Synchrony Financial Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Mihir Bhatia Bhatia - BofA Global Research - Analyst : Good morning. Thank you for taking my question. I wanted to start with just the health of the consumer. It sounds like the consumer is coming in a little weaker than you had maybe anticipated between purchase volume being lower, reserve rate a little higher. First, I guess, is that a fair statement? And if so, can you just comment on what other changes that is driving? Is it signaling that you need to tighten underwriting? Are you continuing to tighten underwriting? Is that broad-based? Is it about tweaking around the edges? Just how are you thinking

Question: Mihir Bhatia Bhatia - BofA Global Research - Analyst : Yeah. So, maybe just staying on credit then, just on the reserve rate guidance. It's changed to be -- I think now you're saying year-end '24 in line with '23. I think earlier, it was a little bit better than '23. That said, you did call out and we see the data, right, the delinquency rate is trending in line to better than seasonality. Were you expecting more improvement than you got? I'm just trying to understand the factors driving the higher guide on reserve rate and if that implies '25 net charge-offs will be similar to '24. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yeah. Thanks for the question, Mihir. When we entered the year, I think everyone had a perspective with regard to how the economy is going to develop, how inflation potentially could bend and interest rates could move down, right? As Brian mentioned, the consumer is managing. And the longer they stay in a period of higher costs, particularly those that are lower income to medium income, that poses different risks. I think as we sit here in the middle part of the year, we would have hoped for probably greater progression against the inflation or even though we understood it was sticky. And we'd hope for -- even though we only had three rate increases or -- I'm sorry, rate decreases for the back half of the year we're down to one. So I think things have shifted out a little bit. So I think we're just being a little bit more cautious with regard to how we think about the macro going forward until we see signs that inflation really is breaking through some of the stickiness, and you see some health to those consumers. So I don't think it's a tremendously different posture. It's just a little bit more conservative in how you think about your quantitative reserves versus your qualitative reserves.

Question: Terry Ma - Barclays - Analyst : Hi, thanks. Good morning. So I guess, based on the rollout of your PPPCs, is the $650 million to $700 million range still kind of the right range to think about for the second half? And then secondly, is there a way you can kind of quantify what that -- how that range changes if the late fee cap were to not be implemented this year? Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yeah. Thanks for the question, Terry. I'll start where you ended. As we sit here today, there continues to be activity in the Texas courts. And as Brian indicated and I indicated in our remarks, that is uncertain. So the best guess we have now is an October 1 implementation date. And until we get some more definitive view with regard to whether or not that rule becomes effective on that date or a different date, we don't really have an update with regard to the impact and its effect if it doesn't go into play. So again, when we have greater certainty with regard to that implementation date, we'll most certainly come back. With regard to the impact of the PPPCs, we provided updated guidance today. Again, if you take the midpoint of both the core as well as the delayed fee assuming October 1 implementation date and add the Pets Best, you're at the midpoint to high end of the range from an EPS, which should give you a perspective on how we feel about both the core business as well as the actions we're taking with regard to the potential change in late fees.

Question: Terry Ma - Barclays - Analyst : Yeah, got it. Thank you. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Thanks, Terry.

Question: Mark DeVries - Deutsche Bank - Analyst : Yeah. Thanks. Look, I appreciate there's a lot of moving pieces on the NIM for the second half of the year just given the implementation of some of the PPPCs and then -- and the potential rolling of the late fee impact. But could you just, Brian, maybe just give us a sense of kind of what the moving pieces are and what kind of your expectations are for NIM in the back half of the year? Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Sure. Thanks for the question, Mark. So here's a framework of how I think about some of the moving pieces you got to take into consideration, right? Number one, as we talked about net charge-offs being lower in the second half versus the first half, you'll get a benefit to the net interest margin, right, relative to lower reversals. So that's a positive to net interest margin. I think when you look at the net funding costs, so the interest expense and the investment income, that's probably going to be flattish to the back half of the year. You will pick up and there'll be a benefit into the net interest margin relative to the mix between average loan receivables and average interest-earning assets. So that will be a positive to NIM. You will pick up and you should see it in the third quarter some of the PPPC actions that are yield related. So again, some of the things that were strictly APR-related, some of the brackets related to how our interest was assessed and a little bit related to some promotional fees that roll into place. And you should see, again, hopefully, a little bit of benefit on the interest in fee line. So generally, there should be a positive trend up from where we move here into the back half of the year.

Question: Mark DeVries - Deutsche Bank - Analyst : Got it. Thank you. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Thanks, Mark. Have a good day.

Question: Mark DeVries - Deutsche Bank - Analyst : Thanks.

Question: Moshe Orenbuch - TD Cowen - Analyst : Great. Thanks. Just continuing on that idea of the pricing changes. I know it's early but have there been kind of impacts on the consumer side that you can kind of see or talk about positive or negative from the pricing changes that you've put in place? Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yes. Thank you, Moshe, for the question. We have a detailed monitoring dashboard that's in place that looks at a lot of different measures, Moshe. It starts with purchase active rate, sales per account. As you can imagine, it includes closure rates, voluntary closure rates. It includes call volume, complaint volume, all sorts of different measures that we would look at relative to this. I think it's important to understand while the first wave is complete now, we only have the CITs that we nailed in December having a full quarter. When we look at that dashboard in its entirety, it's generally in line with our expectations. As we step into the third quarter, I think we're going to get a greater view with regard to consumers' adoption with regard to it. I think we've seen some positive things around e-bill adoption, et cetera. So we closely monitor it gets produced and distributed to a wide variety of people inside the organization as we closely look at that and share that with our partners.

Question: Moshe Orenbuch - TD Cowen - Analyst : Okay. Thank you. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Thanks, Moshe. Have a good day.

Question: Ryan Nash - Goldman Sachs - Analyst : Hey, good morning, everyone.

Question: Ryan Nash - Goldman Sachs - Analyst : Maybe sticking with the late fee topic. Given the range of things that have been added, APRs, paper statements, trailing interest and the like, obviously, markets have become hopeful that the rule could get delayed or may roll in favor of the industry. And I'm just curious, in a scenario -- in a positive outcome for the industry, when you think about the range of changes you've made, what changes do you foresee sticking versus others that there's the potential you may pare back over time? Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yeah. First of all, good morning, Ryan. The first thing I think we have to have certainty, right, relative to whether or not the late fee rule, if it is delayed or ultimately overturned by the courts, where not the CFPB would continue down the path of pursuing some type of limitation on late fees. So I think you have to have some level of certainty beyond that. I think as you think about the pricing change, first and foremost, we're going to look at consumer behavior and when that consumer behavior changes here and whether or not changes will be warranted. I think when you step beyond that, there's probably two buckets, Ryan. The first bucket is one that involves our partners and RSAs. And there, we would go and share the data with our partners and have a discussion with regard to pricing and make some decisions with their input. And then bucket B is things that are inside our brand and control. So if you think about our Synchrony Mastercard, our home and auto cards, things like that, that we would control. But obviously, we do that. It's fair to say not everything would ever get rolled back. But to be honest with you, Ryan, we have not been a lot of time as a team going through this scenario right now. We're really focused on implementing the PPPCs and following the developments in the court being prepared, I think, for the outcome that the late rule goes into effect. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, SYF.N - Q2 2024 Synchrony Financial Earnings Call

Question: Ryan Nash - Goldman Sachs - Analyst : Awesome. Appreciate the color.

Question: Sanjay Sakhrani Sakhrani - Keefe, Bruyette & Woods North America - Analyst : Thanks. Good morning. Maybe just a follow-up on some of the questions around credit quality. Brian Wenzel, if we -- I know I've heard you talk about some of the moves you made to sort of refine the underwriting some time ago. I mean, is the -- are the benefits of that in front of us so that we should see some more stepped-up improvement in that second derivative on delinquency rates? And then just I'm trying to think through some of the questions that were asked before, like shouldn't that really -- that coupled with the tighter underwriting and the slower loan growth should help credit quality, shouldn't it? So I mean, is that just built-in conservatism in your credit outlook or what for this year in terms of the flat reserve rate? Thanks. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yes. First of all, good morning, Sanjay, thanks for the question. I think there is a combination where the credit actions -- remember, we started this in the second quarter last year into third and then really started in again, the latter part of the first quarter into the second quarter of this year. You see it reflecting in the moderation of the year-over-year change in delinquencies, which we showed on page 10 of the earnings presentation here. So some of it is being manifested itself in delinquency trends. Obviously, it takes time to season. So I think you would expect the benefit of those actions to kind of continue to go through. Now again, actions that we put in place in the second quarter this year have probably a little bit more reduced effect on this year, more effect as you exit out of '24 into '25. So it's really a combination. I'd say from an efficacy standpoint, we are not taking or not continuing to take broad-based actions at this point. We stand ready to do that. if something deteriorates. But right now, we are continuing with our normal refinements, which are more idiosyncratic at the partner portfolio product and channel level.

Question: Sanjay Sakhrani Sakhrani - Keefe, Bruyette & Woods North America - Analyst : Great. Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, SYF.N - Q2 2024 Synchrony Financial Earnings Call

Question: Rick Shane - JPMorgan - Analyst : Good morning, everybody, and thanks for taking my questions.

Question: Rick Shane - JPMorgan - Analyst : Look, I'd love to talk a little bit -- you've moved guidance to sort of the upper end of your prior range. And I'm curious how much of that is a function of timing, favorable timing with PPPC implementation versus late fee, how much is a function potentially of slower loan growth into the second half of the year and a favorable impact on reserves and whatever other fundamental factors might be driving that? Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yeah. Thanks for the question, Rick. From a timing perspective, I don't believe that there's anything significant with the timing of the execution. I'd say from an execution standpoint, I think we've hit all our deliverables. Given the process you have to go through to do the amount of things in terms that we've done. We've executed on the timeframe in the timeframes that we have in place and they're rolling out according to schedule. So there's nothing really timing related there. I'd sit back and say moving to the middle end of the range to the higher end of the range, just really overall business performance. I think we -- while purchase volume might be slightly lower than expectations, it shows the consumer is managing. We don't see them going under stress. So I think as we look through the various elements, our funding costs have stabilized and moving into the back half of the year, I think the expenses which we haven't really talked about only being up 1%, including the cost of $23 million related to the execution of change in terms or otherwise would have been down, I think, is a positive as we move forward. So I think we're continuing to execute the business. The business is really focused on what we have to do this year in order to execute both on the core business, the reaction to or the PPPC changes that we're rolling out as well as the integration of Ally Lending, which we're very happy about and the disposition of Pets Best. So the team is focused on execution. That's what I would say, drove us to the mid- to the higher end of the range. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, SYF.N - Q2 2024 Synchrony Financial Earnings Call

Question: Bill Carcache - Wolfe Research - Analyst : Thanks. Good morning, everyone. I wanted to ask about capital. So in contrast to many banks that are still dealing with large AOCI marks, you guys appear to have greater clarity on the level of capital that you're going to need to run with. And therefore, it seemed like you may be in a better position to perhaps return the capital in excess of your target a little bit more aggressively relative to those who are still accreting capital to sort of plug that AOCI hole. Can you speak to that dynamic and how we should think about like the trajectory of that excess capital position relative to the 11% target you've talked about historically? Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yeah. Thanks, Bill, for the question. We've been on a journey. You've heard me talk about this a number of times. When we separated from our former parent, we started out and got to a peak of CET1 of 18%. And then there's been a journey down where today, we're at 12.6%. We have an excess relative to the target. We're continuing on the path, right? But our first priority is always going to be organic RWA growth. Our second is going to be the dividend. And then third will be what we do with share repurchases or inorganic. And Brian talks about the discipline we have around inorganic growth. So we have the ability to do that. I think we're going to be prudent with regard to the way in which we return it back to shareholders. We're not going to just drop it tomorrow because obviously, we have many stakeholders here who would not necessarily agree with that action. But we are on a trajectory and moving towards our target, which is always been our long-term goal.

Question: Bill Carcache - Wolfe Research - Analyst : Understood. That makes a lot of sense. Thanks again for taking my questions.

Question: Dave Rochester - Compass Point - Analyst : Hey, good morning, guys. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Morning.

Question: Dave Rochester - Compass Point - Analyst : Got it. That makes a lot of sense. Appreciate that. And then to follow-up on Ryan's question from earlier in the scenario where the late fee rule is shut down regarding the changes that stick. I know you haven't given us a ton of thought yet, and that's understandable. But just based on your early assessment of consumer reactions so far and your dialogue with your partners and the fact that there's a good amount of expense associated with implementing those changes, is there any reason you've seen so far to indicate you would want to unwind the APR changes? Or would those be the easiest changes to leave in place? Thanks.

Question: Dave Rochester - Compass Point - Analyst : Great. Thanks, guys.

Question: John Hecht - Jefferies - Analyst : Morning, guys, and thanks for taking my question. Actually, I think all of my questions have been answered or asked and answered, But I guess I have one incremental one is, you did renew Verizon in the quarter and then you added Virgin. I'm wondering, given just, I guess, the overhang and uncertainty around the late fee situation, how -- have there been any kind of structural changes in how you negotiate these new contracts with that uncertainty in the background?

Question: John Hecht - Jefferies - Analyst : Great. Appreciate the color, guys. Thanks very much.

Question: Don Fandetti Fandetti - Wells Fargo Securities, LLC - Analyst : Yes. Can you talk a little bit about the '23 vintage, just how that's performing? You've got another quarter under your belt relative to your expectations, and maybe '22. And I know you haven't had as much sort of volatility versus general purpose. Brian Wenzel - Synchrony Financial - Chief Financial Officer, Executive Vice President, Interim Chief Accounting Officer Yeah. Thanks for the question, Don. So again, I think level setting -- first of all, I'd like to do it against the industry. I think if you go and look to some of the credit bureaus and you look at the industry vintage curves, our relative portfolios are performing better than the industry's curves, both from delinquency and accumulative net charge-off perspective. That being said, we talked extensively over time that there is a shared consumer. We do feel the effects of what other issuers did as they exited the pandemic adjusting some of their credit criteria or according the credit box in their world and issued an awful lot of -- some of the biggest vintages we've ever seen in the credit card industry. So I use that as a background. I think when you look at delinquencies -- and I'll give you some of the details here, Don. When you look at delinquencies, the second half of '21 through the first half of '23 are performing slightly worse than or worse than 2018 vintage. 2019 gets skewed because you without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, SYF.N - Q2 2024 Synchrony Financial Earnings Call had the year of the pandemic. The second half '23, and what we see, and again, is very early, but when you look at the early indications off of '24, because the credit actions we've taken, they are performing better than the first half of '23. And when you think about a charge-off perspective, the second half of '23 and the first half of '24 are performing better than '18. So I do think some of the modifications that we've made in credit actions are supporting the vintages. We have some of the shared consumer in that '21 into partially -- into the back half of '21 into early part of '23 that has given us a little bit of the trends above our historical delinquency rate. But again, we feel good about how the vintages are developing.