The operator welcomes listeners to the Synchrony Financial Fourth Quarter 2023 Earnings Conference Call and provides instructions for accessing materials and asking questions. Kathryn Miller, Senior Vice President of Investor Relations, introduces the call and reminds listeners of the risks associated with forward-looking statements. Non-GAAP financial measures will be discussed and a reconciliation to GAAP measures is available. The only authorized webcasts are on the company's website. Brian Doubles, President and CEO, and Brian Wenzel, CFO, are on the call.

Synchrony reported strong fourth quarter results, with net earnings of $440 million and a return on average assets of 1.5%. The company's multiproduct strategy and diversified sales platforms contributed to record purchase volume and the origination of 23 million new accounts. Loan receivables grew by 11.4% and credit normalized, with net charge-offs reaching pre-pandemic levels. The company also demonstrated cost discipline and returned $1.5 billion to shareholders.

Synchrony's business model focuses on delivering attractive returns and adapting to changing market conditions. They have added new partnerships and diversified their offerings, including launching a co-branded credit card with J.Crew and offering multiple financing options to customers. This demonstrates their commitment to innovation and providing choice to their customers and partners.

Synchrony has successfully implemented their pay later solutions at over 200 provider locations and 18 retail partners, resulting in a 20% increase in new accounts and 95% of sales coming from new customers. They have also announced the sale of their Pets Best insurance business and a strategic partnership with Independence Pet Holdings, giving them more exposure and insights into the pet industry. Additionally, they have acquired Ally Lending's point-of-sale financing business to further expand their business and accelerate growth.

Synchrony has acquired a $2.2 billion loan portfolio with partnerships in the home improvement and healthcare industries. This acquisition allows Synchrony to offer both revolving credit and installment loans at the point-of-sale, expanding their home specialty financing options. They also plan to leverage their industry expertise and scale to drive growth and efficiency. Additionally, Synchrony is focused on delivering best-in-class experiences for customers through digital transactions and their marketplace on synchrony.com and within their app.

Synchrony's fourth quarter results show the success of their unique business and financial model. They saw record growth in purchase volume thanks to their diverse sales platform and partnerships. Credit performance remained stable due to their strict underwriting and credit management practices. Their retail share arrangements helped mitigate the effects of the economic environment, allowing Synchrony to continue delivering strong returns.

Synchrony's strong balance sheet allows for investment in long-term strategic goals and returning capital to shareholders while meeting customer and partner needs. Despite an uncertain economic backdrop, the company's prudent management and financial model have led to sustainable outcomes. In the fourth quarter, purchase volume increased 3%, driven by growth in the Health & Wellness, Digital, Diversified Value, and Lifestyle sectors. Purchase volume for Synchrony Dual and co-branded cards grew 9%, representing 43% of total volume. The company's out-of-partner spend is evenly split between discretionary and non-discretionary categories.

In the fourth quarter, there were changes in consumer spending patterns, with a shift from travel to clothing and from gasoline to groceries and discount stores. However, there was no significant change in the overall composition of discretionary and non-discretionary spending. The company saw an 11.4% increase in ending loan receivables due to growth in purchase volume and a decrease in payment rates. Net interest income also increased by 9%, driven by higher loan receivables and benchmark rates. However, net interest margin declined due to higher interest-bearing liability costs. The company also saw a reduction in RSAs and an increase in provision for credit losses due to higher net charge-offs. Other expenses also grew by 14%.

In the fourth quarter, Synchrony saw an increase in expenses due to growth-related items, operational losses returning to pre-pandemic levels, and several notable expenses such as employee costs, real-estate restructuring charges, and FDIC's special assessment. Excluding these items, the efficiency ratio would have been lower. Synchrony generated a net earnings of $440 million and saw a return on average assets of 1.5% and a return on tangible common equity of 14.7%. The consumer remains resilient as Synchrony manages through inflation and higher interest rates, supported by external deposit data showing steady savings account balances. The company's disciplined underwriting and credit management have positioned them well as they enter 2024, with delinquency ratios slightly above pre-pandemic levels.

In summary, Synchrony's delinquency rates have increased compared to the previous year, but remain consistent with the average for the past three years. Net charge-offs have also increased as expected. The company continues to monitor its portfolio and make necessary adjustments. The allowance for credit losses has decreased slightly due to growth in receivables. The company's balance sheet remains strong, with significant growth in deposits and a high percentage of liquid assets. Synchrony has elected to take advantage of the CECL transition rules and will continue to make adjustments to its capital ratios until 2025.

In the fourth quarter, Synchrony reclassified $500 million of assets from intangible assets to other assets, resulting in a 50 basis points increase to their capital ratios. Their CET1 ratio decreased to 12.2% and they returned $353 million to shareholders through share repurchases and dividends. They have $600 million remaining in their share repurchase authorization and plan to continue their capital allocation framework prioritizing organic growth, dividends, share repurchases, and potential investments.

Synchrony has announced the acquisition of the Ally Lending point-of-sale financing business, which will help them expand their leadership position in home improvement and health and wellness verticals. This acquisition is expected to be accretive to earnings in 2024 and will result in a reduction in the CET1 ratio. Additionally, the sale of their Pets Best business will result in a gain of $750 million and contribute to an increase in the CET1 ratio. Synchrony remains focused on driving growth and achieving financial objectives, as evidenced by their strong growth in purchase volume and expansion of their deposit franchise.

The company's credit and financial outlook for 2024 align with expectations and their RSA functioned as intended. The outlook assumes a stable macroeconomic environment and growth in loan receivables and net interest income. The company also expects to close on two transactions and will provide updates on the potential impact of a late fee rule.

Synchrony expects to have net charge-offs within their targeted range and for losses to peak in the first half of the year before returning to pre-pandemic levels. They also expect to have an operating efficiency ratio of 32.5% to 33.5% and to continue investing in their long-term success. Synchrony's business model has proven successful and they are well-positioned for the future.

Synchrony has focused on key strategic priorities to expand its customer acquisition and engagement, diversify its products and services, and improve the quality of experiences for all stakeholders. This has resulted in strong financial results and returns for shareholders, while also preparing the business for the future. The company is confident in its ability to sustainably grow and deliver returns, and sees opportunities ahead to deliver even greater value. During the Q&A session, the company was asked about the cadence of delinquencies in 2024 and its confidence in staying within its net charge-off range of 5.75% to 6% in 2025. The company mentioned that it has normalized slower than its peers due to not adjusting its credit box during the pandemic.

The company invested in an advanced underwriting tool called PRISM since 2017, which has helped improve their credit performance as they exit 2023. The delinquency rates for the fourth quarter were only slightly higher than the three-year average from 2017 to 2019, and the mix of delinquent credit is similar to that of 2019. The delinquency rates have been consistent month-on-month and year-over-year, and the first-half charge-offs are expected to be higher than the second half, with a range of 5.75% to 6% for the year. The company took actions in the second and third quarters to improve credit, and the positive entry rate is encouraging for the company. The company also discussed their NIM and NII guide.

In response to a question about the impact of potential rate cuts, Brian Wenzel explains that the company's projections assume three rate cuts in late 2024, which would result in a 30% lag for digital banks and a lower beta. He also mentions that if there were to be rate increases earlier in the year, the company would see a benefit to their net interest margin and lower interest on interest-bearing liabilities. A question from Rick Shane about the relationship between NCOs and RSAs is addressed, with Wenzel noting that the '24 guidance puts NCOs at the higher end of the target range, while RSA looks lower due to interest rates. He clarifies that if NCOs remain in the 5.5% to 6% range but interest rates decrease, the RSA ratio would likely trend back up to a more normal level.

Brian is discussing the risk-adjusted return and the relationship between net charge-offs (NCOs) and risk-adjusted return (RSA). He mentions that in 2024, there will be a lift in net charge-offs which will have a full-year effect on the rate increases seen in 2022 and 2023. This will result in higher interest-bearing liabilities, which may benefit the company through a low RSA. The guidance states that payment rates will not return to pre-pandemic levels, which will impact interest and fee yields. Brian also addresses a question about the NII and NIM guide, explaining that the 30% beta is a point-to-point measure and that there is still a path to a 16% NIM, although the timeframe is unclear.

The speaker addresses a question about beta and net interest income. They explain that beta will likely mirror the way it went up, and that NII will depend on the assumption of rate cuts and payment rates. They also mention that delinquencies are starting to follow normal patterns and charge-offs are expected to peak in the second quarter, but it is uncertain when the allowance will start to come down.

The speaker discusses the potential decrease in coverage rate over the course of the year and explains that there will be a rise in the first quarter due to seasonal factors and the addition of the Ally Lending portfolio. They also mention that credit performance will impact the coverage rate and that they have spent $7 billion in preparation for the late fee ruling, but there has been no update from the CFPB yet.

The speaker discusses the upcoming final rule and the preparations that have been made for its implementation. They mention the complexity of the process and the work that has been done with partners to agree on pricing actions and offsets. They also mention their goal of protecting partners and maintaining access to credit for customers. The speaker then discusses the growth in different verticals, with Health & Wellness expected to continue to see strong growth due to increased investment and the acquisition of Allegro Credit.

The company has a strong position in the dental, vet, and cosmetic industries, and plans to continue investing in these areas for growth. The digital platform, which includes partnerships with companies like Venmo and Amazon, is also expected to see significant growth. The lifestyle and home and auto sectors may see slower growth due to lower foot traffic and transaction values. The company has made strategic changes to its recovery operations during the pandemic.

The company has recently brought in-house some of its external management, which has positively impacted the recoverability of written-off dollars. Despite a decrease in rates and total charge-offs, the company has been able to offset this with increased efficiency. As the company moves into 2024, there may be a rise in net charge-offs due to increased volume and potentially lower costs of capital. The company has not seen a significant shift between discretionary and non-discretionary purchases by consumers, with some rotation out of travel and into other items. The consumer does not seem to be stretching their dollars.

The speaker discusses the company's transaction values and frequency, noting a slight decrease in values but an increase in frequency. They also mention that sales have been softer than expected in the first 20 days of the year, potentially due to colder weather and lower foot traffic. The speaker then answers a question about portfolio renewals and movements, stating that they have a regular renewal cadence and do not have any major programs coming up in the next 24 months. They also mention that the credit normalization and pending late fee rule may be affecting retailers' decisions to renew or participate in RFPs. The speaker mentions the recent acquisition of the Ally portfolio and the announcement of J.Crew as a new client, but does not provide specific details about the current pipeline of renewals and RFPs.

The speaker discusses how late fees are impacting the pricing of new business and renewals, but they have been able to work through it. There is speculation and uncertainty involved, but they have tried to cover themselves for possible outcomes. The speaker also mentions that the financial aspect has become a big part of the sales process due to the uncertainty. The majority of their programs are out until 2026, but they are open to renewing early if necessary. The revenue under contract in 2026 and beyond will be updated in February.

The speaker discusses their underwriting posture and how they are cautious about using credit as a growth lever. They have taken actions to manage risk and are encouraged by other issuers taking credit actions. They will continue to monitor consumer trends and have not seen signs of them struggling with spending.

The company recently made two significant transactions, the sale of their pet insurance business and the acquisition of Ally Lending. These decisions were driven by the company's desire for scale and familiarity with the industries. The acquisition of Ally is seen as a complement to the company's current strategy and is expected to have a positive impact on financials.

The speaker discusses two recent acquisitions, one in the Home & Auto and Health & Wellness industries and the other in the pet insurance business. They explain that the pet insurance business was not actively up for sale but the offer was too good to pass up, resulting in a significant financial gain. The speaker also mentions that there may be more deals in the future, but their focus is currently on closing the two acquisitions and maintaining good alignment with partners in any potential deals.

During a conference call, a representative from a company discusses their partnership and their plans for growth. They mention that they are always looking for opportunities that align with their interests and that they are assuming a 4% unemployment rate as they exit 2024. The speaker also talks about their loan growth and potential drivers for growth in the coming year, including payment rate, consumer spend, and new account growth. They mention that a softer consumer or higher payment rate could result in lower growth.

The company's credit actions may have a greater sales impact than expected, which could result in a lower range of performance. However, if payment rates decline faster than anticipated and the economy is more robust, there could be improved performance. The acquisition of a home specialty vertical will not significantly impact the company's overall metrics. The company is now focusing on an efficiency ratio rather than quarterly dollar amounts and expects low single digit expense growth, possibly due to efficiencies in marketing and compensation.

The speaker discusses the company's improved efficiency ratio and expense control, attributing it to investments and operational levers. They also mention the impact of late fees and the competition in negotiating offsets.

The speaker believes that the impact of pricing changes on competitiveness will be equal for all issuers. They will have a better understanding of how to adjust their pricing once a final rule is issued. The company plans to make changes to their pricing strategy in 2024, which may have a larger impact in the short or long term. They will provide more details once a final rule is issued. The speaker also shared some insights on their purchase volume and account growth expectations for 2024.

Brian Wenzel discusses the company's purchase volume and asset growth for 2024. He mentions that the rate of asset growth declined in 2023 due to payment rate declines, but they do not expect it to have as big of an impact in 2024. He also mentions that their purchase volume in 2023 was a record high and they are facing a difficult comparison for 2024. He then talks about the company's preferred equity issuance for the year, stating that they have about 75 basis points of capacity in Tier 1 and the maximum amount they can do is $700-750 million to reach their target level for Tier 1.

The company is focused on developing a cost-effective capital structure and will consider market conditions and demand for products when deciding on the timing and structure of issuing preferred stock. Their priorities for deploying capital from the Pets Best sale remain the same, with a focus on organic growth, maintaining the dividend, and potentially using some for share purchases or inorganic opportunities. They are also being prudent and selective in their approach to inorganic opportunities, as seen with the Ally Lending transaction.

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