you've kind of set-up some goals. How kind of the changes in macro environment that you see today included in some of your reserves. It has that changed where the efficiency ratio trend could go by any chance. Thanks.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes. No. It's great question. We don't think the current environment changes our long-term framework is getting down to that 32% to 33%, which is I think best-in class when it comes to efficiency ratio. I think one of the things that Brian and Margaret is during the pandemic they drove us to drive digital efficiencies in our collections and insourcing of other things that drove productivity again. The efficiency ratio was negatively impacted with the decline in interest and fee yield, But again, as we drive those efficiencies and get operating leverage and Brian and I are committed to delivering operating leverage as we step through the periods. That should bring us back into that long-term framework and again at the macro environment gets tougher. I think the investments we've made digitally with regard to our collections activities, but across our entire business. We'll have to bolster that where we can control expenses. This would be a very different play than what happened back in the great financial crisis where you do a lot of bodies added just started calling people, that's not what would happen even under any form of recession.

Dominick Gabriele
Analyst at Oppenheimer

Thanks so much. Thanks have a good day. Thank you. We have time for one last question. That question will come from David Scharf with JMP Securities.

David Scharf
Analyst at JMP Securities

Great. Good morning. Thanks for squeezing me in here. The first one, Brian Doubles, maybe just a clarification. I don't believe, I heard or read anything in your releases regarding the status of your capital plan that was submitted last Monday. Is there any update you can provide and kind of status timing in perhaps directional help on magnitude.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Thanks David. When I say that question we did submit our capital plan. It went through our same process we actually include some additional stresses. Given some of the developments in the first quarter into that capital plan that was approved by our Board and we submitted to our regulators on target with past years, again, they go through that and provide what we believe will be a non-objection to that. That non-objection can come anywhere from later this month into May based upon their timing and how long it takes to get through that. So we don't anticipate given the capital plan and what we put in net debt. Anything to read into that other than they're just working through their process and we'll be back probably later April. And they kind of as soon as we get it will people now through that. With regards to the magnitude of it. Unfortunately, I can't really comment until we get our non-objection from our regulators.

David Scharf
Analyst at JMP Securities

Yes. I understood. And just as a follow-up question. Wondering if there's any color you can provide on your assessment of competition right now. Whether you sense, there has been any sort of greater than expected pullback back and maybe direct mail marketing by some of those who typically. We would view as primary competitors, whether just in general purpose. But it kind of point of sale and I guess along those lines. You noted your kind of higher quality credits we're transacting more frequently at larger aerage purchase sizes. It just given all the discussion of macro uncertainty. Is there anything that ever tells you that now is the time to consolidate market share in various FICO bands, if you see, various pullbacks by competitors or is the environment pretty stable relative to the last few quarters.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Yes. So, I would say it's still a pretty competitive environment out there. I think it's a little bifurcated. I think the more established players are still competitive in our space direct to consumer side for a second. So I think we're still seeing it as a pretty competitive environment. The one thing that is encouraging now is I think just given the uncertainty on the horizon. There is pretty good discipline across the more traditional competitors, and I think that's generally the case anytime you enter a period like this. Nobody is factoring in a credit environment like we've experienced over the last couple of years. I think that's encouraging. So pretty good discipline. I do think you've seen some of the fintech players and some of the newer players pulled back a bit. I do think direct to consumer direct mail from a data pull-back a little bit, but generally in our core space, it's still pretty competitive out there, but we're pretty good discipline.

David Scharf
Analyst at JMP Securities

Got it. Thank you very much.

Brian Doubles
President & Chief Executive Officer at Synchrony Financial

Thanks.

Operator

[ Operator Closing Remarks].

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