Synchrony Financial Q4 FY2024 earnings call

• Added over 45 new partners in 2024, including iconic brands and technology-oriented relationships.
• Acquired the Ally lending business and finalized the sale of Pets Best, with an equity interest in IPH post-sale.
• Launched new products and services like Synchrony Pay Later, CareCredit into wellness markets, and enhanced private label credit cards' utility.
• Expanded digital presence with growth in marketplace visits, digital wallet users, and engagement, driving incremental new accounts and lower acquisition costs.
• Saw improvement in portfolio delinquency trends, with 30-plus delinquency rate declining and 90-plus delinquency rate showing some increase but with improving formation trends.

In the fourth quarter, Synchrony added 5 million new accounts, generated $48 billion in purchase volume, and grew ending loan receivables by 2%. For the full year 2024, the company acquired almost 20 million new accounts and financed more than $182 billion of purchase volume. Dual and co-branded cards accounted for 44% of total purchase volume for the quarter. Net revenue grew 4% to $3.8 billion. Net interest income increased 3% to $4.6 billion. Provision for credit losses decreased to $1.6 billion. Other expenses decreased 4% to $1.3 billion. The efficiency ratio was 33.3% for the fourth quarter, an improvement of approximately 270 basis points versus the prior year.

• Expect low-single-digit growth in ending loan receivables for 2025.
• Net revenue for 2025 is expected to be between $15.2 and $15.7 billion.
• Portfolio net charge-off rate for 2025 is expected to be between 5.8% and 6.1%.
• Efficiency ratio for 2025 is expected to be between 31.5% and 32.5%.
• Capital ratios: CET1 ratio ended Q4 at 13.3%, Tier 1 capital ratio at 14.5%, total capital ratio at 16.5%, with plans for final CECL transition adjustment in January 2025.

• Uncertainty regarding the litigation process and political landscape surrounding the late fee rule.
• Impact of credit actions on growth and potential disincentivizing effects on purchase volume if not balanced properly.
• Macroeconomic uncertainties affecting consumer spending and credit performance.

Q: Good morning, everyone. Maybe to start off on the net revenue guide, Brian, you talked about growth in both fees and NII. Can we maybe just dig in on some of the moving pieces on net interest income? And I guess, first, how do we think about the impact from rates? I know you're targeting 4.25% in terms of Fed funds. The balance sheet should benefit as rates come down? And then second, how is the impact of the PPPCs coming through on your guide? How much of the full benefit that you were anticipating is already incorporated into the run rate for this year?

A: Yes, great. Let me try to unpack a little bit of that, Ryan. So I think when you think about net revenue guide and I'll bridge you a little bit to NII, when you think about the net revenue guy, you're going to get a significant increase related to the PPP fees running through net revenue. You'll also get a lift coming from growth and revolver rate coming through here. But there are two fairly large offsets that are coming back. One, is RSAs, which has the effect not only from a lower net charge-off rate in 2025, but also has the effect of the PPPCs that are flowing through there. And you have a fairly significant drop in late fee revenue that comes through there as well as your charge-offs decline. So those are the general moving pieces. You will see a more pronounced NII growth, because obviously that strips out the RSA impact, but the same weight fee dynamic, the revolve rate, all those kind of flow through. On net funding, it's slightly negative for the full-year. It's more a timing of when we have the rate cut kind of coming through. Prime rate already starting to drop this beginning part of this year. So it's more of timing, to be honest with you, when you think about prime rate decline, the investment portfolio, which resets fairly quickly, and then the funding piece again depending upon when the CD maturities restack. So again, more pronounced NII growth and the PPPCs, you know, I'll get ahead of the question, are performing generally in line with financially our expectations. You know, we have said there's a little bit of mix where we're getting stronger retention, stronger yield on the interest side and a little bit lighter on the paper statement fees, mainly due to people adopting E-Bill.

Q: Thank you and good morning, everyone. Brian Wenzel, maybe just to drill into that PPPC impact a little bit more. Is it fair to assume that by the end of this year you'd still sort of have that full run rate of what you anticipated putting in as mitigation in the numbers? And I guess, like, you know, how should we think about if late-fee regulation doesn't happen? How would it impact the ROA? I'm just trying to think about, you know, sort of normalize your long-term ROA and when you anticipate getting there? And I would have thought that mitigation takes that higher and sort of when we might get there?

A: Yes. Thanks for the question, Sanjay. Good morning. As I think about how you exit out of 2025 on the PPPCs, if I look at a couple of different components, they're still not going to be fully there on the financial charges. If you recall, we said, you know, you're roughly, you know, half, you know, one year out, you're about 35% two years out. So there's going to be incremental one rate to go on the interest line as you exit out of ‘25 and get closer into ’26, that's number one. Paper statements should reach, I'd say, a steady or state level, but then will grow rate relative to our average active accounts and how that grows depending upon mix and when not all the accounts have that paper statement. So, you know, potentially there could be a little bit of headwind if more people choose e-bill and then you're going to get the benefit down on the expense line versus the other income line. And the last thing I'd say is on the promotional fees, that should build throughout 2025, because that's something I want to affect a little bit later in 2024 as promotional volume picks up. It's been a little bit below our historical amounts, right, just on a buying perspective. That should pick up and advertise in over time. So I think as you exit out of ‘25, there still is room to grow up, you know, grow both on the interest line from promo fees and interest income, interest from the interest charges, and a little bit on the paper statement fees.

Q: Good morning, guys. Thanks for taking my questions. First one, I guess, is just another, I guess, aspect of credit, Brian Wenzel, I know '24 is early, but is there any kind of early reads from some of the aspects of the '24 vintage that leads you to believe that it might -- that vintage itself might be performing within the long-term goals?

A: Yes. Thanks for the question, John and good morning. As we look at the vintages in 2023 and 2024, we talked about some of the early performance very early, particularly for ’24, I take back they continue to develop. And I'd say, as we look at those relative to the industry, they are performing better and the industry's experience on both ‘23 and ‘24 in our estimation. Those vintages when I compare them back to 2018 moved slightly worse than 2018, but nothing that's really significant or gives us pause as they develop. So I think as we look at it, we're very happy with those two vintages, between ‘24 vintages that have the full credit actions embedded in, and we feel optimistic as just another reason why we're back, hopefully, inside our long-term target range of by $550 million to $600 million, but in the guide of $580 million to $610 million for next year.