The operator welcomes listeners to the Synchrony Financial Third Quarter 2023 Earnings Conference Call, where they will hear from the company's Senior Vice President of Investor Relations. The call will cover forward-looking statements and non-GAAP financial measures, and the company is not responsible for third-party transcripts. The call will be led by Synchrony's President and CEO and Executive Vice President and CFO.

In the second paragraph of the article, Brian Doubles, the speaker, discusses Synchrony's strong third quarter results, including net earnings, return on assets and tangible common equity. He attributes this success to their diversified product suite and advanced digital capabilities. Synchrony opened 5.7 million new accounts and saw a 5% increase in purchase volume. The company's Health & Wellness, Diversifying Value, Lifestyle, and Home & Auto portfolios all saw growth, with Health & Wellness leading at 14%. However, Home & Auto was impacted by lower retail traffic and lower gas and lumber prices.

The paragraph discusses the performance of dual and co-branded cards in the quarter, which accounted for 42% of total purchase volume and increased by 13%. Synchrony's range of products and platforms gives them insight into consumer behavior, which is gradually normalizing to pre-pandemic levels. Average transaction values have leveled off, while transaction frequency is showing signs of stabilization. Customers are making larger purchases in categories such as home furnishings and electronics, but spending less on travel. The company is seeing slowing spend growth, normalization of payment rates, and growth in balances, leading to higher net interest income. Consumer savings balances remain above average levels, indicating a strong labor market. Synchrony continues to develop and deploy products and value propositions to attract consumers and partners, such as the recent announcement that their cards can now be used with Apple Wallet. The company's journey began with in-store financing options, which have been valuable for retailers and consumers in building loyalty and driving value.

Synchrony has expanded the utility of their products through dual and co-brand card strategies and digital wallets, leading to an increase in active wallet users and sales. This is a result of their investments in technology and their focus on delivering enhanced utility and best-in-class experiences. The impact of this expanded product utility can be seen in their results, with auto partner spend and partnerships in the Health & Wellness sector. Synchrony's continually evolving model and focus on technological innovation make them a preferred partner for delivering digitally powered experiences and value for their stakeholders.

During the third quarter, Synchrony's financial model demonstrated consistent growth and strong risk deducted returns. The company's broad product suite continued to attract customers, leading to a 14% increase in loan receivables and 5% growth in purchase volume. However, the payment rate was still higher than pre-pandemic levels. Interest income increased by 11% due to higher loan receivables and benchmark rates, but the net interest margin declined by 16 basis points due to higher funding costs. Despite this, RSAs remained stable at 4.04% of average loan receivables.

In the third quarter, Synchrony's provision for credit losses increased to $1.5 billion due to higher net charge-offs and a reserve build. Other expenses also grew, but the efficiency ratio improved. Synchrony generated net earnings of $628 million and its delinquency rates are approaching pre-pandemic levels. The company remains below its underwriting target and its recent vintages are performing well.

In the third quarter, Synchrony has implemented credit actions to position their business for the future. Their allowance for credit losses has increased due to receivables growth. They have a stable funding model and strong management of capital and liquidity, with deposits representing 84% of their total funding. They completed a $1 billion securitized issuance in the quarter and have a total liquidity of $20.5 billion. Their capital ratios have been adjusted for the CECL transition, which has already been recognized in their income statement and balance sheet.

Synchrony's CET1 ratio decreased under the CECL transition rules, but the company returned $254 million to shareholders in the third quarter. They plan to continue returning capital to shareholders and may issue preferred stock in the future. The company expects loan receivables to grow by 11% in 2023 and net interest margin to be around 15.15%. Delinquencies are expected to follow seasonal trends.

Synchrony is tightening their forecast for net charge-off rate and expect it to reach a normalized level by 2024. They also anticipate their RSA to trend at the low end of their outlook and are committed to delivering operating leverage. Synchrony remains confident in their ability to execute on their strategic priorities and deliver market leading returns. They prioritize sustainable growth to maintain risk-adjusted margins through changing market conditions.

The company is investing in its future and preparing for a digital environment while still meeting financial commitments. The Q&A session will be limited to one primary and one follow-up question. The first question is about credit performance and the second is about the company's confidence in following seasonal patterns. The company expects a decent acceleration in charge-off performance in the fourth quarter and is confident in its ability to follow seasonal patterns despite various factors such as inflation, resumption of student loan payments, and growth math impacts. The company has been conservative in underwriting and believes it will offset any negative impacts from these factors.

The paragraph discusses the delinquency performance of the company in the fourth quarter and how it has remained consistent throughout 2023. The company's entry rate into delinquency is still below the pandemic period, making collections more challenging. However, the company did not change its underwriting standards during the pandemic and used advanced tools to make good credit decisions. The vintages from the pandemic period are performing in line with previous years, and the company's overall performance is better than other companies. The company took some actions in the quarter due to shared consumers.

The company is taking actions to ensure that their loss rate stays within their targeted range and optimize their risk-adjusted margin. The RSA is performing as designed, with losses being low and charge offs and interest rates impacting it. The mix of the portfolio and growth rates will also influence the RSA.

The speaker, Brian Wenzel, is responding to a question about the net interest margin. He mentions that there is still a tailwind from the prime rate and a benefit from higher revolve rates. However, there may be a headwind from reversals. On the liabilities side, there may be a slight increase in interest-bearing liabilities next year as deposits reset. However, it is uncertain how funding costs will be affected when the cycle reverses.

The speaker discusses the potential impact of the pending new capital rules on Synchrony. They express disappointment with the proposed rules and believe they were not fully thought through. They also mention concerns within the industry and the possibility of the rules changing. The speaker then mentions Synchrony's disappointment with being treated the same as other banking institutions under the tailoring rules. However, they acknowledge that the rules may not stay as they are and state that they will provide more information as it becomes available.

The impact of the new regulations on the company's capital is estimated to be between 15% to 20%. The company has a mitigation strategy in place to manage the increase in unfunded commitments. The reserve rate for losses has not changed significantly and the company is comfortable with its current methodology.

The company's model accounts for potential changes in the macro environment and they feel confident in their ability to withstand them. There was a small shift between the quantitative and qualitative portions of the model in the past quarter, but it is not significant. The competitive environment for portfolio acquisitions and renewals is constructive and disciplined, with issuers being more conservative in uncertain times. The company recently announced a great renewal with Belk and is actively pursuing new program opportunities.

The speaker discusses the steady flow of new accounts for the company over the past three quarters and notes that there have been consistent trends in terms of the magnitude and sources of these accounts. They also mention the success of recently launched programs and the resilience of the consumer in the current market. The speaker emphasizes the importance of keeping consumers engaged and offering multiple products, which has been a successful strategy for the company.

The speaker discusses their company's appetite for acquisitions and their disciplined approach to evaluating potential opportunities. They mention successful smaller acquisitions, but also consider larger opportunities if they make sense financially. They also address the question of any shifts in payment rate trends for near prime to prime consumers, noting that they have not seen any changes at this time.

Brian Wenzel discusses the impact of savings rates and wage increases on consumer cohorts. He notes that there has been a shift in payment rates in the 6.60 to 7.22 bucket, but it is not a cause for concern as it is still above pre-pandemic levels. Wenzel also mentions that early data shows a rise in payments for federal student loans and a deeper analysis shows that those with student loans are performing better than those without.

The speaker expects the fourth quarter to be chaotic due to changes in servicers and borrowers. The bureau will monitor these changes and their impact on payments. The speaker also mentions the upcoming final rule from the CFPB on late fees, but states that they are prepared for multiple scenarios and will closely monitor the situation.

The company is working on pricing offsets to counteract the impact of a new rule that restricts late fees. They believe the rule has unintended consequences and without offsets, it would limit access to many customers. The company's goal is to fully offset the impact and continue to approve the majority of customers. They also discuss their credit tightening strategy and mention that they will continue to evaluate performance and industry trends before making any changes.

The company will continue to monitor the performance of consumers based on data elements provided by partners. They do not frequently change the credit box in order to maintain consistency and meet the expectations of both partners and customers. When it comes to the impact of the new rule on late fees, the timing of offsets is still uncertain due to factors such as the implementation period and potential litigation. The company has been working on a plan with each partner for over six months and is confident in their actions if the final rule is implemented as written.

The company implemented incremental credit actions in the third quarter, primarily focused on originations and account management. These actions were not related to shifting score cutoffs, but rather to different criteria and data elements. Additionally, the company noted that the health and wellness sector has a lower concentration of RSAs compared to other product areas. In response to a question about credit guidance, the company stated that their full year guidance implies a fourth quarter close to their long-term target of 5.5%.

The speaker discusses the company's underwriting strategy and predicts that the charge off rate will remain within their target range of 5.5 to 6%. He also notes that the company has not yet reached pre-pandemic delinquency levels and the performance in the fourth quarter is in line with previous years. The company is focused on maintaining losses within their target range to optimize risk-adjusted margins.

The speaker talks about the company's decision to be more disciplined in deploying capital and their confidence in the trajectory based on vintage performance. They also discuss their recent partnership with Lowe's for a BNPL offering, which has been a successful investment for the company. The speaker mentions their multiproduct strategy and how it has contributed to their growth in installment and pay later products. The BNPL offering at Lowe's is a white label version of their product.

The speaker discusses the importance of flexibility in their strategy and their willingness to offer their product under different names. They have seen good results with their partnership with Lowe's. The speaker then talks about the health of the consumer, specifically in terms of spending, payment, and credit metrics. They note that the lower end consumer is struggling more in terms of credit and delinquency, but are seeing some improvement due to wage increases.

The company is seeing lower transaction values but higher frequencies, indicating that consumers are spending at a manageable pace. The average balance in the company's book has increased and the high-end consumer segment is performing well. The company is confident in their portfolio's performance and entry into delinquency is still below 2019 levels. When asked about the RSA guide, the company attributes the expected decrease in charge-offs to a mix of factors, including differences between platforms and portfolios.

The speaker is asked about the company's reserve levels and their outlook going forward. They mention that they feel comfortable with their current ratios, but are expecting NCOs to increase. They also mention that they will see a rotation as delinquencies stabilize, and the qualitative piece will offset any potential increases. They believe they will ultimately move towards their day one level, and factors that could induce additional reserve builds include a deterioration in collection performance and rising unemployment claims.

The speaker discusses two major areas of concern for the company, collection and unemployment claims, but notes that they have not seen any significant trends in collections and unemployment claims have remained low. They mention that they have factored in potential macroeconomic deterioration in their reserves and do not give quarterly guidance on share buybacks. They clarify that the current level of buybacks is not related to changes in the macro environment, proposals on late fees, or Basel III end game, but rather is based on a set of mile markers and income projections. The call concludes with the speaker thanking participants and ending the call.

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