Q4 2021 Synchrony Financial Earnings Call
Welcome to the Synchrony financial fourth quarter 2021 earnings Conference call. My name is Brandon and I'll be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please.
Please note that this conference is being recorded.
I'll now turn the call over to Kathryn Miller, Katherine 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 investor.
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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.
We are really proud of our synchrony team and the strong level of execution that enabled us to close the year out with such strong results, including several company records.
Our core strategy to drive sustainable growth at attractive risk adjusted returns is founded on three primary objectives.
First grow our existing partner programs and win New partners second diversify our programs products and markets and third deliver best in class customer experiences.
During 2021, we added 36 partners and renewed another 38.
We're excited about the prospects in both our existing portfolio, our new partner pipeline.
Our innovative financing experiences and serve the ever changing needs of our customers.
As you know we are constantly seeking opportunities to extend our leadership position.
And much of that will continue to be driven by the ongoing diversification and expansion of our distribution channels.
To that end, we acquired a Lego credit at the beginning of the year.
A leading provider of point of sale consumer financing audiology products.
This acquisition allowed us to deepen our foothold in the health and wellness space, reaching more providers and customers and empowering them with an expanded suite of financing products and services.
We also announced our strategic partnership with Clover.
Which will enable us to deliver our innovative products and experiences to more merchants and customers.
As a reminder, our integration with Clover will enable small businesses to access synchrony financing products and services.
And accept private label credit card payments via the Clover point of sale and business management platform.
In addition, synchrony continued to expand our two main consumer facing marketplaces might've been printing dot com and care credit dot com during the year.
These marketplaces are broad and deep networks that provide consumers with a one stop shop to final shop with merchant partners and providers as well as submit applications and service our accounts.
And through the broad reach easy accessibility and strong utility of these networks synchrony is driving strong repeat sales.
Combined annual visits across these networks surpassed $300 million by year end, and we drove about 1 million referrals and received almost $19 million provider views through care credit Dot com.
Repeat sales across our networks for 52% in the fourth quarter of 'twenty, one an additional metric that we're focused on driving our sales per active account.
Which are about twice as high in our care credit and home and auto networks compared to the average buy now pay later products that we see in the marketplace.
This is a testament to the deep customer relationships that are network products Foster.
Synchrony has the ability to leverage our networks and drive new customers and repeat sales to our partners at higher spend levels has been and will continue to be a meaningful competitive differentiator and important growth driver for our business.
Another element of our continued diversification and expansion over the last year includes our health system initiative through which we successfully signed seven new systems, bringing our total to 20.
By integrating with health systems through technology platforms like epic Synchrony is able to meaningfully extend our customer and provider reach while also enhancing the utility of our care credit card.
For example, the Epic My chart user base spans about 150 million patients.
And by making our patient financing up available within the epic App Orchard, we're able to provide those patients with expanded access to financing options.
The provider or health system as part of the care credit network across a broad range of needs from elective care to routine medical expenses and non elective care needs.
In an environment, where insurance coverage is increasingly limited, but health and wellness needs are rising we are empowering more patients and providers with greater choice flexibility and utility as we expand our networks and integrate with more health systems. So overall 2021 was a year in which we accelerated our business strategy.
Through strategic partnerships like Clover, we can expand our reach by tens of thousands of new merchants through the expansion of our digital networks, we can reach hundreds of millions of consumers.
And collectively the health systems, with which we have launched care credit and some capacity have over 40 million patient visits.
No matter, how you look at it synchrony is at the center of a large cross section of commerce in the U S.
Regardless of whether the purchase takes place in person are digitally.
We connect almost 70 million average active accounts through seamless omnichannel experiences to nearly 450000 locations and.
And we power their everyday purchases from furniture and home improvement to health care products and services car care needs and clothing jewelry and power sports with customized financing options that optimize value and outcomes for both our customers and partners.
The more consumers merchants providers and partners that synchrony reaches the more diverse the demand for products services and value propositions becomes.
So we continue to diversify both our products and programs in 2021 with the launch of our industry first program with Walgreens.
And the introduction of our set pay paying for a product.
In addition, we continued to advance the growth of our synchrony Mastercard, which represents an important opportunity within our product strategy to drive highly scalable growth and above average returns to our business over the long term.
During the second half of the year, we broadened our synchrony Mastercard acquisition efforts to include new digital channels, expanding our reach and accelerating our speed to market.
With the real time activity and data capture along with our sophisticated <unk> capabilities, which include advanced pre fill in credit Decisioning insights, we streamline the application process and optimize the customer experience.
As a result active accounts grew 11% in the second half compared to the first half of the year.
And thanks to the compelling value propositions, we offer our sales per active account grew 18% on the same basis.
Of course, as we continue to expand our wallet share synchrony was able to reach and serve more customers and provide them with more choices and greater value.
And as we strive to provide easy and comprehensive access to a broader set of financial products and services. We are excited to launch Paypal savings in the first quarter.
Through this expanded partnership with Paypal, we will broaden the distribution number a savings product to reach a unique set of customers with key features and functionality, including instantaneous fund movement between Paypal balances no withdrawal limits and our savings goal feature to empower customers to set and reach their financial goals.
Existing Paypal customers will be able to quickly and easily open their paypal savings account inside the new Paypal Super App.
We're proud to partner in this transformative initiative and remain intensely focused on continuing to elevate the customer experiences we power across all our partnerships.
It should come as no surprise that synchrony is consistent investment in digital innovation has enabled each of our product and partner successes among our evolution.
We are continuously enhancing the ways in which we deliver simple and seamless customer experiences because the outcomes are far stronger for all of our stakeholders.
For example, during the past year, we upgraded close to 11 million accounts across 14 partners to our new alerts platform, which delivers customizable E mail text messages and push alerts with real time enrich transaction data and notifications.
We also rolled out some upgrades to our Sy Pi platform, including several new features like digital wallet provisioning and enhancements to push notifications and E mail.
Collectively the availability of these features contributed to a 40% increase in unique visitors in 2021 and 56% growth in the number of payments we received inside Pi.
With the rollout of enhanced native acquisition capabilities via Sy Pi and our client mobile apps, we've grow new accounts for that channel by 67% year over year.
And more specifically by enabling wallet provisioning for cardholders to add their synchrony account to their digital wallet fourth.
Fourth quarter wallet provisions grew 32% year over year and wallet sales volume increased 63%.
So when you put it all together the unique combination of our deep learning expertise the industry's most complete product set and our advanced digital capabilities has enabled synchrony to evolve into a leading financial ecosystem that delivers compelling outcomes for our partners and our customers.
There is no other industry provider that offers the full breadth and depth of digitally powered financing products services and value propositions that synchrony does today.
This ability to connect our partners and customers through best in class Omnichannel experiences is deeply resonating in driving record results for synchrony and our stakeholders.
And this past year, we achieved almost 25 million new account originations and record purchase volume of 166 billion and a 19% increase in spend per active account.
These milestones combined with strong credit performance and our continued discipline around risk adjusted returns and expense management enabled synchrony to deliver record financial results for the full year, including $4 2 billion of net earnings or $7 34 per diluted share.
Four 5% return on assets and a 39% return on tangible common equity.
As a result, we were able to return $3 4 billion of capital to shareholders, including $2 9 billion of share repurchases and $500 million of regular dividends.
And with that I'll turn the call over to Brian to discuss the fourth quarter performance, which reflected broad based momentum across our business.
Thanks, Brian and good morning, everyone Synchrony delivered another quarter of strong financial results, reflecting our differentiated business model and the strong partner and customer value propositions, which had been made possible as we execute on our strategic priorities.
Our net earnings were $813 million or $1 48 per diluted share we.
We generated a return on average assets of three 4% and a return on tangible common equity of 28, 7%.
These strong net earnings and returns demonstrate the power and efficiency of our digitally enabled model.
And with the compelling value of our financial products and services, we offer through our ecosystem.
Not only were we able to support the strong seasonal customer and with our diverse range of products, but we were able to do so while maintaining cost discipline and strong risk adjusted returns.
We achieved record purchase volume of $47 billion in the fourth quarter, an increase of 18% compared to both last year in 2019, excluding Walmart.
Purchase volume was up double digits across four of our five platforms demonstrating clear broad based strength through the range of diverse industry verticals we serve.
Purchase volume per account also increased during the quarter up 13% compared to last year, and 22% compared to the fourth quarter of 2019, excluding Walmart.
Duly cobranded cards accounted for 42% of purchase volume in the fourth quarter and increased 30% from the prior year.
On a loan receivable basis, including the loans receivable held for sale dual and co branded cards accounted for 25% of the portfolio and increased 10% from the prior year.
Average active accounts increased 5% compared to last year in new accounts increased 20% totaling more than 7 million new accounts in the fourth quarter and almost 25 million new accounts originated for the year.
As you May recall, we reached an agreement for the sale of our GAAP portfolio, which represented $3 9 billion of loan receivables and our held for sale portfolio at year end.
Continuing our commitment to achieving appropriate risk adjusted returns we are discontinuing our partnership with BP, which resulted in the reclassification of approximately $500 million of loan receivables to held for sale in December .
Excluding the impact of our held for sale portfolios.
Receivables would have increased by 4% versus the prior year as the period strong purchase volume growth was largely offset by a persistently elevated payment rate Rfps were one $3 billion in the fourth quarter and $6, one 5% of average receivables the $220 million year over year increase primarily reflected the.
A lower provision for credit losses, and continued strong program performance, including receivables and purchase volume growth as well as the improvement in net interest income.
Focusing on our credit performance provision for credit losses was $561 million.
Included in this quarter's provision was reserve build of $72 million.
Net of the reserve reductions from our held for sale portfolios of $98 million.
Excluding the impact of our held for sale portfolios the $170 million reserve build reflected the impact of loan receivable growth within the context of our unchanged set of macroeconomic assumptions and credit normalization outlook, which includes peak loss in the first half of 2023.
Other income increased $85 million, driven by $93 million gain and venture investments.
I will provide more details later on in our discussion I want to highlight that the majority of the fourth quarter EPS benefits from this gain was offset by unrelated asset impairments and certain opportunistic marketing investments we executed in the fourth quarter.
Moving to slide eight and our platform results.
Our home and auto diversified and value digital and health and wellness platforms. Each continued to experienced double digit year over year growth in purchase volume.
<unk> strong diversified demand.
Our lifestyle platform also experienced robust demand as purchase volume increased 6% year over year, but faced a tough comparison to last year's strength and power sports volume.
Loan receivables growth trends by platform generally reflected the more modest growth versus the prior year as higher purchase volume was partially offset by continued elevation in payment rates.
Average active accounts trends raised on a platform basis.
As much as 9% and both diversified and value in digital.
Home and auto lifestyle, and health and wellness average active accounts grew in the low single digits or relatively flat.
The average active account growth in diversified value largely reflected the stronger retailer performance.
Digital active accounts were up versus the prior year due to the greater engagement across our existing customer base and new programs.
Interest and fee trends, while generally improved across the platforms continued to be impacted by elevated pay Murray.
I'll move to slide nine to discuss net interest income and margin trends.
The cumulative savings by consumers combined with seasonally higher holiday transact or behavior impacted payment rate during the fourth quarter.
As we progressed through the period payment rate moderated somewhat from the third quarter levels, but increased with the seasonal how they spend we typically see in December .
<unk> for the period was about 180 basis points higher than last year, and 290 basis points higher than our five year historical average.
When tracking the account payment trends from the third to the fourth quarters, we see a slight mix shift away from above and full statement balance payments towards more minimum and below minimum payments more specifically the percent of account balances paying their full statement balance decreased sequentially by approximately 20 basis points and the percent of accounts paying between their minimum.
Payment and they're full steam with balance decreased sequentially by approximately 70 basis points.
The percentage of accounts paying their minimum payment or lessen their mill in payment increase sequentially by approximately 90 basis points.
We continue to expect payment rate to gradually normalize as customers spend remains robust the consumer savings read is declining and industry wide forbearance expires, while it is difficult to predict elevated consumer spending lower consumer savings inflationary pressures and returned to full financial obligations has begun to impact accumulated.
<unk> levels by consumers, which we believe will lead to a moderation in <unk>.
Fourth quarter interest and fees were up approximately 2%, reflecting average loan receivable growth net interest income increased 5% from last year, reflecting the year over year improvement in interest and fees as well as lower interest expense for the period.
The net interest margin was 15, 77% compared to last year's margin of 14, six 4%, a 113 basis point improvement year over year, driven by the mix of interest, earning assets and favorable interest bearing liabilities cost more.
More specifically the mix of loan receivables as a percent of total earning assets increased by 500 basis points from 79, 9% to 84, 9% driven by average receivables growth and lower liquidity held during the quarter.
This accounted for 96 basis point increase in our net interest margin.
Interest bearing liabilities cost were one 8% a year over year improvement of 51 basis points, primarily due to lower benchmark rates.
This provided a 42 basis point increase in our net interest margin.
The loan receivable yield was $19 six 1% a.
Our year over year reduction of 32 basis points.
This resulted in a 26 basis point reduction of our net interest margin.
Next I'll cover our key credit trends on slide 10.
Elevated <unk> continued to drive year over year improvement in our delinquency metrics.
Our 30, plus delinquency rate was 262% compared to three 7% last year and our 90 plus delinquency rate was one 7% compared to one 4% last year when removing the impact of the held for sale portfolios on our delinquency measures for the fourth quarters of this year and last year.
30, plus delinquency metric would have been down approximately 60 basis points versus 45.
And the 90, plus metric would be down approximately 30 basis points instead of 'twenty three.
Our portfolio of strong delinquency trends have continued to drive strong year over year improvement we've seen in our net charge off rate, which was 237% compared to three 6% last year, a 79 basis point improvement.
Our allowance for credit losses, as a percent of loan receivables was 10, 76% down 52 basis points from 11, two 8% in the third quarter.
Let's move to slide 11 and focus on expenses.
Other expenses of $1 1 billion include the impact of $46 million of asset impairments and $29 million of certain incremental marketing investments. Excluding these impacts other expenses increased 5% compared to the prior year.
Focusing on employee compensation fourth quarter was impacted by two key factors.
One higher hourly wages as we've raised the minimum wage to $20 during the third quarter and second higher incentive compensation as 2020 levels were negatively impacted by the pandemic the efficiency ratio for the fourth quarter was 41, 1% compared to 37, 1% last year.
Excluding the impact of the gain on our venture investment the asset impairments and the incremental marketing investments the efficiency ratio would be 39, 7%.
Even with these adjustments our efficiency ratio remains elevated compared to our historical average due to lower revenue, which has resulted from the impact of higher payment rate and lower average receivables.
We will continue to take a disciplined approach to expense management, while also maintaining the pace of strategic investments in the business. This continues to be a clear point of differentiation for synchrony as we demonstrated through our Investor day simply Leverages, our legacy of operating smaller dollar balances to acquire originate and service our accounts more efficiently than other general purpose.
<unk> our cost to acquire is half that of private label peers in a quarter of the broader industry's average.
It's also important to remember that throughout the course of the pandemic, we maintain a relatively steady level of marketing spend to stay engage with their customers much of which is largely contemplated within the RSA.
As a result, synchrony generally does not ramp up our marketing expenses in order to compete for new customers.
Similarly, we consistently prioritize investment in our business and technological innovation.
The digitally enabled products and services that we offer and the seamless omnichannel experience that we power for some of the most sophisticated technology partners in the world would not be possible without our tireless focus and steady investment in innovation year after year.
While the return of our operating efficiency ratio to approximately 32% will primarily be driven by the normalization of payment rate and thus the recovery revenue. We're confident in our ability to continue to achieve market, leading operating leverage as loan growth continues.
Now, let's move to slide 12, and discuss another core strength of Synchroneyes, our funding capital and liquidity.
Given the reduction in loan receivables in 2020, and early 2021, coupled with the stickiness of our deposit base, we've generally been carrying a higher level of liquidity during the year.
While we believe it is prudent to maintain a higher liquidity levels during periods of uncertainty we've been actively managing our funding profile to mitigate excess liquidity and optimize our funding profile.
As a result of this strategy there was a slight shift in our funding mix compared to last year. Our deposits declined by 512 million from last year and are securitized in unsecured funding sources declined by $1 3 billion.
This resulted in deposits being 81% of our funding compared to 80% last year with securitized funding comprising 10% of our funding sources and unsecured funding comprising 9% at quarter end.
Total liquidity, including Undrawn credit facilities was $15 7 billion.
Which equate to 16, 4% of our total assets down from 24, 7% 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 has two primary benefits.
First it delayed the effects of seasonal transition adjustment for an incremental two years and second and allow for a portion of the current period provisioning to be deferred and amortized with the transition adjustment.
With this framework, we ended the quarter with 56% CET one under the seasonal transition rules.
30 basis points lower than last year's level of 15, 9% the.
Tier one capital ratio was 16, 5% under the seasonal transition rules compared to 16, 8% last year.
The total capital ratio decreased 30 basis points to 17, 8% in.
In the tier one capital plus reserves ratio on a fully phased in basis decreased to 24, 4% compared to 27% last year.
During the first quarter of 2022, we will recognize the first portion of the seasonal transition adjustment, which reduce our CET one ratio by approximately 60 basis points.
As a reminder, the impact of seasonal has already been recognized in our income statement and balance sheet. This transitional adjustment pertains strictly to our regulatory capital metrics.
We continued to execute on our commitment of strong capital return to shareholders by returning $1 1 billion to shareholders in the fourth quarter through $982 million in share repurchases and $120 million in common stock dividends.
For the year, we returned $3 4 billion, including $2 9 billion in share repurchases and $500 million in common stock dividends.
Given the strong performance of our business during the year, our board approved an increase in our share repurchase authorization through June 2022 by an incremental $1 billion.
As of December 31, we had $1 $2 billion remaining in our share repurchase authorization.
We have begun our normal capital planning process, and we'll provide an update to our planned capital actions once approved.
Our business generates strong returns and considerable capital, reflecting our commitment to drive consistent growth at attractive risk adjusted returns the scalability of our technology platform and our continued cost discipline.
We have considerable excess capital on our balance sheet to deploy either through growth or returns to shareholders. Accordingly, we will continue to take an aggressive but prudent approach to returning capital to our shareholders.
By our business performance market conditions, and subject to our capital plan and any regulatory considerations.
Finally, let me focus on our outlook, which is summarized on slide 13 of our presentation assumes a stable to improving macroeconomic environment and a well controlled pandemic.
For the upcoming year, we expect consumer demand to remain robust so point broad based purchase volume growth across the various industries and markets we serve as.
As consumers savings begins to decline in payment rate moderates, we'd expect purchase volume growth to moderate somewhat.
We expect our net interest margin should reflect the trends consistent with those during the second half of 2021 and should follow historical seasonality.
With the advance of our held for sale portfolios in late Q2, we anticipate some excess liquidity, creating a modest headwind to NIM, both the second and third quarters and as we've done in the past we will work to reduce this excess liquidity quickly.
As payment rates moderate and credit trends normalize through the gradual rise in delinquency and loss, we expect higher interest and fee yields to be offset by higher reversals.
Our current expectation is that delinquency will peak in the fourth quarter.
Given our reserve levels at year end, we would expect reserve builds in 2022 to be generally asset driven and partially offset by the approximate $130 million of final reserve reductions associated with our held for sale portfolios.
RSA expense will continue to reflect the strength of our program performance and purchase volume growth, but should begin to moderate as net charge offs rise.
In terms of operating expense, we generally expect quarterly expense to run in line with the fourth quarter 2021 levels, excluding the impact of asset impairments and certain marketing items, we discussed earlier.
And lastly, with regard to our held for sale portfolios, we anticipate conveyance to occur in the second quarter, producing a nonrecurring gain on sale of approximately $130 million, we expect to redeploy the scheme through completely offsetting incremental investments in our business. Thus the EPS neutral for the full year.
So putting it altogether synchrony as differentiated model is powering strong growth at attractive risk adjusted returns through changing market conditions, and we are emerging from the pandemic with considerable momentum.
As we continue to leverage our core strengths, our diversified portfolio, which provides resiliency and sustainable growth.
Our deep industry expertise.
<unk> data analytics and digitally enabled product suite, the combination of which enables strong risk adjusted returns and our scalable technology platform, which powers efficient customer acquisition and servicing as well as swift partner integrations.
Simply we will continue to engage more customers drive greater lifetime value and deliver sustainable growth appear leading risk adjusted returns.
So as operating conditions continue to normalize we remain confident in our ability to achieve the long term operating metrics, we laid out at Investor day to continue to drive considerable value for all of our stakeholders.
I will now turn the call back over to Brian for his concluding thoughts.
Thanks, Brian I could not be more proud of the synchrony came in all that we have achieved this year for our partners customers and stakeholders.
Whether it's been through investments in our digital innovations strategic partner integrations expansion into new distribution channels or the addition of new product offerings Synchrony has continued to evolve and enhance the ways in which we connect our partners and customers through our financial ecosystem.
This has positioned us as a leader in the digital Commerce Revolution with very exciting opportunities ahead of us.
We will continue to win new partners and renew existing ones and at the same time, we will further diversify our programs products in the markets we operate on.
And of course underpinning it all as our laser like focus on our integrated product set and providing that best in class customer experience that drives value loyalty and superior outcomes for our partners and customers.
Synchrony will continue to outperform over the long term as we provide our partners and customers with the power of choice.
As we deliver on our key strategic priorities, we will continue to drive consistent growth at attractive returns and unlock even greater value for our stakeholders.
That I will 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 one primary and one follow up question.
Do you have additional questions the investor relations team will be available after the call.
Operator, please start the Q&A session.
Thank you and we will now begin the question and answer session.
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And from K B W. We have Sanjay <unk>. Please go ahead.
Thanks, Good morning.
I guess I have a question on hey, How's it going.
Question for both Brian .
Loan growth I know payment rates are sort of weighing against the underlying loan growth expectations, but your long term targets are sort of high single digits low double digits. Some of your peers are at their average if not above their average maybe you could talk about what's driving sort of the weakness relative to your long term XP.
Patients or do you expect in 2022 to get there. Thanks.
Yes, maybe I'll start and then ask Brian to comment.
I would say look generally we feel really good about the operating environment right now we feel really good about where the consumer is.
Last year was a record year in terms of purchase volume on our products.
And if you look at that one of the things Thats really encouraging is if you look at that by demographic a lot of that is actually driven by millennials and Gen Z sales on our accounts with millennials and Gen Z, we're up 42% compared to 2019.
If you look at baby Boomers that was up only 6%. So as you think about that mix shift our products are definitely very attractive to that younger demographic.
We also generated 25 million new accounts for the full year. So we actually feel really good about the growth prospects and as you said the thing Thats, a little bit difficult to call right now is the payment rate.
But I think if we see payment rates just normalize a bit they don't need to go all the way back to pre pandemic levels. If they just normalize a little bit here in 'twenty, two we could definitely see loan growth in the high single digits for the full year I don't know, Brian if you'd add anything to that yes.
The color I would add Sanjay is that when you look across purchase volume across all of our segments. We're seeing strength in all of the platform. So so that diversification is pulling through and I think when there is a comparison to some of our peers. What gets lost here is the resiliency.
Our business right, we did not have as much volume decline as others are asset decline as others.
Last year, so we are being more consistent with that and listen I definitely agree as we entered into 2022, we came off a record purchase volume I think as we think about the first month of the quarter, we're seeing a strong mid teens growth in purchase volume as that continues and we do see and I am sure. We will talk later in the call on payment rates, we are seeing some auto.
So I do think you can see that high single digits and in certain scenarios. We have one scenario that says you can get you mean in double digits with regard to loan growth. So we feel really good about the model and where we're entering 'twenty two.
Lastly, I'll add Sanjay just.
If you look at that across the platforms, it's pretty broad based if you look at purchase volume digital was up 22% DNV up 26%, we've got a ton of room to grow in health and wellness their sales were up 14% in the fourth quarter. So again pretty broad based growth and it's nice to have turned the corner with all of our platforms having Pos.
<unk> receivable growth year over year in the fourth quarter.
Okay.
Wonderful maybe.
And maybe another revenue driver.
Guys sort of talk about the NIM, Brian Wenzel, and I know Theres, a lot of liquidity and all of a sudden stop it affects that metric, but as we think about the yield I see that last bullet says higher interest and fees offset by higher reversals as that one for one or do we expect the yield to improve over the course of this this year.
Yes.
I would think about it Sanjay is as you see the payment rate decline youre going to see the yield go up on on the book right. The reversals that come ultimately will be with the charge offs, which will trail that.
And it's not one for one it never has been the impact on the NIM. This year. It is benefiting from reversals, but not necessarily the key driver behind it so it trails and it won't be one for one.
From credit Suisse, we have Moshe Orenbuch. Please go ahead.
Great. Thanks.
Okay.
Brian .
Hi, Brian Wenzel, I guess you talked about.
The normalization of the.
The efficiency ratio in this environment to investors, who are paying a lot more attention to.
<unk> expenses and costs.
You said that.
Driven by the revenue that has been kind of deferred losses suppressed.
You talked about how you think about how large that is and over a period of time that comes back.
Yes, Great question Moshe first of all I want to start with the expenses were up when you strip out the impairment and discrete items that we elected to execute based upon some gains we had in the quarter.
Spencer up 5% year over year, and if you think about that just to start a lot of it is employee driven rate, we increased our hourly wage to two employees.
We also had some one time adjustments relative to some critical roles in the organization you'd think about.
Data scientist.
Technology et cetera, so the base in the run rate as we see going forward is pretty stable and as I said in my prepared remarks first.
First of all we don't have to inject a lot of money into this in order to drive our growth. So the expense base as we step through each of the quarters will be relatively consistent as you think about the efficiency ratio clearly the revenue and the yield is lower than we anticipated. So I think over the course of that call. It the revenue normalization between 22%.
Three you will see come back and we see a pathway back to that 30% to 33%, but right now we're managing hopefully tightly to the dollar amount as we step through again, it's mainly volume oriented now with with more active accounts and higher volume that goes through the associations or networks.
So I guess just to just to be clear your cost base is going to be closer to <unk>.
<unk> expands and maybe.
Credit normalization causes the RSA too.
Actually benefit revenue over the course of the next several quarters is that with respect what we should be thinking.
I would say on a dollar basis that would generally be true I think what we're going to drive us there will be an increase in the variable components of that but we will drive productivity to offset that and keep the expense base relatively flat. So I wouldnt say theres a shift to being fixed.
It's weird to drive productivity and get operating leverage more.
We're acting like fixed and fixed yes, I got it okay. Thanks very much. Thanks.
Thanks, So much have a good day.
From Goldman Sachs, We have Ryan Nash. Please go ahead.
Hey, good morning, guys. Good morning, Catherine Alright, good morning, Ryan.
So.
Brian maybe just a follow up to moshe's question, if I look at the expense guidance I adjust for the $75 million I think it points about 7% to 8% expense growth. So I just wanted to clarify for 2022.
The expectation that you're going to generate positive operating leverage can you maybe put some parameters around how to think about expenses relative to the revenue backdrop, and then more specifically the slides talk about you're reinvesting the $130 million from the game is that included in the expense outlook and should we view that as a one time step up or will it remain in the run rate and I have a follow up.
Yes. So thanks. Thanks for the question Ryan Let me deal with the latter part of your question.
The $130 million and any potential offsets we have will not be in the run rate there'll be one time so.
When we actually make those.
Decisions and that could be a wide ranging effect that could deal with some of our fixed costs and again continuing to adjust for the way in which we work.
There could be some investments in marketing programs and we'll highlight those but it should not go into the run rate of the business and would be additive to what we have here on the page I think generally when you think about.
The expense base, we are going to generate positive operating leverage and that's the way. The model was set up so that as we think about the expenses. This year. Our view would be that we would have greater growth relative to the assets and the revenue. So we do believe we're going to get operating leverage we're going to manage to positive operating leverage throughout.
As we step through 2022.
Got it thanks.
And if I can ask a follow up question.
On credit losses are obviously at very very low levels, and we've seen a little bit of increases in delinquencies and charge offs. So I was wondering.
Can you maybe talk about any noticeable trends you're seeing across the portfolio, you're seeing any more normalization in the near prime relative to the Prime and then second Brian just to clarify the allowance at $10 76 versus 10% day, one seasonal although I recognize that <unk> is seasonally low.
You mentioned it being asset driven so is day, one seasonal still the eventual destination and maybe can you just give us some color on how to think about the trajectory of the reserve over time. Thank you.
Yes, So let me, let me I'm, probably going to give you a longer answer on credit Ryan because I do think it's important to get this background to specifically answer. Your question, we have not seen anything discernible in our results.
Two where we come out but theres nothing that we see that says this is performing worse than our expectations.
We understand there is a lot of concern about what the term credit normalization means and how how fast that comes in the range of damage I want to I want to give you a framework first we talked about earlier in the call in my prepared remarks about the delinquency.
Being 60 basis points better than 30 basis points better than in previous periods. When you exclude the held for sale. So the delinquency formation and how that will.
Give you loss content for the first half of the year is in great shape.
I think Ryan when we look at the vintage performance as both on a cumulative basis and a coincident basis and look at it from 2018 forward in these six months kind of tranche views each of the vintages from 2018 through 2020 have improved and we see no deterioration in those vintages as we sit here at the end of <unk>.
2021, when you look at 2021.
Both 2000, and 2021 are significantly better than all of the pre pandemic vintage is significantly better when we look at 2021, specifically, that's a little bit worse than 'twenty, because we took some credit refinements. We don't believe we have added incremental risk in but a slightly worse performance, but again significantly better than than pre.
<unk>.
Pre pandemic I, then think you have to think about three other factors Ryan as you think about credit. The first is our credit strategy multi product strategy, our credit strategy as we have a tighter loan grow line strategy, we have tighter account management strategies, which gives us lower severity as you head into this.
Normalization period, so we think it will be less volatile and that's been demonstrated when you go back and look at the loss curves both in the GSC recessions and in the pandemic and then I think when you look at the tools, we outlined on Investor day, the increase in data analytics. The unique sources the ability to be more surgical we can control credit as we step.
Through 2022.
And then the last thing is the RSA rate the RSA.
We will ultimately take those charge offs and our partners will offset that you combine that with the revenue generation. This will give you a resilient risk adjusted margin as you kind of step through so that's how I would think about credit I think Brian and I and leadership team are really comfortable without credit will develop in 'twenty two into 'twenty three.
With regard to your second question on the allowance we don't have a differing view that says we're not going to get back to day when seasonal it really goes back to what you think your targeted loss rate is and what you mean loss rate is and we don't really have a fundamental view there may be some portfolio mix that comes into that but I think we ultimately can migrate back to that.
Assuming that's the view that we hold it's really the timing and that generally if you hold that view there could be offsets to asset.
Driven provisioning as we step through 'twenty, two so I apologize for the long answer, but I think a framework for how you think about and talk to talk to your customers.
From Citi, We have Eric <unk>. Please go ahead.
Thank you.
On the NIM outlook. There I was wondering when you look at the guidance.
Guidance, there and the kind of two to each levels, which I guess around 15% I would expect it expected that to rise a bit more with the.
Rate increases, we're seeing how many rate increases do you expect for the year.
What are what are some of the other aspects that are keeping that somewhat lower.
Yes, so with regard to expectations for rate increases we had three rate increases.
As our current view, obviously the market I think depending upon the day may.
May be different than that but you got to remember in our portfolio less than 50% of our receivables are variable rate and then when you factor in the trans actors, it's Russ I think less than 30%. So we're not going to be highly subject to.
I would say NIM movements, there could be 2030 basis points potentially.
As it relates to <unk>.
But but to be honest with you it's not a significant driver and at the end of the day, we we intend to run our book really on a <unk>.
Neutral scenario, we're slightly asset sensitive, but not not a lot.
Okay got it and then.
Helpful discussion.
Our expense base.
<unk> revenue item the loyalty program costs kind of ticked up a decent amount in the fourth quarter I guess.
Likely from the.
Sales volume you have there but.
The outlook on your on your loyalty program cuts.
<unk>.
Yes, Great question, Brian and I look at this it's not necessarily a bad thing it really means that our customers are engaging with our products and driving volume. So you're right. It is value driven number one and you can see that in our dual card volume our co branded volume.
Our new programs are contributing to some of that rise and then the final thing is obviously value proposition changes, where we refresh value props to drive volume are factored in there.
Other important element that sometimes gets lost is this is a program expense where approximately 80% of this is shared back through the RSA. So we don't bear the burden and I think again going back to the unique model, we don't have to inject a lot of marketing to drive growth.
Jack a lot in the royalty and then our partners are sharing both in the marketing expenses and the loyalty. So there's a natural buffer in the RSA. So again a lot of it's offset in RSA and it's generally a good thing thats rising means our customers are engaging with our products.
From Morgan Stanley we have three questions. Please go ahead.
Hi.
Thanks, So much couple of questions here.
First on just expenses to tie that up a little bit I know you've got the longer term guide on expense ratio out there from your Investor day last year.
233%.
Is that something we should be expecting you would be targeting over the next.
Year or two or is that more like 24, 25 kind of timeframe.
Yes first of all good morning Betsy.
Would not consider that a 'twenty two related metric where in a transitory year relative to the revenue. So I think you begin to look at that when you move into 2023 and how the revenue really develops again, we're going to control the expense dollars. We can control that the actual output of that hasnt.
Has the denominator, that's a little bit less controlled given the payment rate elevation of payment rate.
Okay and then the other question just on expenses.
Has to do with the investment spend you're making you've got the $130 million.
$130 million gain and then youre going to be.
Investing that.
From the commentary it sounds like.
Youre talking about making those investments.
During the second third and fourth quarter next year is that a fair read of what you are telling us.
Yes, so I would look at the investments being primarily in the second and third quarter, that's where we'd like to have it in there to get the leverage effect of it obviously will depend upon the types of actions and again I think there'll be a combination of actions that both had tried to reduce the fixed cost of the business as well.
Incremental investments really to drive the growth side of the business. So Brian I will review that with the team and set our plans out and hopefully be able to give you an update at the at our first quarter earnings call in April It's fair to say guys. We're not going to make sure we're not going to make any investments that don't have a really good payback a really good return.
The use of those dollars.
Are you talking more about like marketing or investments in the program as opposed to technology is that it.
It's going to be a combination of things it will be and potentially could be we will look at some of the fixed costs that we have in the business relative to <unk>.
Facilities could be refreshes of certain programs, where we may reissued cards and do things like that campaigns like that it could be in technology, where we may try to accelerate.
And continue the acceleration of our digital capabilities. So it's a combination but Brian hit on it we're going to go through review and the best projects with the best payback and <unk> will ultimately win.
Really two lists Betsy that we look at one is to drive long term efficiency in the business and they don't want us to drive growth.
Both lists of great paybacks, we have a really disciplined process around how we evaluate those investments and we'll obviously run that same play this year.
From Wells Fargo, we have Don <unk>. Please go ahead.
Hi, good morning.
The CFPB has been talking a little bit more about cars recently can you provide your updated thoughts on the regulatory environment and secondarily.
How is the pipeline for new partners in portfolios.
Yeah, Hey, Dan.
I would say.
The regulatory environment has been fairly stable, obviously, we we.
We saw the Cfpb's request for information regarding fees.
First I'd, just say that we always strive to be very transparent in terms of our disclosures with our consumers.
We really don't have a lot of fees other than late fees.
As you know those are already governed and calculated by the CFPB, we're completely compliant with that in their guidance on late fees. Today. So, we'll obviously stay close to that but.
Nothing more to report really at this point.
I would say generally the pipeline is strong across all five of our platforms.
A lot of nice new program opportunities in the pipeline that we're looking at a lot of.
The opportunities to partner on new distribution channels that we're excited about so pretty strong pipeline I would say, there's not a lot of large existing programs.
Out there right now a lot of them have been locked up.
Some really exciting new program opportunities out there. So we're excited about that.
Thanks, Brian .
Thanks.
From Piper Sandler we have Kevin Barker. Please go ahead.
Thank you.
And a follow up on that question.
Lee fees are relatively high compared to the industry.
Just given the amount of accounts you have so internationally would be higher.
If the CFPB were to do anything or there was any regulatory changes do you feel like you have the flexibility to adjust your model to continue to generate similar type revenue trends.
Just given your relationships with other merchants.
Well so just the first thing I would say.
We don't disclose the aggregate amount of late fees, but the late fee dollar amount that we charge on accounts is again regulated by the CFPB and very consistent across all of the general purpose card players out there.
And look if something were to change on that front, we can price for it in other ways and protect our revenue and our margin.
But look I think we just got to stay close to this as I as I said and I don't know, Brian if you'd add anything yes, the way I would think about it Kevin is.
Look at the average late fee per incident and being that we are in the safe Harbor with the CFPB. It shouldnt be any real difference between us and I'd say industry industry participants I think if you go back historically under the card act or revenue when the cardiac changes when its place essentially remained the same we went back to partners that we work.
So I think historically we've had.
Run the play where if the environment shifts with regard to how the revenue may or may not be impacted will work with our partners to so again provide the value to our customers to them and their churn and appropriate risk adjusted return.
Okay. Thank you for taking my questions.
Thanks.
From Jefferies. We have John Hecht. Please go ahead.
Hey, good morning, Thanks, very much for taking my questions Hey, John .
How are you guys.
<unk>.
Just you talked about the RSA, but just thinking.
Like RSA the relationship to rising delinquencies.
Or charge offs, what's the timing there and is it kind of basis point for basis point and then also how do loyalty program costs kind of influence the RSA just trying to kind of think about those moving parts within that.
Sure. So if you think about delinquency, John delinquency should yield higher revolve and higher late fees that flows generally immediately through the RSA. The same things with charge offs. So when they happen. It goes I mean, there is no lag no delay loyalty is the exact same way it flows through in the period of which its encountered.
So to the extent that you see higher interest and fee yield that will flow through giving upward bias to the RSA charge offs will give you the downward bias and then either marketing or loyalty, depending upon which program expense line. It comes through that will also provide immediate.
Downward downward bias through the RSA.
Okay.
In that same time period, we should think about the fluctuation.
Correct. The only thing that really fundamentally works more on a lag would be reserves.
John .
Okay, and then follow up second quarter.
Question on a different topic as you had clover go into play last year develop set pay.
New partners Venmo, Verizon maybe can you comment on kind of the contribution this year of those new partners and products.
Yes, I mean, a lot of really exciting growth opportunities in front of us for 'twenty two John you hit on a bunch of them I would say venmo and Verizon are doing extraordinarily well.
Quantitatively and qualitatively.
Feedback that I get on the Venmo experience is just off the charts.
The feedback that we get on the Verizon value prop and how much you are able to save.
And the fact that that card is definitely acting like a top of wallet card, which is exactly what we intended.
We couldnt be more pleased with the performance of both of those.
We also launched a Walgreens as you know it's still very early there, but I think we've got a great customer experience.
Very integrated both in store online mobile et cetera.
And then paying for.
Obviously, it's still very early but we've got a really good pipeline of partners that will be integrating this year.
In addition to individual partner integrations were also looking at broader distribution opportunities in health and wellness, we're going to be turning this on and that in dermatology in the first quarter. We think just given the ticket size there.
Product that will really resonate.
The providers are excited about it so just a lot to a lot to focus on for the team. This is definitely a year of execution I think we've got we've got the product set that we want we made a lot of progress on distribution channels and now it's just getting those products out there.
As much as we can so they're available.
To consumers and we're laser like focused on the customer experience I mean at the end of the day, that's what's winning out there and you just can't invest enough in making sure that you can make it really easy to apply for our products.
Really easy to service and really easy to buy so that's where our focus but lot of a lot of exciting things for 'twenty two.
From Barclays, We have Mark Devries. Please go ahead.
Thank you a question for you on the credit guidance.
There's been a lot of investor focus on just kind of the pace and magnitude of normalization.
With that context, I just wanted to clarify when you say peak.
<unk> is expected in Q4 that you're referring to is just kind of your seasonal peak for 2022, its not your assumption of when you normalize.
That's the case, how are you kind of thinking about kind of the pace and magnitude of normalization, we'll see.
First of all good morning, Marc when you talk about normalization of delinquencies.
That really is going to happen kind of poke post peak of losses, and we've kind of indicated the peak of charge offs will be in the first quarter maybe.
Maybe early second quarter of 'twenty three so it would happen normalization happens on delinquencies after that we expect it to rise now I think you have to start out with where we start the year at and how that's going to build we're low levels.
We haven't seen anything but it will it will begin to rise as we step through <unk>.
2022, which again, we think is going to be closely.
Aligned with how payment rate will begin to change the payment rate remains elevated for a longer period delinquencies will be slower to rise. So I think thats its all going to hinge on that payment rate behavior pattern and outlined a little bit in our prepared remarks, how we see some movement in there.
Its payment rate.
Has changed the one thing that we started noticing some of our cohorts is that on a unit basis, we see migration back for some cohorts of accounts back to 2019 levels. What's happening is that we have a another cohort of accounts that have increased spending and increased payments and so on a dollar basis at the top of the <unk>.
House, it looks like payment rate is not not slowing down for certain pieces for some pieces of our portfolio. It is clearly migrating back to.
2018, so when that happens more in total for the portfolio Youll see delinquency trends I think move with them.
Okay, Great and then just on the pace of normalization. If you think about kind of the macro assumptions that you've made about a stable to improving macro and in a contained pandemic.
Kind of how you're thinking about.
Economic stress how quickly.
Bankruptcies could normalize.
Well.
Typically vintages take about 18 months.
Begin to season from a delinquency perspective, so again being that we started some clarify minutes in the first quarter. This year you would begin to see some of that flowing through in the latter part of this year. So the third or fourth quarter, mainly the fourth so you'll begin to see that absent any any changes in the macroeconomic environment.
The simple fact that we've.
Unwound certain things and begun to induce what we would call smart growth with regard to some of our CLI and upgrade activities inside our dual cards and private label book.
We have time for one final question from Wolfe Research, we have bill car catching please go ahead.
Hi, good morning.
Brian doubles, I believe you said that even if payment rates normalize just a little bit you could see high single digit loan growth can you give us a little bit more color on what you mean by a little bit could that be 50% of 2019 levels and Brian Wenzel. You said, there is a scenario where loan growth could be double digit could you expand a little bit more on what.
What that scenario looks like.
Yes, So bill I would say, we certainly don't need payment rates to come all the way back to pre pandemic levels to post high single digit loan growth a modest improvement.
And just a <unk>.
Slight reversion to the mean and I'm not going to give you a basis points here, but would put us in that high single digits.
For the full year I don't know, Brian if you want to add anything to that yes.
What I would say bill is our planning process. This year, we had multiple scenarios that we ran and we ran it on varying degrees of how how the payment rate evolves. So there is a scenario where the payment rates slows down quicker.
And in that in that scenario given the timing lag on purchase volume you will see potentially under that scenario a higher rate of growth when it comes to loan receivables. So it really is going to hinge off of I think the important part is what does that payment rate doing in the trend of the payment rates throughout the entire portfolio as we step through 'twenty.
Two which will give you the range of outcomes, but but again, we're printing a mid teens type of purchase volume growth. It doesn't take a lot on the payment rate in order to to impact that sequential loan growth that we're seeing and Brian hit on this earlier I mean, we are seeing some positive developments in terms of the payment rate in terms of Europe .
People paying in fall.
And so I think there is there is some.
Asian that there will be some reversion to the mean in 2022, it's hard to call exactly when and how much but.
Again, if you look at the purchase volume across our platforms, we feel really good closing out a record year last year and as you look across all platforms, we see broad based growth in purchase volume and we did have every one of our platforms in the fourth quarter had positive receivables growth. So.
It's a pretty good setup as you as you look to 2022.
That's really helpful. Thank you I guess expanding on some of your earlier comments.
Sort of thinking about the interplay between that normalization in payment rates and credit.
All concerned over the risk of credit normalizing faster than payment rates and alternatively based on what youre seeing in credit could there actually be a non op.
Opposite scenario, where receivables growth leads credit normalization side.
Absolutely absolutely to the latter part we could see loan growth going faster than credit normalization. It may be able to stay there more likely and that theyre going to move in sync we do not.
Generally see a scenario where credit normalization happens and you have elevated payment rates.
The way we have that's that's would be highly unusual and probably not something we've ever seen before.
Thank you and ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
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