Synchrony Financial (NYSE:SYF) is a premier consumer financial services company delivering one of the industry's most complete, digitally-enabled product suites. The company's diversified portfolio of credit products, including private label, Dual Card, co-brand and general purpose credit cards, as well as short- and long-term installment loans, has enabled it to navigate the changing economic environment with resilience.

For the full year 2023, Synchrony reported annual net income of $2.24 billion on annual revenue of $13.63 billion. The company's annual operating cash flow and free cash flow both stood at $8.59 billion, showcasing its strong cash generation capabilities. In the second quarter of 2024, Synchrony reported net earnings of $643 million, or $1.55 per diluted share, a return on average assets of 2.2% and a return on tangible common equity of 20.2%.

Business Overview

Synchrony operates through five sales platforms: Home & Auto, Digital, Diversified & Value, Health & Wellness, and Lifestyle. These platforms cater to a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, offering a range of credit products tailored to their specific needs.

Platform Descriptions

The Home & Auto platform provides comprehensive payments and financing solutions for home improvement, furniture, bedding, flooring, appliance, electronics, and automotive merchandise and services. The Digital platform focuses on digital-first brands and merchants, as well as online marketplaces. The Diversified & Value platform serves large retail partners delivering everyday value to consumers, while the Health & Wellness platform specializes in healthcare payments and financing solutions. The Lifestyle platform covers power sports, outdoor power equipment, sporting goods, apparel, jewelry, and music.

Synchrony's diverse product offerings, deep industry expertise, and advanced data analytics capabilities have enabled it to forge strong partnerships and deliver customized solutions to its customers. The company's proprietary CareCredit brand, for instance, has become a leading provider of healthcare financing solutions, serving a network of over 250,000 healthcare providers.

Financials

Synchrony's financial performance in the second quarter of 2024 demonstrated the resilience of its business model. Ending loan receivables grew 7.9% year-over-year to $102 billion, driven by lower customer payment rates. Net revenue increased 13% to $3.7 billion, reflecting higher interest and fees on loans, lower retailer share arrangements, and an increase in other income.

Net interest income grew 7% to $4.4 billion, as interest and fees on loans increased 10% primarily due to growth in average loan receivables and higher benchmark rates. Retailer share arrangements decreased 8.7% to $810 million, driven by higher net charge-offs, partially offset by higher net interest income.

The company's provision for credit losses increased by 22.3% to $1.7 billion, reflecting higher net charge-offs and a $70 million reserve build. Other expenses grew 1% to $1.2 billion, driven by technology investments, preparatory expenses related to the late fee rule change, and servicing costs related to the newly acquired Ally Lending business, partially offset by lower operational losses and cost discipline.

Outlook

Looking ahead, Synchrony expects the consumer to continue managing their cash flows and consumption, which, when combined with the company's credit actions, should result in flat to low-single-digit decline in purchase volume for the second half of 2024. The company anticipates payment rates to moderate, contributing to more moderate loan receivable growth. Excluding the impact of the late fee rule implementation, Synchrony expects net interest income and other income to progressively grow in the third and fourth quarters as its product, pricing, and policy changes take effect.

From a credit perspective, Synchrony expects delinquencies to continue trending in line with or better than seasonality, and its net charge-off rate to be lower in the second half of 2024 than the first half. The company's reserve coverage ratio at the end of 2024 is expected to be generally in line with the year-end 2023 reserve rate.

Combining these factors, including the impact of the late fee rule and the $1.96 per share gain on the sale of Pets Best, Synchrony expects to deliver fully diluted earnings per share between $7.60 and $7.80 for the full year 2024, which is in the upper end of its prior guidance.

Geographic and Segment Performance

Synchrony's loan receivables portfolio had the following geographic concentration at June 30, 2024: Texas (11.0%), California (10.3%), Florida (9.3%), New York (4.8%), and North Carolina (4.2%).

At the platform level, purchase volume and receivables trends were generally consistent in the second quarter. Purchase volume growth ranged from up 2% to down 3% year-over-year, reflecting lower consumer spend on bigger ticket items and the impact of credit actions. Receivables growth across the platforms ranged from 6% to 15% higher versus last year, driven primarily by payment rate moderation.

Dual and co-branded cards accounted for 42% of total purchase volume for the quarter and increased 2%. Synchrony's out-of-partner spend gives the company deeper insight into recent customer trends, as the broad utility of its offerings and compelling value propositions attract purchases across a range of categories, industries, and products.

Risks and Challenges

Synchrony faces several risks and challenges, including the potential impact of the CFPB's final rule on credit card late fees, changes in consumer behavior in response to the rule or the company's product, pricing, and policy changes, and the ongoing uncertainty around the timing and outcome of the late fee-related litigation.

Additionally, the company's performance is subject to macroeconomic conditions, such as the pace of economic recovery, inflation, and interest rate movements, which can affect consumer spending and payment patterns. Synchrony also faces competition from other consumer finance providers and the risk of disruption from technological advancements in the industry.

Liquidity

Synchrony's funding, liquidity, and capital position remain a source of strength. At June 30, 2024, deposits represented 84% of the company's total funding sources, with secured and unsecured debt each accounting for 8%. Total liquid assets and undrawn credit facilities stood at $23 billion, or 19.1% of total assets.

Under the Basel III Standardized Approach rules, Synchrony's common equity Tier 1 capital ratio was 12.6% at the end of the second quarter, while its total risk-based capital ratio was 15.8%. The company has the flexibility to return capital to shareholders, guided by its business performance, market conditions, and regulatory restrictions.

Conclusion

Synchrony Financial has demonstrated its ability to navigate an evolving economic landscape, leveraging its diversified product portfolio, advanced data analytics, and strong partnerships to deliver sustainable, risk-adjusted growth. The company's focus on credit discipline, digital capabilities, and innovative solutions positions it well to continue serving the needs of its customers and partners, while generating attractive returns for its shareholders.