Q4 2020 Synchrony Financial Earnings Call
[music].
Welcome to the Synchrony financial fourth quarter 2020 earnings Conference call. My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is.
Being recorded.
I will now turn the call over to Kathryn Miller Senior Vice Presidents director of Investor Relations you may begin.
Thank you and good morning, everyone welcome to our quarterly earnings Conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release detailed financial schedules and presentation are available on our website synchrony financial Dot com.
Information can be accessed by going to the Investor Relations section of the website.
Before we get started I wanted to remind you that our comments today will include forward looking statements. These statements are subject to risks and uncertainty and actual results could differ materially.
We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.
During the call we will refer to non-GAAP financial measures in discussing the company's performance you can find a reconciliation of these measures to GAAP financial measures in our materials for today's call.
Finally, synchrony financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties.
The only authorized webcasts are located on our website.
On the call. This morning on Margaret Keane, Brian doubles, and Brian Wenzel I will now turn the call over to Margaret.
Thanks, Kathryn and good morning, everyone 2020 was a challenging year marked by a global pandemic economic disruption and unrest due the ratio of adjusted.
It was a true test for our resilience, our agility and our strength on the business. We're proud of the way synchrony manage through these challenges.
No there have been significant developments that provide hope that the pandemic will begin to moderate the virus research on and resulting regional shutdown and continued impact on unemployment is something we are still managing through and that will depend on what continues to impact results. We are encouraged by some of the two.
So I'd have to that later on the call Brian Wenzel will detail. These impacts on the quarters results and provide a view on how we think the CMI for Val <unk>.
I will provide a high level overview here.
Let's first focus on our quarterly results, including some of our recent successes, which are outlined on slide three and for.
Earnings were $738 million or $1 24 per diluted share an increase of nine tenths of a lost share.
Loan receivables were down 6% to $81 9 billion and average active accounts decreased 10% from last year with new accounts down 19%.
Purchase volume per account increased 10% over last year to $602 and average active balance per account increased 4% to just under $1200 net.
Net interest margin was down 37 basis points to 14, six 4% and the efficiency ratio was 37, 1% for the quarter net.
Net charge offs hit a new low at 316 per cent.
As a result of on liquidity and funding strategy in response to COVID-19 impact on our balance sheet deposits were down $2 3 billion or 4% versus last year.
This include a strategic decision to slow overall deposit growth given the excess liquidity we have.
Total deposits comprise 80% of our funding and our direct deposit platform remains an important funding source.
Our ability to service and provide digital tools to customers makes our bank attractive to depositors and we will continue to build out additional capabilities.
During the quarter, we returned $128 million on the quarter through a common stock dividend. We also announced that the board authorized $1 6 billion in share repurchases for 2021, beginning in the first quarter.
We have a solid pipeline across our platforms and net.
The startup and existing program.
But we are being very disciplined around risk and return given the uncertainty in the current environment.
And while this retail landscape is shifting we believe similar opportunities will continue as evidenced by recent wins I will touch upon a few highlights.
We announced that we will become the issue on Walgreens co branded credit card program in the U S.
For such credit program and the retail health sector. The card will allow customers to earn rewards for purchases anywhere Mastercard is accepted we expect to launch for new program in the second half of 2021.
This new agreement builds upon the company's existing strategic partnership cash.
Credit is already accepted at more than 9000, Walgreens and Duane Reade stores we.
We are committed to providing walgreens customers and patients with unparalleled experience at a best in class loyalty program and the ability to manage their health and wellness spending.
In addition, we renewed our strategic partnership with mattress firm, we provide flexible financing solutions and innovative business tools that empower mattress firm to meet their customers at critical moments in the purchasing journey, which is increasingly on line.
Our digital tools and industry, leading credit program team, including marketing and analytic retail experts have optimized every step of the omnichannel customer journey to deliver a competitive user experience.
We look forward to many more years as a strategic partner with mattress firm.
We also reached a definitive agreement to acquire <unk> credit a leading provider of point of sale consumer financing for audiology products and dental services.
Allegro office numerous customers loan option through its merchant partners with flexible payment terms at the point of sale.
These products are designed to offer customers choice to purchase our products and services they need or want on.
The addition of Allegro credit merchant network and customers complement for our strategy of growing cash credit or leading health and wellness financing platform.
The transaction is expected to close in the first quarter of 2021.
Altogether this quarter, we signed non renewals and $1 seven new deals along with the acquisition.
I cannot overstate the importance of digital innovation to the success of our programs.
Consumers are rapidly adopting technologies that enable contactless commerce and expecting Keith on along their digital purchase journey.
We are leveraging our digital assets and continuously investing to ensure our partners on.
Well positioned in this rapidly evolving dynamic.
These investments include the capabilities to empower fast and seamless integration with our partners digital assets enable customer choice at the point of sale.
<unk> contactless experiences.
<unk>, a seamless and easy application process.
Bringing the in store experience to a customer's digital devices for applications and payments and integrate our financing office throughout the entire digital shopping experience.
We also continue to expand our digital penetration of all aspects of our customer journey apply buy and service.
Approximately 60% of our applications were done digitally during the fourth quarter and grew 18% and mobile channel application.
In retail card, 51% of ourselves occurred on line five.
Finally, approximately 65% of our payments were made digitally.
In short we are rising to the challenges presented by this difficult time.
We have strengthen the strategic positioning of our business and expanded the opportunity set that lies before us.
And we're investing in the right strategy that will enable near term successes, while also driving considerable shareholder value over the long term.
With our future in line as you know a few weeks ago, we announced some important changes to the leadership of this company effective April one I will transition to the role of executive Chair of our board of directors and Brian levels will become synchrony as president and CEO.
Synchrony means so much to me and one of my goals as CEO was to setup, a thoughtful leadership transition with a successor, who will advance what we have built.
The board and I believe there is no one in the world better equipped to do that and Brian Brian.
Brian has helped to build synchrony every step of the way. He has been my trusted partner for more than a decade, including through our IPO.
When we started synchrony back in 2014, we set out to build a great business with a great culture that delivers for our partners and customers every day together with our 16500 employees. We are doing just that.
With synchrony and a position of strength now it's a time to implement this transition, allowing Brian to continue the incredible progress that has been made and to drive the next stage of synchrony exciting growth journey.
I look forward to working with Brian for this transition and continuing to support synchronized growth and future success as executive chair with that I'll turn the call over to Brian.
I want to start by thanking Margaret for all the cheap for synchrony and for me personally with low off decade.
We truly would not be where we are for who we are today without our leadership and it's an absolute honor to succeed and lead synchrony into the future.
I am also grateful that we will continue to benefit for Margaret expertise and leadership in her role as executive chair.
I'm excited to partner with her on the board, our leadership team and especially our employees as we continue to capitalize on our momentum.
There is a lot to be excited about as we continue to think when he's journey.
We have a strong business a winning culture.
Tremendous opportunity to build on this strong foundation.
As income and CEO I will continue to implement the strategy that we've developed over the last two years on which has enabled the momentum of the business up to that.
We will continue to leverage our competitive strength.
Deepen our market leadership and invest in digital data analytics on new product offerings.
Create a seamless customer experience.
We will continue to grow our business and drive value for all of our stakeholders.
Our employees, our partners and our customers.
On that note I'd like to shift gears and turn to slide five to.
To talk about just one example of a strategy that we implemented to enhance the utility.
All of our offerings, and which has become an important part of our business today equal payments financial.
Fundamental to our business is our objective to provide a full suite of products that can be tailored to serve the evolving needs of our customers and partners, while earning appropriate economic returns.
Our partners most critical needs for centered on their ability to offer a product that can scale.
We will fully integrate with their digital assets on systems.
Higher average order volume and sales.
Increased conversion rates.
And deepen customer loyalty.
By the same token custom.
Customers have their own unique set of needs, including financing solutions, yet fit within their budget.
Current and easy and convenient to use.
And it was offer them flexibility in their purchase on financing decision.
We have extensive experience in installment loans, which has informed our approach to equal payment for naphtha.
We think about these products in two categories.
For revolving products.
We have a mid and long term equal payment plan with promotional periods anywhere from 12 to 152 months, depending on the product category.
We also offer thoughts on equal payment plans with multiple periods of three to 12 months.
Second closed on products.
For the collateralized installment products for bigger ticket purchases with promotional period from 12 to 180 months.
And we also offered for in long term installment loans for us update product.
Product these products one anywhere from three to 36 months.
All of these products are priced appropriately to meet our partner and customer objectives with APR starting at zero percent.
Each of these products and turn off the distinct benefits and address the unique objectives of our partners on customers.
Revolving equal pay products for example can be embedded inside of an existing revolving account eliminating the need for a customer to open on the account.
And given the nature of the functionality. They also provide for repeat purchases as well as higher engagement and loyalty with a partner is bad.
Meanwhile, closed on products tend to appeal to customers for regular predictable payments.
For the overall equal payments financial strategy on perspective.
We currently have 15 billion equal payment volume growth.
56% of which have zero percent APR for ethane.
We have about 74000 partners on locations often on a payment plan.
And we have an overall repeat purchase rate of approximately 30% within 24 months for the first purchase.
So for the success of net on our other credit strategies have been driven by our commitment to data driven innovation.
A deep understanding of our partners objectives on customer needs.
Our ability to adapt as the competitive landscape on market conditions have evolved over time.
Our organization is built around being nimble responsive and results oriented we leverage our decades of underwriting experience, our proprietary data analytics and our industry expertise in order to design and implement customized solutions that again.
That's our partners' needs, while also delivering appropriate economic outcomes.
This is what has driven the company's longstanding track record and deepen our market leadership over the years we're on.
Excited to drive this momentum forward in 2021.
Simply by continuing to enhance the value we offer for all of those we serve.
And with that I'll turn the call over to Brian Wenzel.
Thanks, Brian and good morning, everyone before I begin I want to congratulate Margaret and Brian on their new roles and thank them for what they have done for synchrony and for me personally I speak for everyone on the company when I say, we look forward to working closely with them in the next chapter for Synchrony as we begin 2021, we're encouraged by the developments being made to fight the pandemic.
And continued to be inspired by those on the front lines.
For our part we remain dedicated to keeping our employees safe and helping our partners customers and communities. During this difficult period guided by our values and principles and with a partner centric focus we are working to help our constituents to navigate this environment with an eye towards the future and the opportunities ahead of us as we begin to overcome the pandemic.
During the fourth quarter, the pandemic continue to impact our growth in several areas as noted on slide seven.
However, our business mix, which includes a significant digital component and certain industries benefiting from staying at home. So just home related products and services veterinary services and electronics and appliances have on balanced against some of the effects of the economic downturn.
Purchase volume was essentially flat down 1% versus last year and in line with our expectations for the quarter. Despite some pressure from new shutdowns and restrictions as the pandemic progressed during the quarter.
The continued pressure caused our average active accounts be down 10% and decrease in loan receivables was 6%.
Payment rates continue to be elevated relative to normalized levels.
Interest and fees on loans were down 11% from last year consistent with the core decrease we experienced last quarter.
Dual and co branded cards account for 38% of our purchase volume for the fourth quarter and declined 4% from the prior year on.
Receivable basis day, count for 24 percentage of the portfolio and declined 10% for the prior year.
While we're seeing positive trending in a growth metric as we entered the quarter. The acceleration of the pandemic resulted in regional shutdowns and diminished effects for the cares act stimulus slowed that early momentum.
Our sales are stable, we are encouraged by recent developments, including the recently enacted stimulus for proposed stimulus the new administration and national rollout of a vaccine.
We believe these factors low positive impact it should provide momentum as we progress through 2021 I'll.
I will provide a more comprehensive view on 2021 shortly.
<unk> increased $18 million or 2% from last year.
<unk> as a percentage of average receivables was five 2% for the quarter. This was elevated from the historical average primarily due to the significant improvement in net charge offs and the elimination of Walmart, which operate at a lower than company average RSA percentage.
The improvement in net charge offs resulted in decrease in the provision for credit losses of $354 million.
For a 32% from last year.
This was partially offset by a reserve build in the fourth quarter of $119 million.
Other income decreased $22 million, mainly due to higher loyalty costs.
Other expense decreased $79 million or 7% from last year due to lower purchase volume and average active accounts, coupled with lower employee cost as we have begun to implement our strategic plan to reduce operating expenses.
Moving to our platform results on slide eight our.
Our sales platforms continue to be impacted in varying degrees due to COVID-19, and their trajectory through this period had been different based on factors such as business and partner mix digital concentration provider access and availability of hard line goods and.
In retail card loan receivables were down 8% with the COVID-19 impact being partially offset by strong growth in digital programs.
That resiliency is evident in the growth in purchase volume, which was up 1% over last year. Other performance metrics were down due to the impacts from COVID-19.
We're excited about the launch of our new value prop with Sam's club.
They are an important and valued partner and we're excited about the changes in this program for Sam's club members.
Continued strength in power sports and home specialty in payment solutions helped to offset some of the impacts from COVID-19.
So on receivables declined 2%.
Average active accounts and interest and fees on loans were down, 9%, which was driven primarily by lower yield on loan receivables.
<unk> decreased 7% this quarter.
We signed several new programs and renewed several key partnerships. This quarter, we continue to drive growth organically through our partnerships and networks and added over 2800, new merchants during the quarter.
We also continue to drive higher card reuse, which now stands at approximately 34% of purchase volume, excluding oil and gas our efforts and successes are expanding an already solid base for growth as we exit the pandemic.
Although care credit was impacted the most by COVID-19 earlier. This year, we began to see some improvement as the year progressed as providers continue to increase elective and plant services from the trough in the second quarter.
That said rising infection rates, increasing stay at home restrictions did slow some of this progress loan receivables declined 7% with interest and fees on loans decreased 4%, primarily driven by lower merchant discount revenue as a result of the decline in purchase volume, which was down 6%.
Average active accounts decreased 10%.
As Margaret noted earlier, we are excited about our partner activity within this platform, including the acquisition of Lego credit our Aspen dental renewal on expansion and a new partnership with community Veterinary partners.
During the quarter. We also continued to grow our share credit network enhanced utility of our card.
And all of our network and accept the strategy has helped to drive reuse rate to 59% of purchase volume in the fourth quarter.
We are proud of these achievements and particularly excited about the opportunities we see to drive future growth. In this platform is the impact of the pandemic subsides.
Moving to slide nine and cover our net interest income and margin trends.
Net interest income decreased 9% from last year, primarily driven by an 11% decrease in interest and fees on loans receivables due to the impact of COVID-19 net.
Net interest margin was 14, 64% compared to last year's margin of 15, 1% largely driven by the impact of COVID-19 on loan receivables and increase in liquidity and lower benchmark rates.
Specifically the mixed them on receivables as a percentage of total earning assets declined approximately 30 basis points from 82% for 79, 9% driven by higher liquidity held during the quarter.
This accounted for five basis points of the net interest margin decline.
The loan receivables yield a 19, 93% is down 94 basis points versus last year and was a driver of a 75 basis point reduction on our net interest margin.
For liquidity yield decline as a result of lower benchmark rates and accounted for 30 basis point reduction on our net interest margin.
These impacts were partially offset by an 89 basis point decrease in the total interest bearing liabilities cost to 169% primarily due to lower benchmark rates.
Higher proportion of deposit funding.
This provides a 73 basis point increase in our net interest margin.
Next I'll cover our key credit trends on slide 10.
In terms of specific dynamics in the quarter I'll start with the delinquency trends.
The 30, plus delinquency rate was three 7% compared to four for 4% last year.
The 90, plus delinquency rate was one 4% compared to $2, one 5% last year.
Higher payment trends have helped drive the improvement in delinquency rates.
Focusing on net charge off trends for net charge off rate was three 6% compared to $5, one 5% last year.
The reduction in the net charge off rate was primarily driven by improving delinquency trends.
Customer payment behavior improved throughout 2020.
The allowance for credit losses, as a percent of loan receivables was 12, 5%, 4% with the increased last year being primarily driven by the adoption seasonal in 2020 and the impact from COVID-19.
Moving to slide 11, I'll cover expenses for the quarter.
Overall expenses were $1 billion for the quarter down $79 million for 7% from last year.
The decrease was driven by lower purchase volume and average active accounts as well as reduction in employee costs and operational losses.
Patiency ratio for the fourth quarter was 37, 1% compared to 34, 8% last year.
The ratio was negatively impacted by lower revenue that resulted from low receivables and lower interest and fee yield which was partially offset by the reduction in employee costs and operational losses.
Moving to slide 12.
Given the reduction on our loan receivables and strengthen our deposit platform, we continue to carry a higher level of liquidity.
While we believe it's prudent to maintain a higher liquidity level. During this uncertain and volatile period, we are actively managing our funding profile to mitigate excess liquidity where appropriate.
As a result of this strategy Theres a shift in the mix of our funding during the quarter on.
Positive declined $2 $3 billion from last year are securitizing unsecured funding sources were down $2 6 billion and $1 5 billion respectively.
This resulted in deposits being 80% of our funding compared to 77% last year, the securitized and unsecured funding each comprising 10% refunding sources at quarter end.
Total liquidity, including Undrawn credit facilities was $23 7 billion, which equated to 24, 7% of our total assets up from 22% last year.
Before I provide details on our capital position. It should be noted that we elected to take the benefit of the transition rules issued by the joint Federal banking agencies in March which had two primary benefits.
First it delays the effects of the seasonal transition adjustment for an incremental two years and second it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment.
With this framework we ended the quarter at 15, 9% CET one under the seasonal transition rules 180 basis points above last year's level of 14, 1%.
The tier one capital ratio was 16, 8% on the seasonal transition rules compared to 15, 8% last year.
The total capital ratio increased 180 basis points as well to 18, 1% in the tier one capital plus reserves ratio on a fully phased in basis increased to 27, 8% compared to 21, 4% last year, reflecting the increase in reserves as a result of implementing seasonal.
During the quarter, we paid a common stock dividend <unk> 22 per share.
For the full year, we returned approximately $1 $5 billion to shareholders in the form of share repurchases and common stock dividends.
As we finished 2020 and enter 2021.
To assess the capital and liquidity strength of the company and the stability of our business at this point in the pandemic.
With this backdrop the board has authorized $1 6 billion of share repurchases for 2021, beginning in the first quarter.
Repurchase are subject to our capital plan and regulatory restrictions as well as overall market conditions, including any potential deterioration from the ongoing pandemic.
Next on Slide 13, we are providing a framework on key drivers for 2021.
It goes without saying, but the current environment will have periods of uncertainty and volatility until the pandemic is under control.
<unk> impact for the economic environment is more fully known.
While our visibility is limited for providing this framework about how we're thinking about the year might unfold based on our best assessment as of today.
These views assume that in the first half of the year. There is continuing pressure from the pandemic in a slow economic recovery in the second half we assume the pandemic is largely under control and economic recovery accelerates.
First quarter purchase volume is expected to be consistent with the trends that developed at the end of 2020.
Second quarter comparisons will obviously reflect the economic trough experienced in second quarter 'twenty.
The second half of the year, we anticipate improving growth trends as the pandemic impact moderates and macroeconomic growth accelerates.
Regarding loan receivable growth in the first half we expect continued higher payment rates from the stimulus actions to impact loan growth.
On the second half of the year, we believe paying rates will slow as stimulus debate and we return to more normalized payment behavior patterns combined with the expected increase in purchase volume from an improving macroeconomic environment. These drivers will contribute to accelerating asset growth.
For net interest margin overall, we expect continued improvement as we enter 2021.
Regarding the improvement in the first half, we anticipate that higher payment rates will contribute to continued excess liquidity impacting asset mix in the second half excess liquidity has reduced the asset growth in flooring payment rates, which drive normalized interest and fee yield leading to increasing them.
With respect to our view on credit for the year delinquencies are expected to increase with peak delinquencies occurring in third quarter 2021, and result in sequential quarter increases in net charge offs.
We would expect reserves to be largely driven by asset growth and the impacts from any changes in the credit macroeconomic scenario.
We anticipate a reserve release during 2021 as a credit macroeconomic environment develops.
RSA is will remain elevated in the first half primarily reflecting the strong program performance, including revenue and net charge offs.
In the second half, we expect lower RSA is generally reflecting the higher net charge offs, partially offset by higher revenue.
As we outlined previously we've implemented cost reductions across the organization. We believe this will result in expense reductions of approximately $210 million during the year.
Partially offsetting these cost reductions will be expense increases related to growth. In addition to the anticipated increase in delinquent accounts. We will continue to closely monitor how the pandemic develops and its impact for the macroeconomic environment and adjusted for landscape unfolds as we enter 2021, and we remain optimistic in the strength and the strategic position of our Biz.
To meet the challenges and exit the pandemic period in a stronger position than when we entered it will continue to make investments in our people products technology and platforms to drive long term value and cash.
To ensure safety of our employees, while meeting the needs of our partners merchants providers can cardholders.
I'll now turn the call over to the operator to begin the Q&A portion of our call.
And thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key if youre using a speakerphone you may need to pick up the handset first before pressing the numbers.
Again, if you have a question. Please press Star then one on your Touchtone phone, we have our first question from Ryan Nash with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
Good morning, Hey, Ryan Hey, Brian.
Margaret first just wanted to say that it's been a pleasure working with you over the last seven years I've really enjoyed the opportunity to learn from you and best of luck on your next role as executive chair. Thank.
Thank you so much right.
So.
Maybe I'll kick it off for question.
For <unk>.
Ian Wenzel, so Brian the RSA the loans was over 5% in the quarter just given.
For the better than expected credit and I was wondering if maybe you can just give us a framework how to think about the RSA for 2021, if your base case that you outlined on the slide plays out can we expect it to kind of remain in this 5% RSA the loans range before eventually dipping later in the year.
Yeah, great. Thanks, Thanks, Brian.
You know obviously the elevation that we've seen as we enter into 2021. It was really driven by credit, which is 200 basis points better on net charge offs.
Slightly offset by or offset by some.
Some of the interest expense in them, but but clearly elevated so I think as you slide into.
2021, what youre going to see is as we continue to expect NIM to rise there will be a benefit that.
That will flow back through the RSA to the retailers pushing it upward, but then as credit normalizes.
That will that will deflated.
Our expectation is it remains a little bit elevated we would not expect.
On that type of elevation at the end of the year as we exited out of <unk>.
2021, and I think as you get into 2022 and beyond it should be back into the <unk>.
More normal type range that we've operated pre pandemic.
Got it.
And.
Brian doubles, thank you for all the color on the equal payment strategy.
Maybe just expand on on the product offering and how you think it can evolve over time. So if I look your products generally started around three months of financing. So I was wondering if there is potential we could see some of the short term products evolve into your own buy now pay later product and second just given the some of the new players in the space are charging merchants is pretty healthy.
Fees for the for these products can you maybe just talk about the pricing on merchant discount rates in some of your equal pay products and can you maybe use pricing as a lever to drive volumes towards your offering and maybe away from some of these newer entrants. Thanks.
Yes, Brian that's a great question I think you really got to take a step back and say look our strategy is really to provide a full suite of products that debt. Both what our partners want but also what consumers are looking for and obviously buy now pay later as a trend that's not going away.
Installment loans that trend is not going away.
Take a step back do you think about our business, we have such a broad set of partners that you really just can't have a one size fits all strategy.
So as you know, Brian we sit down with each one of our partners, we sit down and say okay. What are you trying to achieve how can we help you drive sales how can we help you.
Communicate lifecycle market to your customers.
And that means that day will want to offer a variety of products.
In some cases, a revolving product is going to make more sense.
In some cases, an installment product is a better fit if you think about bigger ticket products that stares more towards longer term installment.
That can be on a revolving product or closed end and then smaller ticket the trend that we've seen recently is that tends to steer more shorter term and more shorter term installment.
So again it comes back to really what the partner wants at the end of the day.
Now you make a really good point, obviously merchant discount pricing plays into this.
The shorter you go in if you're not charging interest on the account then obviously you charge a higher merchant discount.
So again it comes down to what the partner wants and what the consumer wants at the end of the day.
Look I feel great about the product set that we have the one thing that.
I would not underestimate, though as the product is really just one piece of the equation.
What we've been working on on what's really important is how do you embed the product in the shopping journey.
So that the way that we integrate is more important than ever. So it really comes down to features and capabilities even more than the products at the end of the day. These products are not that complex, it's really about how do we integrate how do we embed the financing offer throughout the shopping journey.
Thanks for all the color and congratulations on your promotion to I forgot to mention that earlier, yes. Thanks, a lot Ryan thanks for that and have a good day.
And thank you we have our next question from Sanjay <unk> with <unk>.
Thanks, My congratulations as well to well.
I guess, the total weird because the credit quality.
Being so strong is affecting you guys a little bit more because you're sharing some of the upside there with the retailers I'm just curious.
As we have the stimulus benefit like how much of the stimulus benefit is helping credit quality and do you expect it to wear off at some point did you start to see it we're off a little bit in the fourth quarter on just I'm, just trying to figure out sort of.
How stimulus how long you've been credit sort of remains favorable at this point in time understanding your forecast that things might revert to the mean.
Yeah. Thanks, Sanjay so so stimulus clearly has benefited we've seen that throughout 2020, most certainly we saw an influx of payments right. When when the most recent stimulus package. It so payment rates actually elevated back.
Higher in the early part of January so.
Clearly stimulus isn't effect and you do see it we're off now whats interesting more interesting about this latest stimulus is not surgical as much it is going through a broad based population so the.
<unk> as we continue to move on even with further stimulus our portfolio shifted we used to be 27% subprime now we're 23% subprime. So the effects of that will not hold so so we do if we do assume that when the seamless burns off year on.
Most really from the one in December but if there's another stimulus that does get enacted in the first quarter.
That will burn off and you will see payment rates elevated back and then youll see delinquencies come back into the into the portfolio well certainly were expecting given the high level of unemployment that delinquencies will build pretty quickly here as we move out of but again, we haven't seen that to date on.
On the credit metrics that you've seen so.
There is a chance, though that with the future stimulus and if you get the pandemic under control with the vaccine that you may flatten the ultimate loss curve here and have a bridge, which is what we would hope for.
Got it.
And maybe one for Brian doubles just on.
And Margaret.
Verizon and Venmo card, so I'm, just curious sort of.
I know that is an important part of the growth story.
At least over the intermediate period as we're waiting for offline to recover on just curious if youre seeing.
Progress on how they're doing relative to your expectations, yes.
I would say.
Both are doing really well.
Verizon we launched back in the summer and you know.
Again, it was our first launched during a pandemic.
I think as we started out more on line and ask the stores have opened up we're definitely seeing a positive momentum there people are liking the value prop. So we feel really positive about our Verizon relationship on where that could be on venmo, we did a soft launch and.
The fall that's on also very well and consumers are really liking.
How the product operates within the Venmo app.
There's a lot of technology that both parties built out to make that really an integrated experience for consumers and we're getting a lot of positive momentum there.
As we rollout to the broader population soon we expect that to continue to pay a day part of our growth story as we go for and it will just happening. So two really exciting programs two programs, where our technology and our investments have really paid off and we you know we look forward to continue to advance.
On our investments and technology as they continue to integrate even further yes.
The only thing I would add to that is I wouldn't I.
I Wouldnt gloss over Walgreens, we're really excited about that relationship and I'd put that in the same category as the venmo and Verizon in terms of the opportunity for us so on.
90 million Walgreen loyalty customers, we're really excited about what that relationship can do for us as well.
Absolutely Greg congratulations.
Thanks, So on just have a good day.
And we have our next question from Moshe Orenbuch with credit Suisse.
Great, Thanks, and congratulations for Margaret and Brian.
Maybe just to follow up on that exact question and clearly each of these as kind of.
Independently.
Large large customer bases and large opportunities.
But maybe is there a way to kind of discuss how the combination of tight.
Type of customer that debt.
Has the loyalty to that particular brand and the value prop.
Proposition.
Translated to a a credit offering.
In some way kind of thinking about for three of them.
Perhaps even ranking them in terms of how you see them kind of contributing to growth with synchrony.
Yes, I don't know if we could rank them yet because it's still early but I would say that our experience has always been that customers can come.
Compartmentalize fan so if you think about venmo I think.
That's going to become more of an everyday use card, particularly with folks that use that app all day long.
And we think assets assets integrated into that payment mechanism.
And the ability to really split payments then actually.
<unk> experienced that back and forth between how people spend but I think the big opportunity on Venmo really is the fact that you can use that card now and brought on merchants. So I think as the us.
The QR code becomes more of a.
Go to type of technology, it's still it's still not where it needs to be but we think thats really the other big opportunity with them. All so you have the in App experience for people are.
Working together on a purchase things, but then.
In store or the QR code opportunity presents a whole different.
I think different set of experiences and may be brought into that customer base for us. So we're excited about that on on the other two it really is the value prop that I think makes another big difference.
Where for Walgreens, what we do know and we know this through a cash credit that people do compartmentalize their health care spend.
And as consumers are being asked to really.
Bigger burden on health care spend we spend we view this car to be.
On a great way for us to enter into the broader space of health care as you know thats been part of our strategy I should also say that it's building on our relationship we already had with Walgreens because we already had the card the cat credit card accepted in Walgreens now this is really tying our card with their value prop connecting the two together and really allowing.
Customers, who have health care needs and wellness needs to really leverage that and then get the rewards and then again, we're going to work towards making all of this day shut off so it's a really seamless frictionless experience for the consumer and then Verizon is really I think the value prop on Verizon and in terms of how you use Verizon I think all other time for it.
And also I have kept for other still on my plan.
And you never really got kicked off the plant all the way.
Leveraging that value prop on confusing that towards your.
Your Bill I think is another really.
Positive momentum that we're seeing so we think all three of these programs have real growth potential.
I think it really demonstrates for us our ability to really be agile in a very difficult environment to rollout during the pandemic and to really meet the needs of what I would say are really strong value props leveraging technology.
Got it thanks.
I know what you mean on the phone plan.
As a follow up question.
Given Brian Wenzel, given what you talked about in terms of the capital positioning how strong it is.
Simply I mean, you guys earned over $1 billion. This past year on the balance sheet shrunk and so how do you relate the $1 six <unk>.
Buyback authorization to that I mean, it feels like that could get stronger over time, and maybe just kind of talk about how that was developed.
Yeah. Thanks, Moshe so it's important to note that the announcement that we made in the board authorized is slightly different than we historically done this is for calendar year.
Obviously, the fed has put some restrictions in for the first quarter, but.
We're going to go through our process, we've been going through a quarterly process from a governance perspective looking at loss stresses.
Looking at the way our balance sheet will perform and I think if you go back a quarter.
We werent, we werent sure we'd be in this position to start the year, we were thinking more back half of the year, but I think as we talk with the board, we recognize the strength and the capital and liquidity of the company. We recognize the stability of the company as we progress through the back half of 2020, as we look into 2021.
Again, it's uncertain theres going to be volatility, but we're optimistic that the pandemic comes under control in the first half and that the macroeconomic piece picks up so we thought it was prudent to start.
We will go through a process and submit our formal capital plan to the fed at the end of March beginning of April and then we'll circle back with what that amount is that we think that that's a prudent amount right. Given given this is a transitional year rate relative to two the visibility on uncertainty so.
Obviously, we haven't changed our long term view with regards to capital.
And where we want to get too, it's just really the pace and so where we're comfortable that this is a good place to start and we can always revisit as we move through the year.
Thank you very much thanks.
Thanks, Moshe have a good day.
We have our next question from Mihir Bhatia with Bank of America.
Hi, Thank you for taking my questions.
Also let me add my congratulations to both Margaret and Brian.
Maybe we get.
Wanted to start with maybe just going back to your comments on Walgreens I guess my first question just really to clarify is this been a student debt credit or is it going to be in your retail card sector because it looked like from your press release. It was on care credit and then my follow up on that would just be other is there any implication of that because I think historically okay.
Credit has had no RFP are low.
Part of it and so just in terms of the program is there something we should be thinking about specific to Walgreens, which makes it different than the typical co brand on retail card program well I'll start and then Brian can talk about the RSA, but look I think one other things that we have said for a while now is that we.
I believe that we have a unique.
Insight into the whole health care wellness space, given our cash credit platform, we've expanded backpack platform.
All through last year as we've expanded into hospital networks you just saw.
Acquisition of Allegro credit.
We believe that.
Consumers and by the way it does sit in care credit so I should clarify that for us it in cash credit.
We believe that the everyday spend around wellness is an area where consumers are looking for rewards. We believe Walgreens is a great partner because we were already in their accepting the Walgreens other cat credit card. So.
We believe this spaces is a real ripe opportunity because of our unique knowledge and experience in this space for over 30 years.
And we really see Walgreens as a way for us to really <unk>.
Continue to expand and differentiate ourselves in the health care.
I don't know, Brian if you had mentioned the RSA yes.
The only thing I'd add on some mortgage comment is when you think about the capabilities. We already have a care credit dual card that operates there and most certainly while we're a big business the ability for us to really take the tools technology talent that exists in that manages the co brand relationships inside the retail card will most certainly partner with those folks.
Combining the health care knowledge that we have in other platforms on the payment solutions platform. We do have some limit on RSA. So you would see some RSA here, but again.
It's a $10 billion platform for us so I wouldn't consider it to be to me be material certainly in the early early part here. So.
But you will see some develop over time there.
Understood. Thank you and then if I just my other question was just going to be on capital and going back for some of your comments on deploying.
Deploying capital on getting your capital ratios Joseph the opioid free.
Like you've had excess liquidity the entire time.
You've been public so I guess is there an opportunity or interest in deploying some of that capital Y our portfolio acquisitions or through other inorganic growth, whether it's M&A or something else that we should be thinking about or do you just feel like you have enough on your on hand between Walgreens Venmo Verizon.
On the economy reopening that near term, that's probably more what we should be focused on thank you.
Yes, Greg Great question, you know when we think about the capital priorities of the company. The first priority for US is the organic growth that we have so when you think about.
Some of the longer standing existing programs, whether it's an amazon or Paypal or T. J ex Sam's loans theres lots of opportunity to continue our penetration March there. These newer programs for Verizon and Venmo Walgreens will will most certainly.
Like to deploy capital into that so so that's our first priority is grow that piece, but we will have capital beyond that debt.
That ability to grow the book if you think about the capital generation of the business you think about the resiliency and the return you think about the resiliency of the RSA, we will have excess capital, which then our next priority is to maintain our dividend and provide that back to shareholders and then beyond that we believe there will be excess that will be deployed.
First in share repurchase to the extent that we find an acquisition that makes sense, whether it be a portfolio of businesses.
We will look to do that I think that was demonstrated this quarter by the acquisition of Allegra. So if the right opportunity comes along that fits with our long term strategy and is at the right return for US. We certainly are looking at those opportunities should they come on.
And that's the key that's the key point still on this part of the cycle I'm not sure valuations have checked up enough, where we would do something large but to the extent that they do and the opportunity exists we would gladly deploy that capital for the long term value creation.
Thank you for taking my questions.
Great. Thank you have a great day.
We have our next question from Don Vendetti with Wells Fargo.
Hi, good morning.
Brian we're getting more questions around regulation and I, just wanted to sort of get your perspective.
How youre thinking about that risk.
Are there any parts of your business that could become more focus.
B.
Yes, John I'll take that.
We are I'm, assuming this is in relation to the new administration.
Today, we've been around for a really long time, we've had all administrations we feel.
Confident that even in the new administration, we'd be able to manage through any changes that they may make.
I think.
We feel like we're well positioned and you know look I think the regulation and our focus is really always on.
This whole idea of being fair and transparent to consumers and I think that's our job. So we have the infrastructure in place we have the people on place.
We're trying to ensure we're doing all the right things from a consumer perspective, and also working with our partners on this as well on so.
We're not overly concerned I mean look there probably be more things coming up I will just as we have to.
Okay. Thanks Margaret.
Thanks, Don.
Thank you Lee.
Thank you Sir we have our next question from Betsy <unk> with Morgan Stanley.
Hi, good morning.
Good morning Betsy.
Margaret it's been such a pleasure working with you and I know you're still going to have like fantastic influence over it synchrony in your new role, but thanks very much for all the time that you've given us over the years and Brian looking forward to even working with you're closer.
Alright, thanks very much.
Okay. A couple of questions on Sept pay just wanted to see if you could give us some color on the take up rate at your partners and things like what percentage or has it been rolled out to how much do you think you can push that in 2021, which is a period, where I think youre going to see.
Some of the pure play guys really push hard to get into merchants. So I wanted to get an understanding of that.
From you and whether or not the partners that you have today with another being PL platform can add sub pay on top of that or do you have to wait for their programs to come up for RFP in a few years just some color on that'd be helpful.
Sure Betsy.
Really does come down to the individual partner and what they're trying to achieve and I think obviously this is a hot topic. That's why we put a slide in the deck today.
Just to kind of lay out in more detail how much of this business, we actually do today.
It's well known that we have $15 billion of balances that are on equal pay products.
Both short and long term.
And I think it really does come down to partner choice. So as I said, we sit down with each one of our partners in some cases, they love the idea of an equal pay product because that's what the consumer wants that's what their customer wants but they want to put it on a revolving product and part of the reason.
Part of the reason for that is it gives them an ongoing relationship with the customer right. It allows them to drive the repeat usage. It allows them to do the lifecycle marketing all of those things that are really important to our partners and that frankly, they've been trying to drive for the last five or six years, we always talked to you about.
How much reuse we get on the card and that's a big priority for our partners is creating that lasting relationship.
With their customer and then we also have some customers that depending on.
Their customer base and the types of products. They sell that they are they're actually interest in more of a short term.
Closed on installment product and so we're able to provide that as well for setback.
And we can do that very short term, we can do it longer term.
But it really is customized.
For the individual partner in terms of what they're trying to achieve the one thing I can tell you is we are seeing slightly higher growth rates on those installment products and we're seeing on the other products in the portfolio, which I think is good news I mean, we have to stay.
We absolutely have to stay ahead of that curve.
It's rapidly evolving.
But the product is just one piece of the equation I touched on this earlier, what our partners really wanted to make sure. We can do and this is this is very different depending on the types of partners is how do we integrate into their digital point of sale.
And if I look across the investments that we're making the company. That's one of the biggest one so it's not enough just to have the product actually having the product is the easier part in our line of cases, but how do you integrate.
Seamlessly inside of all of our partners digital assets. So how do you do that online how do you do it on their mobile App and you can imagine given the breath of our partner base, we have to have solutions that customized for each of those individual partners.
And so it really is more about the experience then the actual product at the end of the day.
And then answer your question.
Yeah, I guess the.
Mike My underlying question here is.
Do you anticipate like I understand that you have a significant amount of balances on.
On this equal pay product today.
<unk> pay is a slightly different tone to that slightly different offering and I'm wondering if this is in your opinion.
2021 is a year where that take up by your partners is going to be explosive or is this normal course for you and.
Yeah, we really shouldnt expect to see that much difference in how your partners interact with you on the equal pay product I think you're definitely going to see higher growth rates.
Pay then you see kind of broadly across other products with that said I wouldn't consider explosive growth.
Because it really comes down to what the partner is trying to achieve at the end of the day and we do have some partners that are very focused on a strategy, where they liked the equal pay product, but they'd like to see it sit on our revolving account where they can continue to drive the repeat usage and continue to have that ongoing relationship and I think the other piece is customer choice.
Right, what does the customer really wants and for some our job, it's really off of the products and position them for the right way to the consumers. So that they can have consumer choice and I think one other things. We're very focused on is making sure that is integrated in our tangible assets. So it's a choice for our customer at the end of the day. It comes down to what are <unk>.
<unk>, one in what consumers want and.
Given the breadth of our partners, we have to be able to provide a very full product suite revolving short term long term installment and we will be able to do that but it does come down to the partner on what the customer wants.
Okay. Thank you I appreciate it thanks, Vince and expect to have a good day.
We have our next question from Bill <unk> with Wolfe Research.
Thanks, Good morning, Greg.
I'll add my congrats to you both Margaret and Brian.
Thanks Bill.
You have line.
Great new programs that you're investing in as you look to the resumption of growth in new inactive accounts coming on to this but can you give a bit more color on.
You're gauging what the right level for the investment is your guidance for operating expenses calls for higher investments, but maybe you can give a little bit more context, maybe in terms of an efficiency ratio.
Yes, Thanks Bill so.
We've continued even during the pandemic different than a lot of our peers, we did not slow down any of the investments whether it was on technology.
Or you know on resources, we've allocated towards these growth initiatives, we re prioritize certain things.
Side of that that were greater short term opportunity. So we've maintained that.
So for US we're going to continue to invest.
<unk> 'twenty was a big year for us when you think about the investment the standup of them.
On a Verizon and again, we're looking forward to a full venmo launch here in 2021, so we've invested quite a bit Walgreens comes right behind this we continue to drive core productivity and which we're continuing on the investment and again.
We're positioning the company for the longer term Bill is to look at.
Looking out 2025, what is an above average ROI and we're going to drive that efficiency ratio back down into.
A range, where it has been more historically, but really delivers that on ROA given the revenue mix and loss content that we see in that portfolio mix that being said, we are going to find ways in order to either increase the margin of the.
The portfolio in order to drive incremental cost out to maintain and perhaps expand that investment technology that is something that we want to do when we feel we need to do for the medium and long term.
That's super helpful.
Separately.
Yeah.
On capital can you.
You give a little bit of more color on how you guys are thinking about the Cecil in cares Act phase ins on your ability to return.
Excess capital.
And.
I guess just is there a possibility that we could see you guys increased at $1.6 billion authorization under a favorable macro scenario, where you guys end up releasing a sizeable amount of reserves as we progressed through 2021.
Yes, So let me unpack that the first piece on all our modeling as we move through 'twenty and really 'twenty. One we've always modeled in the transition adjustment relative to <unk>.
Seasonal on most certainly that would come out of we view the capital generation in those years as we move out.
This is roughly around I think 60 basis points.
Assuming that assuming that the real estate tech we are continuing to be honest with you engage with dialogues with our stakeholders about a form of permanent capital relief because we honestly believe that when you look at our tier one plus reserves of 27%.
That is very high.
Where we are and that we believe that there should be credit whether it sits in tier two and tier one relative to seasonal so that's always been a factor as part of our plans and it shouldnt really impacted with regard to your second part of your question that the improvement in the macroeconomic.
Scenario most certainly.
We're not tied to the $1 $6 billion, that's where we view it today, we're going to go through our capital planning process here on the first quarter and get our capital plan approved by the board.
In March submitted in April.
And then hopefully we'll come back to you in the second quarter with a full flow perspective, but there is a scenario where we're clearly we can return potential more capital I think right now at $1 $6 billion as we're sitting January 29th in our.
Transition in a year that debt is a little bit on certain is not a bad place to start the year at so we're going to continue to monitor the same way a quarter out we thought we weren't going to do anything until the back half of this year. So we will continue to evaluate it bill.
That's very helpful. Thank you for taking my questions.
Thanks, Bill Thanks, Bill I have a good day.
Vanessa we have five more people in the queue, but time for only one more question.
And thank you so much we have our last question from John Hecht with Jefferies. Please go ahead.
Morning.
Congratulations Margaret and Brian and our welcome Kathryn.
Thanks, Sean.
A question. Another question on the RSA, just wondering I mean, because we can look back at historical average levels and understand it may be elevated because of the charge offs cycle.
Number one is there is there anything different.
Where that maybe are average RSA should sit over time.
Well, let's see where it was for.
It sounds like there might be some modest change because of the.
Walmart transition, but is there anything else that would change the long term kind of average ours day levels.
Yeah. Thanks, John So the simple answer is no I mean, Walmart clearly if you strip that out we will push the RSA higher because it's operating at a lower.
RSA level than the company average absent that theres not theres nothing fundamentally I think what's challenging people and I can appreciate it.
I'm an outside in perspective is <unk>.
<unk> has.
Dramatically impacted.
On the profitability of the company and its very difficult, we've lagged Cecil, but when you don't see delinquency formation at a retail partner, it's difficult to go to them and say, okay, even though I havent seen delinquencies theyre going to come at some point here is 100 $200 million. So so that is unfortunately, pushing the RSA higher here and then when you look at credit really.
Outperforming.
The loss in.
In NIM.
We have a higher RSA I think when you look at it over time, if you look at 'twenty and 'twenty. One combined together is going to come back down the average and most certainly as we exit the pandemic, there's nothing structurally that debt debt. This should operate at a different level ex the Walmart impact.
Okay. That's very helpful. Thank you.
And my last question.
And you've talked about some of the new products on a fully appreciate the customer centric focus of the new products.
At what point do vote.
On a mix of the new products starts to start to impact call. It.
The economics of your business.
For instance, a closed on product might have a bigger merchant discount that would flow through a different.
I imagine a different line item in your P&L. So what at what point should we envision changes in that mix and what might that what might be for micra uptake and thanks for taking my questions.
Yeah. Thanks, John I'll just start on that.
As you know we are pretty disciplined around around pricing and I think we try and maintain.
On pricing that gives us an overall on attractive return on either for the program or the product that we're underwriting.
And so that that will remain consistent I think there are certainly trade offs and I think how you earn on these products is a little bit different obviously shorter dated promotions, you're maybe getting more merchant discount youre getting less often.
For the APR their consumer.
But I wouldnt see having a material impact on our overall profitability return.
Longer term you might just see the components change, which as you know both of those run through net interest income. So I don't think you wouldn't see it have a significant.
Impact there I don't know, Brian if you'd add anything.
I mean, John we have $81 billion assets, so I think to try to move more.
<unk> materially this would have to be incredibly large I mean, obviously you see growth rates, so much smaller competitors, but at $81 billion. It shouldnt have a material effect.
Relative to most of them in the short and medium term with the way our.
Our pinos construct I think the best way to think about it is these are going to be really attractive avenues for growth for us longer term.
This whole product strategy, we do a lot more of this business than I think.
People realize I think we are.
Obviously, we're well known for revolving credit, but we do a lot of installment.
We're very comfortable underwriting, we're very comfortable pricing and like I said, we're seeing a little bit better growth there than the other products that we have so I think that's exciting at the end of the day again it comes down to partner on customer choice and we're in a position to be able to provide whatever that solution is for our partners that they want.
Great. Thank you guys very much thanks.
Thanks, John Thanks, John I have a good day.
Yes.
And thank you. This concludes our question and answer session. Thank you ladies and gentlemen. This concludes our conference call. We thank you for your participation you may now disconnect.
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