Q2 2021 Synchrony Financial Earnings Call
Welcome to the Synchrony financial second quarter 2021 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 President 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. This information can be accessed by going to the <unk>.
Bester relations section on 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.
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 or 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 are Brian doubles, synchrony, as President and Chief Executive Officer, and Brian Wenzel Executive Vice President and Chief Financial Officer, I will now turn the call over to Brian doubles.
Thanks, Kathryn and good morning, everyone.
Synchrony and delivered strong results during the second quarter.
The power of our technology enabled model.
Durability of our partner centric value proposition and the early indications of a consumer resurgence.
With now more than a year of the COVID-19 pandemic moving into the rearview mirror.
I am proud of how our team has continued to execute on our strategic priorities.
Our multi product multi capability strategy has enabled us to nimbly adapt and deliver best in class products and services to address our partners evolving needs, while also generating appropriate risk adjusted returns for all our stakeholders.
Let's get things started by reviewing some of the key financial highlights from the quarter.
Net earnings reached a record $1.2 billion or $2.12 per diluted share.
This reflected an increase of $2.06 over last year as we mark the anniversary of the pandemic initial impact on our business and really the world.
We are deeply grateful for all of the frontline workers scientists and leaders have done to support our community and make progress toward an eventual return to normalcy.
Purchase volume grew 35% over last year, reflecting a 33% increase in purchase volume per account.
Increased spend was broad based across our 5 business platforms.
This strength in purchase volume was largely offset by the persistently elevated payment rate trends, resulting from the government stimulus and industry wide forbearance actions, leading to a slight increase in loan receivables, which were $78.4 billion for the second quarter.
Average balances per account were down about 4% for the period, while new accounts were up about 58 per cent.
Net interest margin of 13, 7.8% was 25 basis points higher than last year.
Elevated payment rates and excess liquidity levels continue to have an impact on receivables yield.
The efficiency ratio was 39, 6% for the quarter, primarily reflecting lower net interest income.
Expenses were down about 4% compared to last year and down 5% year to date as our cost efficiency initiatives continue as planned.
We remain on track to remove about $210 million from our expense base by year end, even as we continue to invest in our business.
Credit continued to perform very well net.
Net charge offs were $3.5 7% for the second quarter down almost 178 basis points from last year.
Turning to our balance sheet deposits were down 4 billion or 7% versus last year, reflecting retail deposit rate actions, we took to manage our excess liquidity position.
Deposits represented 81% of our funding mix at quarter end.
Slight increase versus last year due to the retirement of some of our debt during the second quarter of 2021.
During the quarter, we returned $521 million in capital.
Share repurchases of $393 million and $128 million in common stock dividends.
We also continue to reinvest in our business 1 of our greatest competitive Differentiators remains our digital capabilities.
We continue to invest in innovative products and services that enable our partners to meet their customers wherever and however, they want to be met.
That where and how of course can change fairly quickly asking the objectives that our partners seek to achieve so we need to stay nimble and ahead of the curve.
We have continued to win and renew key partnerships, including a recent renewal with T J X companies.
This has been a very valuable partnership for over 10 years now.
We are excited to continue to provide innovative financing products to T J X customers.
We also renewed 10 other programs during the quarter, including shop, HQ Daniels and Sutherland.
And added 4 new programs, including JCB and Ochsner health.
Our go to market strategy utilizes innovative and scalable ways to reach and serve customers effectively across a broad spectrum of industries and financing needs and over the course of their lifecycle.
We have built a technology platform that harnesses, our proprietary data analytics cutting edge digital capabilities to offer a customized suite of products, specifically designed with our partners and their customers in mind, all while delivering appropriately aligned economic outcomes.
Our recent business reorganization, which included the creation of a growth organization and the redistribution of our partners from 3 sales platforms into 5 will allow us to better leverage these company resources and deliver swifter more optimized products and capabilities for our partners and sustainable profitable growth for our business.
In fact, the growth we expect to achieve within each platform will be driven by utilizing our suite of products to expand lifetime value.
<unk> more of our digital capabilities to expand customer reach or adapting our value propositions to harness organic trends as the landscape evolves.
In the case of our home and auto platform a combination of all 3.
In particular, our home partnerships have been a focus of synchrony is going back to our business inception, when we started providing financing for appliance purchases.
Over the years, we have significantly broadened the scope of this platform and expanded our customer reach.
Today, Synchrony has penetrated across all distribution points and each sector of the home market.
From big retailers to independent merchants and contractors and Oems and dealers are home platform provides financing solutions to about 60000 merchants and locations across a broad spectrum of industries, including furniture, and accessories mattresses and bedding appliances windows roofing HVAC in flooring.
Our partnerships are deeply rooted and industry expertise data driven strategic objectives and mutually beneficial economic outcomes.
The average length of our top 20 partners has over 30 years, because we are able to deliver a breadth of financing products innovative digital capabilities and seamless customer experiences that are customized to each partner's needs as they evolve over time.
Our data insights and analytics expertise when combined with the partners own data empowers each merchant as they seek to optimize their marketing customer acquisition and sales strategies.
And the value that our suite of products provides to their customers is clear about 58% of our sales are repeat purchases.
Our customers are looking to upgrade their living room couch or suddenly find themselves in need of a new washing machine, we enable our partners to consistently support those needs through a variety of financing options that are best suited to the customer and that particular purchase they are considering.
So whether we've been entrusted to enhance customer loyalty.
<unk> transaction volume.
Sure our retailers' adoption of digital assets, our strategy has enabled steady growth across our home market.
For the 4 years prior to the pandemic synchrony home receivables grew at a 7% CAGR as consumer spend within home improvement furniture, and decor and electronic on appliances sectors. Each grew by between 4 and 8% annually.
Certainly the pandemic has brought with it both challenges and opportunities.
As consumers quarantined in their homes, the desire to renovate their homes or upgrade their furniture and decor intensified.
As people thought to leave crowded metropolitan communities for suburban neighborhoods home improvement spend increased in 2020 alone on the home industry represented an approximate $600 billion market opportunity synchrony.
Synchrony serves a fraction of that today.
Even as we normalize toward a pre pandemic cadence the consumers' desire to invest in their living spaces is as strong as ever perhaps reflecting a secular shift in favor of more remote work we.
We have positioned our home platform very well to capitalize on these trends we have opportunities to deepen the scope and reach of existing partnerships. While also implementing a number of strategic initiatives to better leverage our core competencies and deepen our market penetration for.
For example, we have begun using more data and advanced analytics to enhance our acquisition marketing and drive higher repeat sales.
We've also launched our director device capability, which puts us simplicity of our financing application and the power of our underwriting in the hands of the contractors and customers as they seek to install a new HVAC system replace their windows or repairing oven.
This directly device technology is also being deployed on retailer locations, which helps shorten checkout lines and delivers a completely digital solution to apply and buy when in store.
In short we are excited about the opportunities for growth that we see in our home platform.
There are certainly some natural tailwind in the industry that should fuel home spend even as life normalizes on a post pandemic world.
We're actually more excited about the ways in which we're leveraging our technological innovations to extend our customer reach enhance the value of the products and services, we offer and deepen our competitive differentiation.
As we continue to execute on on a long term strategy, we are driving even greater customer lifetime value for our partners better experiences for their customers and strong returns for our stakeholders with that I will turn the call over to Brian.
Thanks, Brian and good morning, everyone as Brian mentioned earlier the strong results we achieved during the second quarter reflected a number of factors first healthy consumer with significant savings and pent up demand to spending leading to broad based purchase volume growth.
Second continued strength in credit quality across our portfolio. We continue to closely monitor our portfolio as industry wide forbearance begins to expire across the broader consumer finance landscape and for some customers as rental forbearance also expires.
Finally, the strong positioning of our business combined with consistent execution by our team while we maintained focus on efficient delivery of customized financing solutions and digitally enabled customer experiences across our diverse portfolio of partners merchants and providers.
Focusing on the healthy consumer who has robust savings and desire to spend in an environment with improving economic trends during.
During the second quarter consumer savings rates remained strong unemployment continues to improve and consumer confidence reached 16 month high.
As a result discretionary spend seems to be making a gradual return to pre pandemic levels. In fact, our conference Board survey from June indicated that Theres also a healthy interest among consumers to spend on long lasting manufactured goods over the next 6 months, including homes cars and major household appliances, which.
We expect to be a positive tailwind for our home and auto platform in particular.
Across our diverse set of platforms strong consumer spend trends contributed to 35% higher purchase volume compared to last year, primarily reflecting 33% stronger purchase volume per account.
When comparing these trends to the more normalized operating environment of the second quarter 2019, and excluding the impact of Walmart purchase volume was 18% higher in the second quarter 'twenty, 1 and purchase volume per account was 22% higher this.
This demonstrates strong consumer demand translate into higher spend relative to pre pandemic levels.
Dual and co branded cards accounted for 39 per cent of the purchase volume in the second quarter and increased 56% from last year.
On a loan receivables basis, they accounted for 23 per cent of the portfolio and were flat to the prior year.
Average active accounts were up about 2% compared to last year in new accounts were 58% higher totaling more than 6 million new accounts in the second quarter and over 11 million new accounts year to date.
Loan receivables reached $78.4 billion in the second quarter, a slight increase year over year as a period strong purchase volume growth was largely offset by persistently elevated payment rate.
This marks the first quarter of year over year growth since the start of the pandemic.
Payment rate was almost 300 basis points higher when compared to last year was primarily led to a 6% reduction in interest and fees on loans.
<unk> increased $233 million or 30% from last year and were $5.2 5% of average receivables the increase relative to last year's second quarter was primarily reflected in significant improvement in net charge offs.
As a reminder, our retailers share arrangements are designed to share on the program's performance and when the portfolios are performing better on a risk adjusted basis, our partner's share on this performance. So the RSA is performing as it is designed and the elevated levels. We've seen over the last few quarters are a reflection of synchrony as particular financial strength through the pandemic.
We continue to expect the RSA used to decline as net charge offs begin to rise.
With an improved credit performance and a more optimistic macroeconomic environment, we reduced our loan loss reserves by $878 million this quarter.
Other income decreased $6 million generally, reflecting higher loyalty program costs from higher purchase volume during the quarter.
Other expense decreased $38 million due to lower operational losses, partially offset by an increase in employee marketing and business development and information processing costs.
Moving to slide 8 and our platform results, we saw a broad based purchase volume growth across all 5 platforms as consumers have become increasingly confident and remaining local restrictions are being lifted.
Both our health and wellness and diversified value platforms experienced more than 50% growth in purchase volume and.
In health and wellness this primarily reflected lifting of local restrictions on in person interactions and consumers being more comfortable with the environment and undergoing elective procedures.
The lifting of state restrictions was also a primary driver of the significant purchase volume growth in our diversified value platform as consumers increase their discretionary spend in categories like clothing and assorted household goods.
Meanwhile, purchase volume grew by 30% in our digital platform, 25% in home and auto and 9% in lifestyle.
Loan receivable growth trends by platform generally reflected stabilization or modest growth versus the prior year as the higher purchase volume was partially offset by the elevated payment rates. The 1 exception being our diversified value platform, which is also impacted by store closures in 2020.
Average active account trends were mixed on a platform basis up by as much as 5% in digital and down by as much as 6% in health and wellness.
Active account growth in digital generally reflected the combination of a shift in the timing of an annual promotional events and the ramp up on some of our recent partner launches.
The active account decline in health and wellness was primarily associated with the continued strength in consumer balance sheets.
And fees were generally down across the platforms with the exception of lifestyle due to lower yield as a result of elevated payment trends we've been discussing.
I'll move to slide 9 to discuss net interest income and margin trends.
During the quarter. The continued combined impacts of the March stimulus and high savings balance built during the pandemic led to higher than average payment rate across our portfolio as.
On slide 9 shows payment rate ran approximately 280 basis points higher than our 5 year historical average and about 300 basis points higher relative to last year's second quarter.
It's worth noting on the gradual moderation in payment rate from April to June at which point the payment rate was 18, 5% a 90 basis point decrease from the March monthly peak of 19, 4%.
We expect continued gradual moderation in pen rate as consumers continue to spend the extra savings they accumulated resulting from the combined impact of stimulus and slower discretionary spend during the lockdown.
Interest and fees were down about 6% in the second quarter, reflecting lower finance charge yields from elevated payment rate trends and continued lower delinquent accounts, resulting from our strong credit performance.
Net interest income decreased 2% from last year day net.
Net interest margin was 13, 78% compared to last year's margin of 13, 5.3% to 25 basis points year over year improvement driven by favorable interest bearing liabilities cost and mix of interest, earning assets, partially offset by the pandemic impact on loan receivable yields.
More specifically interest bearing liabilities cost were 142% a year over year improvement of 73 basis points, primarily due to lower benchmark rates.
This provided a 62 basis point increase in our net interest margin.
The mix of loan receivables as a percentage of total earning assets increased by 170 basis points from 78% to 79, 7% driven by lower liquidity held during the quarter.
This accounted for a 32 basis point increase in the margin.
The loan receivables yield was $18.6 2% during the second quarter day, 84 basis points year over year reduction reflected the impact of higher payment rate and lower interest and fees, which we discussed earlier and impacted our net interest margin by 65 basis points.
We continue to believe that in the second half of the year liquidity will continue to be deployed into asset growth and slowing payment rates should result in a higher interest in fee yields leading to increasing net interest margin.
Next I'll cover our key credit trends on slide 10.
In terms of specific dynamics for the quarter I'll start with the delinquency trends are 30, plus delinquency rate was 211% compared to $3, 1.3% last year on.
Our 90, plus delinquency rate was 1% compared to 177% last year.
Higher payment trends continue to drive delinquency improvements.
Focusing on the net charge off trends, our net charge off rate was 357% compared to $5.3 5% last year.
A reduction in net charge off rate was primarily driven by improving delinquency trends as customer behavior pattern improved over the last several quarters.
Our allowance for credit losses, as a percent of loan receivables was 11.5 1%.
As far as our credit outlook is concerned we are monitoring trends in our portfolio closely as he counts in roles in multiple forbearance programs roll off but have not seen any indication of our portfolio to date.
Our best expectation at this time is that delinquencies should begin to rise sometime in the back half of 2021, leading to peak delinquencies in mid 2022. This would translate to a net charge off peak in late 2022.
Moving to slide 11, I'll cover expenses for the quarter.
Overall expenses were down $38 million or 4% from last year to $948 million as we continue to execute on our strategic plan to reduce costs and remain disciplined in managing our expense base spa.
Specifically the decrease was driven by lower operational losses, partially offset by an increase in employee marketing and business development and information processing costs.
Deficiency ratio for the second quarter was 39, 6% compared to 36, 3% last year. The main driver of the increase of the efficiency ratio was negative impact from lower revenue resulted from a combination of lower receivables and lower interest and fee yield.
This was partially offset by a reduction in expenses.
Moving to slide 12.
Given the reduction on our loan receivables in 2020, and early 2021 and the strength in our deposit platform. We continue to carry a higher level of liquidity.
While we believe it is prudent to maintain a higher liquidity levels during uncertain and volatile periods. We continue to actively manage our funding profile to mitigate excess liquidity where appropriate.
As a result of this strategy there was a shift in our mix of funding during the quarter.
Our deposits declined $4.3 billion from last year.
Our securitizing unsecured funding sources declined by $2.6 billion.
This resulted in deposits being 81% of our funding compared to 80% last year with securitized funding comprising 10%.
The unsecured funding comprising 9% of our funding sources at quarter end.
Total liquidity, including Undrawn credit facilities was $21.2 billion.
Which equated to 23% of our total assets down from 29% 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, which had 2 primary benefits.
First it delays the effect of the seasonal transition adjustment for an incremental 2 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 17, 8% CET 1 under the seasonal transition rules 250 basis points above last year's level of 15, 3% debt.
Tier 1 capital ratio was 18, 7% under the seasonal transition rules compared to 16, 3% last year.
The total capital ratio increased 250 basis points to 21%.
And the tier 1 capital plus reserves ratio on a fully phased in basis was 28% compared to 26, 5% last year, reflecting the impact of the retained net income.
During the quarter, we returned $521 million to shareholders, which included $393 million on share repurchases and paid a common stock dividend <unk> 22 per share.
During the quarter, we also announced the approval of a $2.9 billion share repurchase program through June 2022, as well as our plans to maintain our regular quarterly dividend.
Our business generates a considerable amount of capital thanks to the scalability of our digital capabilities utility of our diversified product suite and the prioritization of growth at attractive risk. Adjusted returns. We will continue to take an opportunistic approach to returning capital to shareholders as our business performance and market conditions allow subject.
To our capital plan and any regulatory restrictions.
As we exit the pandemic and the environment normalizes, we're confident on our capabilities and positioning of our business.
We are emerging from this period as a stronger and more dynamic company and we're excited about the opportunities we see to drive strong financial results and shareholder value.
I will now turn the call back over to Brian for his final thoughts.
Brian.
While the pandemic has presented our company in the world with never before seen challenges Synchrony has continued to rise to the occasion facilitating the evolution of many of our partners is a new operating environment has been ushered in.
We have a truly unique understanding of the partners, we serve and the customer needs. They seek to address we havent almost 90 year history in consumer financing. We have continued to invest in our comprehensive product suite, a mass our proprietary data and leverage our advanced analytics to achieve targeted outcomes for each of the merchants we work with.
We have been consistently investing in digital innovation for years and have demonstrated how effectively we can adapt to deliver the value. Our partners have come to expect while also driving strong financial results and attractive returns for our shareholders.
With that I'll now turn the call back to Catherine to open the Q&A.
That concludes our prepared remarks, we will now begin the Q&A session. So that we can accommodate as many of you as possible I'd like to ask the participants to please limit yourself to 1 primary and 1 follow up question.
Additional questions the Investor relations team will be available after the call.
Operator, please start the Q&A session.
Thank you we will now begin our question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key.
Youre using a speaker phone please pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then 1 on your Touchtone phone and our first question is from Sanjay <unk> with <unk>. Please go ahead.
Thanks, Good morning so.
So Brian doubles, you mentioned, an early indication of consumer resurgence I'm just curious.
<unk> macro data points on micro ones give you. The most encouragement and then I guess the question I'm getting quite a bit.
What the setup is for loan growth with us moving away from stimulus and there are other.
Their benefits coming from the government like the tax credits and obviously infrastructure, maybe you could just help us think through all of that.
Yeah, Hey, Sanjay So look I think I think no matter, where you look we feel pretty bullish around what we're seeing in the economy.
Consumer confidence continues to build.
The trends on retail sales and spending all of that is translating into really good spend on our card. So as we look across our 5 platforms.
It really is broad based on.
35% purchase volume growth year over year.
Really strong strong across all 5 platforms. The fact that we were up 18% versus 2019, I think it's a really good indication. So it's not just that we're comping against a weak 2020. It really is broad based growth across the company.
And then as you look at kind of per account purchase volume per account was up 33%. So that's another positive indicator and then this is a little more anecdotal, but as we talk to our partners.
No matter what segment, we're in they're seeing a lot of pent up demand to spent the providers and care credit.
On their booking appointments now 3.4 months out they are opening the practices on on Saturdays and Sundays to to keep up with the volume. So I know that's a little more anecdotal, but as our teams are out every day talking to the partners that are in the stores.
They're just seeing and feeling a lot of pent up demand to spend.
I don't know, Brian if you want to add to that a little bit on yes.
The only the only thing I'd add Sanjay to that is as we look at savings rates, you clearly see the consumer who increase their savings.
In the beginning part of the pandemic when stimulus happened that came back down in line with historical averages towards the end of 2020 again saw that lift here in the end of the first quarter into the second quarter with the stimulus actions. We began we see now across the 29 largest banks that beginning of the trail down a little bit.
Some of those will come back in line clearly with the spending behavior patterns as well as the increase in the financial obligations as mortgage forbearance auto forbearance is and the day.
The enhanced unemployment benefits begin to fade here in the back half of the year, Yes, I think I think Sanjay you touched on receivables growth.
It will absolutely come we had we had 4 out of our 5 platforms had receivables growth the payment rate is a little bit tough to predict but we don't see anything that is permanent inside of the portfolio. So I do think we will see a reversion.
To the mean around payment rate.
And based on the spend that we're seeing on our cards.
Receivables growth will absolutely come and we're starting to see some positive signs there and like I said 4 out of our 5 platforms this quarter.
Okay, Great that's perfect and just a follow up.
There's a couple of portfolios that have been out there mentioned to be for RFP I'm just curious how you're seeing your pipeline development in terms of deal portfolio.
Acquisition et cetera, maybe you can just touch on that and just 1 clarification, Brian Wenzel the framework for.
Key drivers from last quarter, I mean, it sounds like most of them stand, but I just wanted to clarify that they still stand.
Yes, So let me start on the on the pipeline question Sanjay So I would say across all 5 platforms. We've got a good pipeline of new opportunities.
1 of the benefits of the reorganization as our teams are getting even deeper and aligned by industry and we've got some fresh set of eyes on certain things and we're looking at opportunities for new programs and startups.
Debt are a little bit.
Unconventional a little bit creative.
And I think that that's.
That's a great sign and kind of part of what we're trying to achieve with the re org.
I would tell you most of the opportunities that we're seeing in the pipeline are startups are new programs.
With a couple of exceptions of things that are out there that we're looking at debt that have existing portfolios, but again strong pipeline.
All 5 platforms, yes.
Yes, so on day to your framework.
Questions on so the the lack of the page I Wouldnt confused with the fact that we're changing that framework again I think when you look at what we put out in the first quarter, we highlighted the continued high.
Payment rates that would impact loan growth in the first half of the year. That's going to continue we do think it begins to abate in the back half of the year. So I think from the purchase volume and receivables growth standpoint, it's the same clearly that the elevated payment rate and persistency of that will provide a little bit of headwind in net interest margin as we move into the back half of the year.
From a credit perspective.
The higher payment rate really has given us a what I would say almost pristine type credit. So I think youll see it in the back half of the year on really for the full year for the company, we're going to be sub 4% on a loss rate perspective, which is remarkable for this business given the high margins and then the OSA following those trends will be a little bit more early.
<unk> in the back half of the year.
<unk> again is working as it's designed to share on the upside performance of the company. So.
That's how I'd think about it its largely consistent with what we've said back in the first quarter.
So.
Thank you.
Thanks Sanjay.
And thank you. Our next question is from John Hecht with Jefferies.
Hey, good morning, and thanks for taking my questions.
Good good new customer activity.
Can you tell us how much of that was safe from the newer channels like venmo on Verizon, maybe just give us kind of an update on.
Call it the maturation of those 2 new programs.
Yes, John So we obviously can't break out any specific performance on the programs, but I can just talk generally about both.
Then Moe.
Is going really well we're in full launch mode.
I would say performance is better than our expectations so far.
Getting really great feedback from the customers around.
Just the Val prop and the fact that we maximize rewards on those spend categories. They loved the card designed they loved the QR code the ability to split payments on share.
And so that that program is off to a great start it's still early but all of the key indicators that we look at are performing really well.
And similarly on Verizon.
It's another program for us that will be a top 10 program in the future.
Performing ahead of our expectations I think great feedback on the value prop desk.
Definitely behaving like a top of wallet card, which is what which is what we intended that was the goal and so we're seeing really good spend on Verizon products and even in.
And outside as well so off to a great start on on both ends.
Like I said I think these can both be top 10 programs for us in the future.
Okay very good thanks, and then.
I'm wondering just maybe if you could give us a high level kind of quick discussion in your opinion on the state of the market and really what I'm, what I'm kind of interested in it.
You've got some new kind of emerging.
Market participants in the buy now pay later product and so forth and I'm kind of getting wondering if what your sense is for kind of underwriting quality across the spectrum and kind of competitive factors across the spectrum given the changing elements of the market.
Yeah, John It's a great question I think.
Obviously, there are always new entrants in the buy now pay later space I think it's pretty clear at this point that every financial service provider out there will offer a buy now pay later product.
Equal pay financing is a big part of our business already we highlighted we do over $15 billion of balances currently on equal pay products, we offer those products over 70000 locations.
So our goal at the end of the day is to have a multi product multi capability solution I think ultimately that's what's going to win.
And that's what we're offering to our providers in terms of the competitive dynamics, it's hard to tell how others are underwriting.
What I can tell you as we bet on this business a long time. It is really important to stay disciplined which means you don't go a lot deeper in really good times and you try not to contract too much.
In bad times, because we know that our partners really value that stability the consistency of our underwriting and they get used to a certain approval rate and we try to protect that in both good times and bad times.
And as we all know.
If you've done on this business a long time.
If you do take on substantially more risk and you're winning business by lowering your underwriting standards and that's that's a losing strategy over the long term and so that's not how we operate and we've got a very experienced disciplined credit team.
And look we want to win business based on our products and capabilities based on our technology. Our partnership model, we never want to win business based on just going deeper and taking on more risk.
Yes.
Really I appreciate the update thanks very much thanks, John Thanks, John.
And we have our next question from Don Vendetti with Wells Fargo.
Yes.
Brian can you talk a little bit about the child tax credit took on a little bit more like for example, do you think that will lead to higher payment rates in July versus June and how do you think about it.
Materiality of it versus prior stimulus.
Yes.
Thanks, Don.
Obviously, an influx of $15 billion of cash.
On top of what's already out there is clearly not going to be beneficial that being said being it's targeted to folks that are in less than $150000.
That's a pull forward really from from 'twenty 'twenty, 2 I'm not necessarily share it will have any material impact necessarily on our our payment rates.
We look at the beginning part of July we have not seen it real elevation as payment rates are more consistent with what we saw as we exited out of June.
So I don't I don't really see any data yet that says that that's going to be a potential problem. Most certainly will watch and see whether or not that becomes a permanent.
Credit in a permanent pull forward as legislation. It gets it gets enacted later on this year. So we'll continue to watch it on.
Okay. Thank you.
Net.
Thanks, Don and have a good day.
And we have our next question from Betsy <unk> with Morgan Stanley.
Hi, good morning.
Alright thats it.
A couple questions just the first 1 you talked through.
And the loan growth and how it's being impacted.
You know by the payment rates et cetera, but could you speak to how much the <unk>.
Loan growth and potentially NIM is impacted by some of these new entrants that we've been seeing in discussing here.
Be it either be NPL or other kinds of payment schemes that enable people to really shift some of their spending away from what might have been there their primary.
Payment device. So I'm just wondering if that's had any impact.
Yes I'll.
I'll, let Brian chime in here, but what we're seeing is really attributed to the to the higher payment rate just because consumers balance sheets are stronger than they've ever been and I think that is that is the primary driver I don't think this is competitive.
Competitive pressure on anyway, but I'll, let Brian add some color to that I'll just point you back to a couple of things Betsy first when you look at our new account origination just $6.3 million new accounts of 1% versus 2019, So we're not seeing and even when we look down at the providers that may have alternatives.
A products. These buy now pay later products, we are not seeing.
It will impact relative to new accounts.
We also don't really see it in the payment rate and where we're kind of coming through it really is as Brian pointed out the accumulated.
Savings rates that youre seeing in stimulus that is flow through the through the consumer that's really driving the pressure against purchase volume and the headwind on to net interest margin, which is producing tremendous credit, which we sometimes put in the back mirror, but but the credit is really terrific right now so.
We will continue to monitor, but we don't see an impact from the alternative players.
Right, Okay, no I get it and clearly credit as a part of <unk>.
Mass here, so it's a little bit surprising when people only look at like a P pop instead of including the credit on their I agree I guess the other question I have on this is with regard to deposit products that you might be.
Our planning or thinking of offering because when you think about the B N P. L to paying for the pure paying for I know theres different be npls, but the pure paying 4 should be financed or funded with a checking account right. I mean, you shouldnt be.
Paying for your paying for with a with a card balance, but I just wanted to understand how youre thinking about that when you're developing your own products.
And whether or not we should be anticipating more on the way of deposit products coming out for me. Thanks.
Yeah, no. It's a great. It's a great question and we agree you shouldn't pay off 1 credit product with another credit products. So that's.
We agree with that.
I think we're looking at some alternatives kind of savings products as part of our broader product strategy.
Buy now pay later obviously.
Top of mind right now across I think all issuers like I said I think everybody will have a version of it.
We have 15 billion of balances today as I said and we're rolling out some new capabilities and features in the second half of the year. So nothing I can get too specific on at this point.
To common definitely part of our multi product strategy that I touched on earlier.
Okay. Thank you.
Thanks, Betsy have a good day.
Thank you. Our next question is from Rick Shane with J P. Morgan.
Good day, everybody. Thanks for taking my questions. This morning, Brian.
Brian you did a great job highlighting the impact of home and auto on the portfolio I'm curious with the changes in the.
The composition over the last several years, how important you think back to school is.
Particularly in light of.
The challenges for back to school spending last year.
Yes.
To school Hasnt been a big driver for us for a number of years records, which is kind of surprising.
We just we don't see.
Ton of volume there and I think it's not as much of an event as it was probably when you point you and I were growing up it was more of an event I know even for my girls they don't.
There isn't a back to school event, where they go all go get new clothes and stuff for school. So we tend to see that spend space out over a longer period of time and it's less of a.
It's less of a spike for us so.
I think that trend will continue even even in the new paradigm.
Got it.
I appreciate that I'm chuckling, because you know me well enough to know that my clothing budget is not that great either even when I was a kid.
Okay.
Yeah.
Thanks Scott.
Rick.
And we have our next question from Moshe Orenbuch with credit Suisse.
Great. Thanks.
Okay.
Brian I'm, sorry, I'm, hoping that you could kind of talk a little bit about the kinds of conversations that you have with your large retail partners about the NPL in other words.
I have to believe that they are quite invested in the success of your programs given they earned a significant amount of money, whereas on the NPL, there kind of paying a significant amount of money and so.
Maybe could you just.
Obviously, not asking about any specific partner, but what are those conversations like.
Yes. It is.
Great question Moshe I think the law.
Lot of our partners are still on kind of the evaluation phase where.
They look at the buy now pay later product and they obviously see a customer desire for that product and our customer demand for it.
But 1 of the big questions is as you pointed out it's around economics.
And it's still early there and I think.
Some retailers are willing to pay what is a pretty steep merchant discount rate.
They believe that they are attracting new customers and theyre getting sales that they wouldn't otherwise get.
But when they look at that comparison, they look at compared to some of our.
Some of our products, where not only do we not charge interchange.
We're also paying them.
A debt through the RSA and they look at that and they say okay clear.
Clearly economically.
They would prefer.
The purchase goes on.
The private label card or a co brand card because it's much it's much better for them financially.
And so to the extent that they stopped believing that they are actually getting incremental purchases or new customers than the economic tradeoff is very clear on so I do think down the road. There is an there is an economic reckoning that will happen.
As this plays out and.
It is still early in terms of these products and how they're offered the other thing I would I would mention is that the other advantage on the things that we hear from our partners.
They like they liked the lifetime relationship that card provider. They can do lifecycle marketing. They can do promotions and offers over number of years and 1 of the things that we talk a lot about with our partners on 1 of the things that we measure.
Across all of our partners as repeat purchases.
And we talked we talked to you guys a lot about that as well because that has been.
That has been a big focus for us over the last 5 years and 1 of the things that frankly, our partners look to us for is that ongoing customer loyalty, we measure that we look at it by customer.
It was the last time, they made a purchase okay, let's send them a customized offer promotion.
So they really like that ability to do that lifecycle marketing. So I think it's a combination of economics and that's still kind of TBD on how all of this is going to shake out.
The other thing that we hear across the board as they want to have.
Our long term relationship with the customer they really value.
The loyalty that a lot of our products provide.
Thank you and my follow up question for Brian Wenzel, you kind of highlighted the impact of.
Of late fees alone along with the payment rate.
Could you just talk a little bit about how that how that comes back like what's the what is the timeframe as it is kind of early stage delinquencies.
How should we think about that.
That normally you know normalization of that factor.
Yes, Great question Moshe I think the way, we've kind of think about the credit outlook now delinquencies build towards the latter part of this year heading into 2022. So so late fees will begin to come back as you see.
The entry rate delinquency begin to rise so that will come first before you get into the charge off so.
If you believe that the latter part of this year, you'll you'll begin to see the yield impact.
Benefit coming from higher late fees in the portfolio.
Thank you.
Thanks, Moshe have a good day.
And thank you. Our next question comes from Mark Devries with Barclays.
Yes, Thanks had a question about the NIM can.
Can you help us think about the lift that you may get from from both a normalization of the payment rate to kind of a long term historic average on also the normalization of of liquidity as a percentage of assets.
Yes.
The way I would think about let's take liquidity <unk> in the portfolio. So clearly we've been able to burn off.
Some of that liquidity here in the second quarter, both through the $2 billion on asset growth that we had as well as the acceleration of some of the maturities in the funding profile. So we're running over $2 billion continued excess liquidity as we enter into the back half of the year.
You take out all of the excess liquidity from here, there's probably another 40 basis points onto the net interest margin.
Debt you'd see a lift from again, we've highlighted before you're probably a 20 to 30 basis points from benchmark rate, so put that off to the side.
The residual comes in probably 2 factors 1 is late fees, which you probably 80% to 90 basis points of lift going back to a normalized late fee loads, so not even at a loss rate higher than 5 and a half but your normal load and then you have the residual which will be.
There were above when pay rates come back in line. So.
The only thing I'd say is we do not see anything in the portfolio today that gives us any indication that the net interest margin in that 16% realm.
It's not going to be the mean that we go back to.
It will continue to watch it but there's nothing fundamentally or structurally that we think is different it's just really the timing to get there given the excess liquidity that the consumer has.
And that Theyre going to deploy here in the short term.
Okay, Great. That's helpful. And then just a follow up question on Brian on your comments about.
You know Youre partners really wanting to kind of stimulate the longer lifecycle with customers did they find that debt using the revolving product where they've got.
Incentives on spend is the best way to do that as opposed to offering.
Some type of a maybe a lower rate.
Kind of fixed.
Loan product on on balances.
Yes, Mark I mean really it really does vary by partner, but I would say the majority, particularly the larger partners.
They see the value of the value prop right the rewards the loyalty that that drives.
When when.
When they go into 1 of our large partners on a lot of times. They are saving 5% that is that is really meaningful when we do that at Amazon would do a lowe's we do a number of places now.
And that is.
That's a great way to incent that repeat purchases.
The other thing debt.
We've been doing for a number of years now as in most of our partners. We store. The card is the default payment types right and so you don't even have to think about it. It just goes right on the card you get your 5% and that's something that our partners have been very focused on as well to drive that.
Again the.
The lifetime relationship with the card holder and the loyalty that comes with it.
Okay, and I assume they also get the fastest checkout using the revolving products correct yes.
Incident rate and stored as I know for Amazon for me that store does my default I get my 5% I don't even think about it it just automatically goes on.
<unk> that goes on the card. So it's certainly the easiest fastest way to check out for most of our partners.
Great. Thank you.
Thanks Mark.
And thank you. Our next question is from Mihir Bhatia with Bank of America.
Hi, This is Richard on 1 of them are here Bob Thanks for taking my question.
It's about how program costs are trending and I know you don't comment on specifics.
Our portfolios.
On rewards for consumers, increasing credit portfolios like for instance have noticed more prominent rewards promotions for them, though I'm just curious if that's additive or representative of our portfolio and trying to get new customers.
Yes, youre quality wasn't that clear are you asking about the loyalty cost trends.
Right is that increasing for the newer portfolios like I've seen demo.
Have like more promotions and rewards on where thats additive or representative of the broad portfolio for new customer acquisitions.
Yes, the way I would think about.
The loyalty costs.
First of all our volume is up significantly year over year and up versus 19, so youre going to see a general trend and loyalty costs higher most certainly the new programs Verizon and Venmo will have those costs that are in there probably a slightly higher percent of of the asset because the assets just beginning to build.
But it's not significantly different than our overall portfolio not necessarily the driver its really the increased purchase volume across the entire portfolio, that's driving our value prop and loyalty costs.
Okay. Thank you that's it for me.
Great. Thank you.
And we have our next question from Dominic Gabriel with Oppenheimer.
Thanks, so much for taking my questions.
Can you.
We obviously have the new segments that you've broken out the new platforms can you talk about the differences.
In each of the platforms that have made you decide to break them up this way.
As far as the marketing teams that go to market strategy and.
If they are actually running a software thats different among them. Thanks, so much guys.
Yeah sure so the.
The reason to reorganize and aligned more by industry was was a couple fold.
First in terms of to your point, the the products and capabilities that we offer tend to align better by industry and even more important than that how we integrate.
And the products and capabilities and how we integrate them into the digital environment or the store footprint tends to align as well by industry. So 1 example.
For a purely digital players.
Paypal Venmo Amazon.
We're integrating through our API technology or through Sy Pi right inside of their app.
And thats different than what we would do in home and auto where for some of our larger partners. We're integrating both in their digital environment.
Mobile online, but we also have tools and technologies.
To apply and buy in store.
And so because of the product the.
The product suite tends to be catered more towards industry because of the types of products that they are selling as well as whether or not theyre purely digital our hub store footprint. It just made more sense to align by industry I'd say the second piece of this and we saw this in care credit over the last.
30 years.
It really is an advantage to get really deep domain expertise in an industry.
And 1 of the things that I think has been a secret to our success in care credit is that domain expertise.
Our teams get.
They build lifetime relationships, they get really deep in the different.
And the different domains that we support dental that etsy.
Et cetera, and we're trying to replicate that in these other than these other platforms. So those were the 2 primary reasons.
I can tell you it's been great. Just you know just a couple of months and having these teams in place looking at these segments differently seeing kind of a natural synergies and ideas for new products and capabilities.
As they are out talking to partners and thinking about it.
More with an industry bent to it so so far the progress has been has been really great.
Great great. Thank you for that detail and then.
This might be a long shot but can you talk about the tender share by each of those and if not specific numbers because I know that's unlikely maybe just per.
Perhaps which 1 of the segments as you know.
At the average tender share below and above average of the whole company and then when we think about the RSA in the second quarter is that the high watermark. If you think about NCO rate stay roughly.
Fairly in line with where they are for the rest of this year is at the high watermark on a percentage basis for the RSA. Thank you very much I really appreciate it guys. Yeah. Let me let me start on the kind of the penetration question I would say.
Across each of those platforms, we've got significant room to grow penetration inside of each of those platforms. We have we have startup programs, where we're a relatively small percentage.
Of the payments inside of those programs and we have very mature programs.
Where we can be 30%, 40% pen.
I can tell you is we measure our teams on increasing that penetration rate, regardless of where they are at so even for the more mature programs. Our teams that are embedded inside of our partners.
They get measured based on growth and driving that incremental tender share so even in mature programs we.
We are very focused on on that the penetration rate now Brian if I would take the second piece of that yes. So still RSA as you think about RSA in the back half 2 factors really to focus on is 1.
On the purchase volume rate because our assays in not only sharing there is volume oriented purchases. So the strength of purchases you see in the back half of the year and then how the net charge off and provision line continues to develop I mentioned earlier on the call. We expect the NCO rate for the full year to be below 4%, but if there are incremental.
ACL releases that could impact it so we will remain elevated in the back half of the year.
From where we are historically.
But it shouldn't be dramatically larger than what we saw on the in the second quarter.
Great. Thanks, so much.
<unk>.
Operator, we have time for 1 more question.
And thank you. Our last question is from Bill <unk> with Wolfe Research.
Good morning.
If you look on a bit further out do you see the normalization of payment rates, providing a tailwind to the normalization of your revolve rates.
We could see your loan growth start to outpace your spending growth if you could just speak to that dynamic.
Yeah, clearly, we've we've said that we believe payment rate will move back to the mean that will accelerate loan growth and most certainly if you had a slowing purchase.
Purchase volume market that could push the the loan growth ahead of.
The purchase volume growth again at the way, we've thought about the back half of the year and it Hasnt really changed on the back half heading into 2022 is that you are going to continue to see elevated purchase volume.
From pent up demand that we see and we as we talk to our partners merchants and providers that you're going to see the consumer who has the wherewithal with the savings to continue to spend so so I think over the next 18 months youre going to Youre going to continue to see elevated purchase volume.
And then you're going to combine that with a moderation of the payment rate to the mean over time so.
The 2 will work in concert.
Got it.
And then separately on capital there's been some skepticism around your ability to get down to peer levels of capital can you speak to what gives you confidence that you can get there and I might've missed this but any commentary on the potential for <unk>.
Increasing the authorization.
Above your current plan.
Yes, Bill I'm going to first point, you back to a little bit of the history rate as we separated from GE, we had an 18% capital level, we'd worked that down to 14%.
Over a couple of years 3 years 4 years.
So we've demonstrated the ability we've demonstrated the ability just before the pandemic to 2.
Take that capital I think $3.3 billion and the 9 month period before the pandemic happened. So I think we have the ability and demonstrated capability to do that.
So I think we're confident in our ability to get down there now with regard to the current authorization rate, we talked about this a little bit in the in the first quarter that is a backwards looking.
<unk> rate so the data on which we used to run our stress scenarios under under our processes on our governance mechanisms were based off of December and early January assumptions rate. So that's where we had the capital plan put together and approved by our board.
As things continue to change, we'll evaluate whether or not there is a.
On the desire for the for the board and leadership team too.
Increase that authorization level, and we'll revisit that but right now we have $2.5 billion remaining.
We've executed $593 million, so far this year, which were on <unk>.
Slightly regulated by the restrictions put on by the by the fed and we will be aggressive with regard to our execution against the $2.5 billion in and again, if the environment warrants, we'll revisit that.
Thank you.
Thanks Bill.
Thank you all for joining us this morning, the Investor Relations team will be available to answer any further questions you have.
And thank you ladies and gentlemen, this concludes our earnings call. Thank you for your participation you may now disconnect.
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