Synchrony Financial's Senior Vice President of Investor Relations, Kathryn Miller, welcomed everyone to the company's second quarter 2023 earnings conference call. Miller reminded listeners that their comments during the call would include forward-looking statements, and that they would be referring to non-GAAP financial measures. Miller also noted that the earnings press release, detailed financial schedules, and presentation were available on the company's website, and that the only authorized webcasts are located on their website. Joining Miller on the call are Brian Doubles, President and CEO, and Brian Wenzel, Executive Vice President and CFO.

In the second quarter, Synchrony delivered strong financial results, including net earnings of $569 million and a return on tangible common equity of 21.7%. They opened 5.9 million new accounts and grew average active accounts by 7%. Purchase volume reached a record high of $47 billion, with health and wellness, digital, diversified and value, lifestyle, and home and auto categories all seeing growth. Dual and co-branded cards accounted for 41% of total purchase volume and increased 14%.

Synchrony's data suggests that consumer behavior is slowly reverting back to pre-pandemic levels, with average transaction frequency increasing and average transaction values decreasing, although this was partially due to lower gas prices. Payment rates have decreased year-over-year across all age and credit bands, while average savings balances have declined slightly from the first quarter but remain higher than 2020's average. These trends suggest that consumers are well-supported by the labor market and their balance sheets as they return to normal.

Synchrony is expanding its multi-product strategy to meet customers' needs across different distribution channels and markets. This includes installment loans with flexible terms and payment schedules, as well as buy now pay later solutions that have seen a 29% lift in new accounts with 95% of sales coming from new customers. At Home recently selected Synchrony as its exclusive buy now pay later provider, integrating this installment product with its existing suite of payment options. Over 700 of Synchrony's partners, providers and merchants now utilize its installment suite.

Synchrony's second quarter results demonstrate the effectiveness of their model, broad reach across industries and verticals, and the value propositions offered on their products. Their disciplined approach to underwriting, diverse funding model, and RSA arrangements have provided effective offsets to changes in the macroeconomic environment, and they have seen a 15% growth in ending receivables compared to last year. They are looking to further roll out their offerings and build deeper relationships with customers, leading to more loyal and engaged shoppers.

In the second quarter, Synchrony's net interest income increased 8% to $4.1 billion, driven by 19% growth in interest and fees from higher loan receivables and stronger loan receivable yields. The net interest margin of 14.94% declined 66 basis points due to higher funding costs, loan receivable yields, and higher interest-bearing liability cost. Reserve for loan losses of $887 million were 3.85% of average loan receivables, a decline from the prior year due to higher net charge-offs and portfolios sold. The RSA continues to provide stability in Synchrony's risk adjusted returns.

Synchrony generated second quarter net earnings of $569 million, a return on average assets of 2.1% and return on tangible common equity of 21.7%. The 30-plus delinquency rate was 3.84% compared to 2.74% last year and the 90-plus delinquency rate was 1.77% versus 1.22%. The net charge-off rate was 4.75% versus 2.73%. To position the portfolio into 2024, Synchrony has taken proactive targeted actions on certain types of inactive accounts and segments of the portfolio with significant score migration into non-prime.

Synchrony experienced positive net flows in the second quarter, leading to direct deposit growth of $2.3 billion. Deposits represented 84% of total funding, with the remainder being securitized and unsecured debt. Total liquidity, including undrawn credit facilities, was $19.4 billion, up from last year. In January, Synchrony elected to take the benefit of the CECL transition rules, resulting in a CET1 ratio of 12.3% and a Tier 1 capital ratio of 13.1%.

Synchrony has committed to robust capital returns and has announced a $1 billion share repurchase authorization for June 2024 and an increase in the company's common stock dividend by 9%. During the second quarter, the company returned $399 million to shareholders, with $300 million of share repurchases and $99 in common stock dividends. The company is also actively managing the assets they originate and prudently managing the capital they generate to optimize long-term value creation and resiliency. For the full year 2023, Synchrony expects loan receivables to grow by 10% or more, payment rates to normalize but remain above pre-pandemic levels, and the net interest margin to be within a range of 15% to 15.15%.

Net interest margin in the first half of the year was higher than expected due to stronger-than-anticipated deposit flows and receivables gross prefunding. However, there is now competition for deposits and higher interest rates from the Federal Reserve. Delinquencies and net charge offs are expected to reach pre-pandemic levels in the second half of 2023 and fully normalized levels in 2024. Operating expenses are expected to be $1.15 billion for 2023, with the company aiming to deliver operating leverage for the full year.

Synchrony's differentiated model has enabled the company to consistently deliver strong financial results in a variety of environments. Brian Wenzel noted that payment rates are expected to continue to normalize in the second half of 2023, but remain elevated compared to pre-pandemic levels. He is confident that Synchrony will be able to execute on its strategic priorities and deliver value to its stakeholders. The Q&A session has been opened.

Brian Wenzel discussed the strong growth seen in the company's digital and health and wellness platforms. He attributed the growth to investments in marketing and products in health and wellness, and to new programs in digital. All sales platforms are performing well, with receivables up 15%, health and wellness up 22%, digital up 18%, and home and auto up 10%.

Brian Doubles reported that the consumer is still strong and that purchase volume was a record in the second quarter. Credit is still below 2019 levels but is in line with expectations. The allowance rate is steady to improving, and delinquency formation is in line with expectations.

Brian Wenzel is discussing the late fee rules proposed by the CFPB and the inquiry into deferred interest medical costs, and he states that they have been having productive conversations with their partners around different offsets. He notes that the industry will likely have to adjust their pricing models and that they have had discussions around underwriting to ensure that customers don't lose access to credit.

Brian Wenzel is proud of the CareCredit products they offer and believes their practices are industry leading. He believes that a positive outcome of the inquiry into deferred interest would be to level the playing field and bring other issuers up to their standards. Wenzel also states that consumer resilience has meant that delinquency rates will approach pre-pandemic levels within the next six months.

Brian Wenzel talks about delinquency levels in the pre-pandemic period and how they compare to current delinquency levels. He states that delinquency is slightly lower than 2019 levels and that the loss rate is 82% of the midpoint of the underwriting average. He also mentions that vintages from 2018 and 2019 are not showing significant deterioration and that the vintages from 2021 and 2022 are performing in line with the 2018 and 2019 vintages. This suggests that they are confident that delinquency levels will stabilize at pre-pandemic levels.

In the first half of the year, the bank took broader-based actions to de-risk the loss rate for the following year. These actions were around accounts that are inactive or have significant score migration into non-prime, and are unlikely to have a material impact on sales or credit. Brian Wenzel then explained that the bank is expecting the net interest margin in the second half of the year to remain in line with the first half, and that the betas in the first half were in the mid-70s for savings and low 90s for CDs.

In the second half of the year, competitors will likely increase their prices due to regional banks experiencing outflows in commercial deposits and larger brick and mortar institutions using online products to raise rates. It is expected that savings rates will be in the mid-80s and CDs around 100%. Additionally, there will be tailwinds from benchmark rates pushing through the floating portion of the portfolio, revolve rate increases, and the deployment of liquidity.

Brian Doubles discussed potential regulatory changes that could affect the way the company manages capital and liquidity. He mentioned Vice Chair Barr's proposed rules around capital, and that the company has been preparing for different scenarios. He also mentioned that if the Fed extends long-term debt or TLAC requirements, the company is in a good position. He concluded by stating that they have not taken any definitive actions yet, but they will be closely monitoring the situation and adapting their business accordingly.

Brian Doubles explains that payment rates remain abnormally high, but they are expected to normalize back to pre-pandemic levels for non-prime and lower credit grades. He notes that prime and super prime customers have built up excess liquidity during the pandemic and are continuing to pay at a higher rate. Additionally, there has been an increase in auto pay which helps entry rate and delinquency, but is not expected to have a material shift.

Brian Doubles states that people with student loans are similar to the regular book of customers in terms of FICO range and delinquency rate. He believes that these customers will be able to manage their financial situation and will not have an impact on purchase volume in the back half of the year and into early next year. He also believes that purchase volume will not decelerate, but will instead be the result of pent-up spending from the backside of the pandemic.

Brian Wenzel discussed the company's funding stack and said that they have not altered their intended targets. He also highlighted the strength of their deposit franchise, which makes up 84% of their funding, and said that customers have stuck with them and their retention rate for CDs is high. He also noted that it is important for them to tap the wholesale markets and stay active in them over time in order to maintain a presence and keep costs low.

Brian Wenzel of a company is discussing the wholesale market with Rick Shane. Wenzel is not looking to take advantage of an arbitrage, but instead is looking to create a steady foundation and have the proper mix for the company's balance sheet. He believes that if they continue to show good performance, credit spreads will eventually tighten. Shane is inquiring about a large portfolio that is out for RFP and Walmart's situation.

Brian Doubles of Synchrony states that most of their BD pipeline consists of small start-up opportunities, and they are very active in larger opportunities. However, they are very disciplined with risk and return and hold higher deals to a higher level of scrutiny. In regards to late fee regulation, they disagree with the proposed safe harbor amount of $8, as it would restrict credit to some customers and make it more expensive for many. They are actively participating in the comment letter process to advocate for a higher amount.

Brian Doubles explains that in order to protect their partners, they are taking credit actions such as reducing exposure, credit line decrease, or account closure if they see a migration of 50-60 basis points into non-prime. They are also looking at other factors to determine if they need to take action.

Brian Doubles explained that the company has raised their guide for the beginning of the year due to opportunities to invest more in the portfolio, particularly in the health and wellness and CareCredit segments. They have added incremental resources and purchase volume has been stronger in the first half. This will lead to increased variable costs as more active accounts are serviced in the back half of the year.

The RSA incorporates expenses into its sustainability, and the industry has seen abnormally low fraud levels compared to pre-pandemic periods. This quarter, there was an incident with a partner that drove up costs, but there was an offset to it. There is an efficiency ratio that the company is focused on, and the NCO is going lower in the 2023 guide, likely due to retail partners being more willing to share in the higher OpEx.

Brian Doubles states that the company has not taken any broad-based actions regarding account acquisition over the last three months, and that the net interest margin has gone from 4% to 4.25% to 3.90% to 4.15% due to increased expenses and credit normalization. He also mentions that the RSA is performing as expected, and that the company has updated its guidance to 3.90% to 4.15%. Finally, he states that there have been no fundamental shifts in the sharing of economics with their partners.

Brian Doubles explains how Synchrony is using BNPL as a customer acquisition tool and how it affects their volume, fee structures, and margins. He states that they are making small adjustments to line assignments, but are trying to be consistent with their partners to manage exposures. Overall, Synchrony is being smart in their decision making and has seen consistency in their new account originations.

The multi-product strategy has benefits for both partners and customers, as it allows for customer acquisition and lifetime value. During the pandemic, partners have used buy now pay later products to drive sales and bring in new customers. The model employed by the company allows for installment loans and revolving products to be tailored to the partner's needs, balancing risk and return in an economically attractive way.

Brian Doubles discussed the debt collection fees, explaining that they are primarily originated through digital channels and that as more people sign up for the product and the average balance increases, the rate impact on the higher balance that is being protected also increases. He concluded that the product offers benefits to consumers.

Brian Wenzel and Brian Doubles discussed the incremental expenses between the guidance numbers, which are being put into employee costs, technology, and marketing. They have a disciplined approach to ensure they are getting the right return on their investments, which is evident in the top line growth and operating leverage.

The earnings conference call for Synchrony has concluded. The participants thanked each other and the operator thanked them for participating before ending the call.

This summary was generated with AI and may contain some inaccuracies.