Q2 2023 Synchrony Financial Earnings Call
Speaker 1: 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 Web site synchrony financial dot com.
Speaker 1: This information can be accessed by going to the investor relations section of the website.
Speaker 1: 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 can differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance.
Speaker 1: are located on our website.
Speaker 1: On the call this morning are Brian Doubles, St. Gurnee's 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.
Speaker 2: Thanks, Catherine. Good morning, everyone. In the second quarter, Synchrony delivered strong financial results, including net earnings of $569 million, or $1.32 per diluted share.
Speaker 2: A return on average assets of 2.1%.
Speaker 2: and a return on tangible common equity of 21.7%.
Speaker 2: Synchrony continues to demonstrate strong growth and financial performance as consumer behavior reverts to pre-pandemic norms and as our products and value propositions resonate strongly across our diversified set of platforms and partners.
Speaker 2: During the second quarter, we opened 5.9 million new accounts and grew average active accounts by 7% on a core basis.
Speaker 2: Once again, we set a new record as our $47 billion in purchase volume reached our highest level ever for second quarter.
Speaker 2: These strong sales continue to demonstrate the value of our diversified products and platforms.
Speaker 2: Health and wellness purchase volume grew 17% compared to last year, reflecting broad-based growth in active accounts along with higher spend per active account.
Speaker 2: The 8% growth in digital purchase volume was driven by higher average active accounts and reflected continued momentum in several of our new programs.
Speaker 2: In diversifying value, purchase volume increased 7%, reflecting higher out-of-partner spend, strong retailer performance, and the continued impact of newer value propositions driving penetration growth.
Speaker 2: Lifestyle purchase volume increased 10%, reflecting growth in average transaction values and outdoor and luxury. And in home and auto, purchase volume was largely unchanged versus last year, as the benefit of higher average transaction values and growth in commercial products was largely offset by lower retail traffic and reduction in gas prices.
Speaker 2: Dual and co-branded cards accounted for 41% of total purchase volume in the quarter and increased 14% on a core basis.
Speaker 2: with several of our newer value propositions continuing to drive elevated growth.
Speaker 2: Our view into the consumer, informed by the billions of real-time transactional data that we regularly monitor, shows continued normalization and consumer behavior toward pre-pandemic levels, which has progressed in line with our expectations.
Speaker 2: Average transaction frequency continued to grow in the corridor, while average transaction values declined modestly.
Speaker 2: This decline, however, was partly attributable to lower gas prices.
Speaker 2: A deeper dive into our auto partner spend shows continued stability in key discretionary categories such as restaurants and entertainment, as well as in nondiscretionary categories like grocery and discount stores. The reduction in average values was noted even among our highest credit quality borrowers, which was also accompanied by some modest slowing in transaction frequency.
Speaker 2: Following the trend from previous quarters, our younger borrowers, as well as those in lower credit grades, continue to reduce the pay suspend.
Speaker 2: This quarter, given the seasonal impact of tax refunds, we saw a small sequential increase in our payment rates, largely driven by higher credit quality segments.
Speaker 2: Year over year, however, payment rates continue to decline across age and credit bands.
Speaker 2: Meanwhile, the external deposit data we tracked shows that the average consumer savings balance has declined approximately 2 percent from the first quarter, but remain approximately 7 percent above 2020's average level.
Speaker 2: So taken together, the payment, spend, and savings trends we're watching suggest that consumers continue to be well supported by the constructive labor market and relatively healthy balance sheets as they gradually revert to their pre-pandemic norms.
Speaker 2: And as we continue to closely monitor the health of our consumers.
Speaker 2: We are also advancing the key strategic priorities of our business to position Synchrony for long-term success.
Speaker 2: One of our key priorities is the continued expansion of our multi-product strategy across partners, distribution channels and markets.
Speaker 2: allowing us to meet our customers how and where they want to be met, and with a variety of financing solutions that address their specific financing needs in each interaction.
Speaker 2: We recognize that our customers' needs change over time.
Speaker 2: And Synchrony can and should be their financing partner of choice throughout life stages. Whether applying in person, online or through an app, we leverage our data and advanced analytics to our digital ecosystem to deliver fast, seamless offers designed to responsibly support each customer's particular purchase.
Speaker 2: For customers who appreciate the simplicity of an installment loan with flexible terms and payment schedules, Synchrony's Binault payloader solutions have become popular options.
Speaker 2: and are successfully attracting new accounts and driving deeper engagement.
Speaker 2: In fact, partners who have launched these products have seen a 29% lift in new accounts with over 95% of the sales coming from new customers.
Speaker 2: These solutions conveniently integrated into our broader partner relationships and product offerings and match with our deep insights into the consumer, clearly expand our reach beyond our traditional set of customers and offer our partners another effective tool for engaging with our most loyal shoppers.
Speaker 2: Most recently, we announced that our partner At Home selected Synchrony as its exclusive buy now, pay later provider, integrating this installment product with its existing suite of payment options.
Speaker 2: Customers can select Synchrony Pay Later at checkout, online, and in-store. And thanks to our integrated data and leading underwriting capabilities, most can be pre-qualified without impacting their credit score.
Speaker 2: AtHome joins over 700 of our partners, providers, and merchants that now utilize Synchro's installment suite in the form of our Pay Later, Allegro, and secured installment loans. We are excited to further roll out these offerings across more programs and through our proprietary distribution channels over the coming months.
I think when it continues to broaden our product suite and empower these offerings with our dynamic decision and capabilities, we are better able to acquire and deepen relationships with our customers.
We see these new installment products leading to cross-selling opportunities and product upgrades across the business and helping partners build lifelong customers. In campaigns across various portfolios, we have seen that 20% of private label cardholders are eligible for an upgrade to a dual card.
which brings higher utility and better value proposition. And our customers respond to these upgrades with nearly double the purchase volume and 1.6 times the lifetime value to San Frigny.
For our partners, these deeper relationships translate into more loyal, better engaged shoppers.
And so ultimately, the successful execution of our multi-product strategy means better experiences for everyone and reinforcing a dependable and resilient model for all of our stakeholders.
As we head into the second half of 2023, Synchrony is well positioned to capitalize on these and other new opportunities while continuing to consistently deliver for our customers, our partners and our shareholders.
And with that, I'll turn the call over to Brian .
Thanks Brian , and good morning everyone. Sycranite's second quarter results demonstrate the power of our differentiated model.
Our broad reach across industries and verticals and the compelling value propositions offered on our products were key drivers of our resilient purchase volume. These core security strengths combined with our disciplined approach to underwriting, our diverse funding model, and our RSA arrangements continue to provide effective offsets to changes in the macroeconomic environment.
On a core basis, any receivables grew 15% versus last year. This was driven by a combination of approximately 130 basis points decrease in payment rate and a 6% growth in core purchase volume.
Our second quarter pin rate of 16.8% remains approximately 150 basis points higher than our five-year pre-pandemic historical average.
Net interest income increased 8% to $4.1 billion, reflecting 19% growth in interest and fees from higher loan receivables and stronger loan receivable yields partially offset by the impact of divestitures in the prior year period.
On a core basis, interest in fees grew 25 percent driven by loan receivables growth, higher benchmark rates, and a lower payment rate as credit continues to normalize towards pre-pandemic levels.
Our net interest margin of 14.94% declined 66 basis points, as higher funding costs more than offset the benefit of strong loan yields.
More specifically, loan receivable yields grew 145 basis points and contributed 124 basis points to net interest margin.
Higher liquidity portfolio yield contributed an additional 53 basis points to net interest margin.
By setting these improvements was higher interest bearing liability costs, which increased 263 basis points to 4.04% and reduce net interest margin by 215 basis points.
Finally, our mix of interest earning assets reduced net interest margin by approximately 28 basis points as continued deposit inflows allowed us to build liquidity and pre-fund anticipated receivables growth in the second half of this year.
RSCs of $887 million in the second quarter were 3.85% of average loan receivables.
The $240 million decline from the prior year reflected higher net charge offs and the impact of portfolios sold in the prior year, partially offset by higher net interest income.
The RSA continues to provide critical alignment with our partners and stability and synchrony's risk-adjusted returns, as demonstrated through this period of credit normalization and higher funding costs.
Provision for credit losses increased to $1.4 billion, reflecting higher net charge-offs and a $287 million reserve build, which was largely driven by growth in loan receivables.
The decline in other income was driven by a $120 million gain on portfolio sales recorded in the prior year period. Other expenses increased 8% to $1.2 billion primarily driven by growth-related items as well as operational losses and technology investments. Our efficiency ratio for the second quarter improved by approximately 220 bases.
tangible common equity of 21.7 percent.
Next, I'll cover key credit trends on slide 8.
As payment behavior continues to revert towards pre-pandemic historical averages, our delinquency and net charge-off rates continue to normalize towards pre-pandemic performance.
Our 30-plus delinquency rate was 3.84 percent compared to 2.74 percent last year, which is approximately 60 basis points lower than the second quarter of 2019.
Our 90 plus delinquency rate was 1.77% versus 1.22% in the prior year, which is approximately 40 basis points lower than the second quarter of 2019. The net charge off rate was 4.75% versus 2.73% last year.
which is approximately 100 basis points below the midpoint of our underwriting target of 5.5 to 6%, where SYNCHONY's risk-adjusted returns are more fully optimized.
While credit continues to normalize in line with our expectations, we're actively monitoring our portfolio and have undertaken some proactive targeted actions to position our portfolio into 2024.
These actions have been focused on certain types of inactive accounts, as well as segments of the portfolio where we are seeing significant score migration into non-prime and are unlikely to have a materially impact on purchase buying.
Focusing on reserves, our allowance for credit losses as a percent of loan receivables was 10.34% down 10 basis points from the 10.44% in the first quarter.
The reserve bill of $287 million in the quarter was largely driven by receivables growth.
Our provisions did not include any natural changes in our qualitative reserves or significant changes in our macroeconomic assumptions.
Turning to slide 10, funding, capital and liquidity continue to be highlights of synchrony's performance.
During the second quarter, our consumer bank offerings continue to resonate with customers. We experienced positive net flows each week, culminating in direct deposit growth of $2.3 billion in the first quarter, which is partially offset by lower broker deposits. This quarter end represented 84% of our total funding.
undrawn credit facilities with nineteen point four billion dollars up five hundred twenty one million dollars from last year as a percent of total assets. Liquidity represents seventeen point nine percent down one hundred ninety basis points from last year as we manage our liquidity portfolio and fund strong loan receivables growth.
Focusing our capital ratios. As a reminder, we elected to take the benefit of the Cecil transition rules issued by the joint federal banking agencies.
SICRE made its annual transitional adjustment of approximately 60 basis points in January and will continue to make annual adjustments of approximately 60 basis points each year until January of 2025.
The impact of CISO has already been recognized in our income statement and balance sheet.
Under the Cecil transition rules, we ended the second quarter with a CET1 ratio of 12.3%, 290 basis points lower than last year's levels of 15.2%.
The Tier 1 capital ratio was 13.1% under the CECL transition rules, compared to 16.1% last year.
The total capital ratio decreased 220 basis points to 15.2%.
And the tier one capital plus reserves ratio on a fully phased in basis decreased to 22.4% compared to 25% last year.
Continuing our commitment to robust capital returns, Synchrony announced approval of an incremental $1 billion share of purchase authorization through June of 2024, in addition to the $300 million remaining on the prior authorization.
We also announced our intention to increase the company's common stock dividend by 9% to 25 cents per share from 23 cents per share beginning in the third quarter.
During the second quarter, we returned $399 million to shareholders, reflecting $300 million of share of purchases and $99 million in common stock dividends.
At the end of the quarter, we had $1 billion remaining in our share of purchase authorization.
Synchrony will continue to execute on our capital plan as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan.
We also continue to seek opportunities to complete our fully developed capital structure through the issuance of additional preferred stock.
We have a strong history of capital generation and management, which is empowered by our resilient business model.
Given the uncertainties in both the macroeconomic environment and the financial services industry, Synchro remains focused on actively managing the assets we originate and permanently managing the capital we generate to optimize our long-term value creation and resiliency.
Finally, please refer to slide 12 of our presentation for more detail on our full year 2023 outlook.
We expect our ending loan receivables to grow by 10% or more for 2023, reflecting the combined impact of the payment rate moderation and purchase volume growth.
We continue to expect pain rates to normalize, but remain above pre-pandemic levels through the remainder of this year.
We now expect our interest margin within a range of 15% to 15.15% for the full year.
The interest margin in the first half was influenced by higher liquidity due to stronger than anticipated deposit flows and receivables growth pre-funding.
The deposit bid is also trending better than expected in the first half, but we have since seen growing competition for deposits.
Our revised full year outlook incorporates these first half trends, as well as the anticipated impacts of further interest rate increases by the Federal Reserve and the possibility of higher deposit beta in the second half of the year.
As a reminder, we expect our net interest margin to fluctuate quarter to quarter, driven by higher liquidity as we pre-flame growth, resulting in variation in the mix of interest trading assets.
and interest in feed growth partially offset by rising reversals as credit continues to normalize. Turning to our credit outlook, we now expect delinquencies to reach pre-pandemic levels during the second half of 2023 versus our previous expectation of an approaching peak in the year.
Net charge off should follow similar but lack progression through the year. Generally speaking, lost dollars will not reach a fully normalized level until approximately six months following the peak in delinquencies.
Given the slightly more moderate pace of delinquency normalization, we now expect net charge-offs to trend toward the lower end of our prior outlook between 4.75% and 4.90%.
We continue to anticipate losses reaching fully normalized levels on an annual basis in 2024.
We expect the RSA to trend below our prior outlook and be between 3.95 percent and 4.10 percent of average loan receivables for the full year. This improved range reflects the impact of continued credit normalization, lower net interest margin, and the mix of our loan receivables growth.
And given our higher than anticipated growth in the first half, we now anticipate quarterly operating expenses to trend at approximately $1.15 billion for 2023.
We remain committed to delivering operating leverage for the full year. Taken together, Synchrony's differentiated model continues to power resilient financial results through a range of environments, and we look forward to delivering on our commitments as we close out the second half of 2023. I'll now turn the call back over to Brian for his closing thoughts.
Thanks, Brian .
Synchrony's differentiated model has positioned the company well through evolving environments. We consistently power best-in-class experiences for our customers and strong outcomes for our partners even as their needs change.
Our business generates strong capital. We are adept at putting that capital to work in an effective, prudent manner to deliver sustainable, longer-term growth at attractive risk-adjusted returns.
As I look ahead to the remainder of this year, I am confident in our ability to execute on our strategic priorities and deliver value to our many stakeholders. With that, I'll 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. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session.
At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2.
As a reminder, please limit yourself to one question and one follow-up question. We'll take our first question from Aaron Seganovich with the city.
you're seeing. With your payment rates still normalizing and purchase volumes relatively stable. What's going to drive the somewhat a bit of a deceleration in your growth from 15% words and recently to kind of closer to 10% plus that you've talked about for year.
last year coming out of Omicron and the pandemic period. There was an acceleration beginning in the second quarter through the end of the year, which provides more difficult comps. So I think when you look at it on a V basis and the asset build as pain rate really came off a tie last year, it's just a more difficult comp. I think when you think about the volume we're gonna put up here in the second quarter, all the way through the end of the year, I think it's gonna be,
strong when you look at that performance across all of our sales platforms.
Thanks. And then in the digital and health and wellness platforms, both of those are showing continued really strong growth there. Can you provide a little color about within those segments, what's driving the strong growth there?
Yeah sure look I would say we're very pleased with the growth that we're seeing across all of our platforms you know you look at receivables up 15% for the company health and wellness leading the charge at 22% digital up 18 but even home and auto up 10% is a really good result and you know really pacing ahead of our expectations.
that sit inside of digital, all of which are performing really well. So we would continue to expect to over-index on those two platforms.
Thanks, Aaron. Thanks, Aaron. Thank you. We'll take our next question from Don Sandetti with Wells Fargo.
Hi, good morning. I was wondering if you could dig in a little bit more on what you're seeing in terms of consumer behavior. I know in the past you've talked about customer call-ins and what you're hearing in terms of slower wage or working less hours. Has there been any change there?
Yeah, I'll start on this one. I think, look, the consumer is still strong. I think they're obviously still spending, excess savings are coming down a bit, but they're still trending above 2020 levels. So, you know, when you look at having a pretty strong labor market.
The one surprise I'd say so far this year is how resilient the consumer has been. You certainly see that on the growth side. We just reported our second quarter was a record in terms of purchase volume.
Credit is very much in line with our expectations, maybe a touch better. We're still operating below 2019 levels. We're below our long-term target of 5.5 to 6 percent. So everything we're seeing on the consumer is still pretty positive.
With that said, you know, we're still operating cautiously. We're monitoring this, you know, every hour, every day. We're listening to the calls. I wouldn't say we're hearing anything abnormal. It really is kind of in line with our expectations and as expected, credit will continue to normalize.
to the balance of this here and in the next.
And on the allowance rate, are you still thinking that it's sort of steady, that maybe improving a bit?
the first half of the year, I think when we look at the reserve provisioning, there have really been growth provisions, I think 285 and 286 respectively for the first quarter and the second quarter. Again, we continue to expect that migration back down towards Cecil day one, I think delinquency formation.
that we have seen has been in line with our expectations. So again, that will trend out over time. I think the one shift, why we haven't changed our macroeconomic assumptions or really things around student loans, they've just been a little bit slower, which is why I think you see us today talking about getting back to that pre-pandemic levels of delinquency in mid second half of this year.
Again, it will migrate, continue to migrate down as long as we believe the macro backdrop comes in line with our expectations.
continue to migrate down as long as we believe the macro backdrop comes in with in line with our expectations. Thank you.
Thanks, Tommy. Thank you. We'll take our next question from here in Batia with Bank of America. Good morning. Thank you for taking my question. Maybe to start, I think the first question I had was just on the regulatory front, specifically thinking around the CSCB's late fee rules and also the inquiry into the deferred interest.
medical cards. Maybe just talk about your perspective on those issues where things are shaken out and if there's any updates to share and how you're just preparing.
the next couple of weeks. Yeah sure. So let me start on Lacy's. Uh you know, we've been. We've been working on this for over a year now when the initial kind of proposal came out. Uh you know, we're we're having very productive conversations with our partners around different
They clearly understand that this is an issue that the entire industry has to deal with. It's likely going to resolve new pricing models and pricing actions across all issuers.
So, you know, we've had those discussions with our partners. I'd say no real surprises. Are they expected to see the things that we're proposing, like higher APRs, different types of fees, penalty pricing?
And we've also been having a good dialogue around underwriting. And I think they fully appreciate that without some of these pricing offsets that a fairly significant portion of the customers that we underwrite today might lose access to credit.
And just to be clear, that's something that we don't want. It's something that they don't want. So our interests are very much aligned on that point. Look, at the end of the day, our goal is to protect the partners. We want to offset the impact here and continue to underwrite the customers that we do today. And then lastly, I'd just say, look, there's a lot still to be decided here.
You know, we expect to see a final rule sometime in the fourth quarter. It's likely to be litigated. That's, I think, the consensus, at least what we're hearing. But we've had teams focused on this for a while. We're as prepared as we could be.
And so we'll just continue to play through and give you updates as we as we learn more.
And then what was your second question? Well, it was just on the medical, if there's anything to, if you have any comments on the inquiry into the deferred interest and the medical cards that they've also been talking about.
Yeah, look, I'd say first, we're very proud of the CareCredit products that we offer. In our view, CareCredit is not a medical credit card. The vast majority of what we do there is elective health and wellness spend, so 70% of the business is actually dental and pet care.
You know, we work very hard to ensure that the products are fair and transparent. Deferred interest is a product that's been around for decades. We believe our practices are actually industry leading. So you know, one positive outcome would be just to level the playing field and bring other issuers kind of up to.
the standards and the things that we do every day. So again, very proud of the product. It's actually one of the products that we get the absolute best feedback on from customers.
And then, just if I could switch here to the credit side, right? Your guidance for delinquency rates, and I think you talked about, you know, consumer being resilient, delinquency taking a little while to get back to pre-pandemic levels, which obviously is a good thing, but your guidance talked about it approaching pre-pandemic levels here in the next...
I guess six bugs. What happens after that? I mean your charge off comments for 2024 suggest you think delinquencies will stabilize at those pre-pandemic levels. So maybe just talk about what gives you confidence that that will happen versus you know going through those pre-pandemic levels and continuing to grind higher. Thank you. Yeah, thanks for being here. So I think the way we...
We think about it and we watch vintage performance, we watch how the rules kind of come into delinquency. You know, I just want to focus where we are today, right? When you look at average delinquency in the pre-pandemic period and compare it to the, you know, apply that to the balances today, our 30 plus and 90 plus are at 87% and 82%.
of historical levels and that's just been moving up slightly as we step through each of the quarters. I think translating that that's about 60 basis points lower than 2019 for 30 plus, 40 basis points lower for 90 plus. So I think you know different than a lot of issuers we are not at that pre-pandemic delinquency formation yet.
albeit we are continuing to move closer to that in a very measured approach. And I think when you think about the loss rate and what's flowing the loss now, we're at 82 percent of our midpoint of our underwriting average. So we look at the formation today and say we feel good about where that is. When we look at the vintage's performances, you know, if I go back to 18 and 19, I would say Latino or Adriana would actually say a big name. We certainly are stepping in both directions, where we guys may see a447 XX with shoe to desktop with a
real significant deterioration of those vintages. They're through their peak wash periods. When we start looking at the pandemic level vintages, particularly in the 21 and 22, when a lot of issuers, I'd say adjusted credit standards to kind of put it on, those vintages for us are performing in line with our 2018 and 2019 vintages. So we don't see performance.
earlier around, I think de-risking the loss rate for next year. And these are really around accounts that are either inactive or see significant score migration into non-prime. So not significant. It's unlikely to have a material impact on sales or credit. But just taking some of what I'd say more appropriate prudent actions across the portfolio in addition to the idiosyncratic options that we're doing. So we feel good with the actions we're taking.
We feel good about PRISM and the decision trees that are inside of PRISM in order to manage credit and adapt quickly to the environment. And the vintage performances are in line with our expectations. So that sets us up to how we form. We'll obviously be back towards the end of the year and give updated guidance with regard to the full 2024 loss rate. Hopefully.
that's what we're doing. That gives you some perspective how we think about him here. Thank you. Thank you. Thank you. Thank you. We'll take our next question from Ryan Nash
the next question. I'm not sure I'm going to get too excited about him here. Great. Thank you. Thank you. Thank you. We'll take our next question. Good morning, guys.
Hey Ryan. So Brian the second half net interest margin guide being in line with the first half. Maybe just talk about what is driving your your updated expectations. I think you mentioned betas could be higher. I'm assuming now you no longer have great cuts as per the forward curve.
Maybe just talk about what you're assuming for betas and how do you think about the puts and takes of the trajectory of the margin over an intermediate term if rates are going to stay higher for an extended period of time?
Yeah, thanks Ryan. So the betas we experienced in the first half of the year, if I make it broadly between savings and CDs, and the savings were mid-70s, were low 90s in CDs. And I think as we step forward into the second half, the one thing that we noticed in the competitive dynamics as we exited out of the second quarter, Ryan, was a little bit more...
price increases from competitors and I think that comes from a couple different places. You have certain of the regional banks that are experiencing outflows relative to commercial.
deposits that's probably twofold. One, them running a little tighter on cash, and two, you know, there's some, I'd say, risk mitigation strategies that some commercial firms are using so they are becoming a little bit more competitive for deposits. You also see some of the big brick and mortar institutions who are trying to...
not have to raise their overall deposit rate, but using an online product in order to raise rates. That dynamic, you know, really emerged, I'd say, late May into June . So as we think about that mid-'70s, low-'90s, in our back-gap assumptions, we have it moving up, you know, called roughly 10 percentage points. So you'd see savings in the...
rate decreases in the future, that the betas will be in a similar type of fashion and we can lower it. I think when we think about the back half, broadly speaking about an interest margin, we should continue to see some tailwinds relative to the benchmark rates in the first half as they push through the floating portion of our portfolio in the back half.
You continue to see revolve rate increases. Well, certainly if you expect the delinquency and losses to kind of come in line, your revolve rate should push up. There will be a little bit of offset there from the reversals as write-offs kind of rise. But again, some tailwinds as we come through there. Here is your feel for the future marks to keep in mind as we drop through the
Clearly, some of the liquidity we built up in the first half will get deployed. The second half will also be, in fact, potentially how liquidity portfolio pays out and some of the wholesale funding that we're going to do in the second half, both in the secured and unsecured market. So hopefully that gives you a flavor for how we think about the betas and then in the second half.
And then and then Brian you know we're obviously waiting on a handful of potential regulatory changes in the coming months. Maybe just talk about you know what way if any you think this will impact the way that you think about managing both capital and liquidity on a go-forward basis. Thanks.
Yeah, Ryan, so, you know, again, Vice Chair Barr has indicated that they will put out proposed rules around capital, which you didn't want to have a comment period before our final rules issued, and then a implementation period a couple of years out to fully transition –
You know, we've obviously been preparing and have run different scenarios relative to the different outcomes when you think about financial changes, whether it's the risk-weighted assets or the potential implications from an operating risk perspective. So I think we've been contemplating that relative to our capital plans. We haven't taken definitive action, so I think it's manageable for us.
I think if the Fed decides to extend some of the long-term debt or two-lack requirements, you know, based on the rules that exist today, we feel like we're in a good position. We're in surplus positions in those. So I think we feel good about what potentially can come, but obviously we'll look at the rules, we'll evaluate it, and we'll certainly adapt our business.
and try to be smarter with regard to changes to the risk-weighted assets and how we optimize it. But we haven't taken actions to date, but we'll be closely monitoring and we'll certainly be addressing as we move forward.
to changes to the risk-weighted assets and how we optimize it. But we haven't taken actions to date, but we'll be closely monitoring and we'll certainly be addressing as we move forward. Thanks for the call.
Yes and they still really have. Thanks Ryan. L. Thanks
Thank you. We've seen payment rates remain abnormally high for an extended period of time relative to pre-pandemic levels. Obviously, loan growth is still fairly robust. Do you expect...
Or do you feel like there is a fundamental shift in consumer behavior?
right now relative to what you were experiencing in 2018, 2019, just given that these payment rates remain very high, could remain elevated for an extended period of time.
Just give us an idea of, you know, if there was a shift in consumer behavior and what you're seeing today. Yeah, and thanks, Kevin, for the question. So when we look inside payment rate for a second, there's a couple of different dynamics. Let me start with we don't see something today that says fundamentally the business payment rates for us or other issues will be fundamentally different as we look out at, you know, the
you'll call it a year from now or so. When I look underneath and break into segments, what you've seen is a normalization back to pre-pandemic levels for the non-prime and lower credit grades. And what's really, you know, kind of boosting the payment rate has been prime customers and super prime customers who have built up.
excess liquidity during the last couple of years, and they continue to pay at a higher rate than they did pre-pandemic. So we expect those people ultimately to normalize back to, you know, I'd say the pre-pandemic period, we're gonna have to wait and see whether that happens.
The other dynamic that we have seen is it has been a rise in auto pay, which is a good thing for us. So we've had about four percentage point shift up to about 20% of the accounts paying on auto pay. And there, you know, that does help entry rate, does help delinquency. It does change a little bit of the dynamics on the payment rate, but that's not...
something that we think is going to have a material shift. So again, we think this is continuing to be part of the K-shape recovery and part of the exit out of the pandemic period for now and until we get more clarity with regard to when the excess savings or money that's been accumulated during the pandemic totally burns off for those higher credits.
Okay, and then maybe just to follow up on the growth, 10% plus implies maybe a slowdown from where we are. Do you anticipate an impact on spending and your sales volume due to this student loan restart in October ?
I know you've already made quite a bit of comments on the credit side, but just give us an idea of your expected impact on the spending side.
Yeah, Kevin, so again, we understand the population of people who have student loans. We understand the magnitude relative to the amount of loans that they have outstanding and what is currently in forbearance and non-forbearance. I think when we look at that population and the mix of that population...Benastic has not ICO risks and is about the individual fees they could pay toarding him for operating data faith.
You know, first of all, they're very close to the FICO range we have. I think they're about 10 points different on advantage for, excuse me, difference. They're within 10 basis points of delinquency. So they look like the regular book. Forty-six percent of those people we have underwritten pre-pandemic that were making payments.
We feel good about their ability to manage the financial situation, so I wouldn't anticipate an impact on that when we think about purchase volume as we move into the back half of the year and into early next year again. I want to be clear, I tried to mention earlier on a call, Kevin, I don't think we see a lot of changes going on on a dayside here these week and we're seeing a lot of change, we're
purchase on a dollar basis, like de-summering, it just goes back into we had a really tough comp last year for everyone as you saw this acceleration coming out of the backside of the pandemic which was pent up spending and demand both for goods and services. So we feel good about the volume you know Brian highlighted health and wellness and digital which are really point.
the engine forward here and we expect that to continue. Thank you, Brian . Thanks, Kevin. Thank you. Our next question will come from Rick Shane with JP Morgan. Thanks guys for taking my questions. Kevin really covered my primary topic, but I'd love to.
discuss a little bit in terms of funding. You alluded to the fact that in the second half of the year you're going to look to the secured and unsecured markets. I'm just curious realizing that you guys have not faced the issues that some financial institutions have had related to deposits. Whether the events of this year have.
caused you to at least take down your sort of target deposit ratio going forward? MR. BERTRAMAN, Senior Director, National Financial Services, National Financial Services, National Financial Services, National Financial Services, National Financial Services, No, we have not altered our intended targets for the funding stack. We feel very confident and very proud of our deposit franchise. enabled us to work in early degrees.
which I believe provides 84% of our funding. As we look at the first half performance of this year, we were positive on net flows every week, including the weeks where there was the bank turmoil. So we feel good about our ability to attract deposits. And those deposits, when you look at the vintages, we've grown the vintages in the first half of the year back. So customers are sticking with us. We continue to have.
a high retention rate with regard to CDEs. So the stickiness of having, you know, essentially 99 retail deposits are really helping us as we move forward. Our willingness and desire to, to, uh, you know, tap the wholesale markets is a very important part of our funding sources. And I think to some degree, when you go longer periods without being into those two markets, it becomes more costly for people to.
willing to buy in and underwrite your name. So having a presence in those markets and continuing to be active over time, particularly when we have debt maturities, is going to be important. We also have some maturities in the back after the year relative to CDs and things like that. So to try to manage the betas, accessing the wholesale market in certain increments makes a lot of intuitive sense for us. So again, we feel good about the deposit franchise, and that will be what makes a ballown barendi or gold aotherapy for your superannualProducer and for you and your whatmost passionate and someone else you meet in a country that does just that. You can see all of those differences that we have in the grandfather's arms and that would be www.prSilenceVictorying.com And the short form that you see in your cover
Again, 80-plus percent of our funding stack as we continue to move forward is our goal. Great. Hey, Brian , that's very helpful. As you think about the wholesale markets, can you talk a little bit in this rate environment and supply and demand? Uh, is there... What is the potential arbitrage in terms of funding versus the deposit market?
Yeah, you know, Rick, for us it's really about access. I mean, obviously, credit spreads are a little bit wider than we would like, given some of the uncertainty and then most certainly given some people's, you know, where benchmark rates may go even after the Fed meeting later this month. So we less look at it as an arbitrage, more as how do I create a steady foundation and have the problem next.
to afford it and we think to some degree we continue to drive what we think is very good performance in the business Show that show the credit performance here and show our ability to manage The regulatory environment that the credit spreads will take it in over time But but we don't look at it as an arbitrage. We more look at it How do I get a balance funding need in order to?
to really protect the balance sheet of the company and provide the appropriate liquidity under all situations. Riff, if that makes sense. Thank you very much. Thanks, Riff. Thank you. We'll take our next question from Sanjay Sakrani with KBW.
Thanks. Good morning. There's some news out there that there's at least one large portfolio out there for RFP big technology company and obviously Wal-Mart still remains in flux. I'm curious Brian doubles if you could give us a sense of sort of where Synchrony might stand for any larger portfolios or any any other deal that might be out there.
Yeah, sure, Sanjay. Look, I would say, you know, with a couple exceptions, most of what's in our BD pipeline right now are smaller startup kind of de novo opportunities, which we're really excited about, but obviously take more time to grow. I think on larger opportunities, obviously we're very active there as well. But I would also say that's where middle
we're extremely disciplined as well in terms of risk return, making sure we've got the right balance, the right alignment with partners. I think that's just absolutely critical. I think you're always going to see us steer a little bit more on the...
small to midsize deals because we just hold the higher deals to, or the bigger deals to a higher level of scrutiny in terms of risk and return and alignment with the partner. I appreciate that. And then I could follow up on some of the late fee regulation commentary.
I guess what I seem to be hearing is like there might not be a whole lot of move on the safe harbor amount that was proposed. And I'm just curious, like, as we think about how the adjustments might be made, it's a pretty significant decline in that rate. I guess what is your operating assumption as you move forward, as you talk to your partners? I mean, is it as low as the safe harbor that's been proposed?
Yeah, so look, we clearly think that this proposal has a lot of unintended consequences to consumers, even to small businesses who rely on credit. So we don't agree with $8. We think that $8 is not a deterrent. It's not an incentive to pay on time.
It will restrict credit to some customers. It will make credit more expensive to many customers.
And so we're very active with the rest of the industry and the common letter process. And we would certainly welcome a higher amount than the $8. But with that said, we have to prepare for the $8 to go into effect as written right now. And so that's kind of our base operating assumption.
We do think that if the cost calculation were
were designed differently, we could certainly substantiate a cost higher than $8, and so that's another angle that we're pursuing here.
But we need to have revenue offsets that we're ready to put in place to offset that. Because again, our goal is to protect our partners here and continue to underwrite their customers just like we do today. And so those are the discussions that are ongoing and that's really where we've been focused for the last, you know.
and as well months Okay, great. Well, thank you so much for the color. Yeah. Thanks, Andre Thank you, we'll take our next question from John Pankari with Evercore ISI
Thank you. Morning. Um regarding the credit actions that you've mentioned you're taking into 2024 given some migration. Uh non prime side. Can you give us more color of what? Portfolios you're seeing this migration and what? What actions you're taking. If you
Yeah, thanks, John . Obviously, we can't get into specifics with regard to portfolios, but I think broader based, if you had a credit that was in the, you know, call it 700 range, and you saw a migration of 50 or 60 basis points into non-prime, we would look at that account. Before, we used to wait and kind of look at it. Now, we look at it in combination of other factors.
and decide immediately whether or not we want to reduce, uh, the exposure down to the balance, so a credit line decrease or two. If it has other, uh, other attributes that we may be more uncomfortable with, we do a credit line, you know, closure and count closure on that account. And we do the same thing effectively in our inactive portfolio. So if these are...
What I'd say, and this is why it's not, you know, it's unlikely to have a material effect next year, is because these are significant movements into non-primes, just because they're not performing the way they would, and they had a very significant movement at the time. So again, not broad-based, and we only draw the fact, you know, to be honest with you, John , because we said all our actions have been idiosyncratic. These are what I'd say minor refinements that...
But again, we are more broader base. If we see it anywhere in the portfolio, we're going to take action. Again, it's really more to de-risk next year a little bit, but not something that's likely to have a material effect. Got it, Brian . All right, thank you. And then separately on the expense front, can you give us a little bit more color on your updated expense outlook? I know you pumped that up a bit.
and mentioning growth and operating losses. So maybe could you help give us more color there, maybe break it out and kind of set out what drove the revision?
So when we look at growth, I mean, obviously the growth for us, we raised the guide from the beginning part of the year. We are seeing opportunities to invest more in the portfolio. Brian highlighted particularly in the health and wellness and care credit, the ability for us to lean into that segment a little bit more. We saw opportunities really to kind of grow with our Allegro product or others that made sense for us to grow the portfolio. So we are seeing growth. We've added some.
in which we're going to be, you know, if we find a good risk adjusted return we want to lean into in this environment from a growth standpoint. You know, operational losses, you know, the whole industry really benefited the last couple of years as a lot of fraud migrated to some of the buy now pay leaders and other people who may not have had as robust fraud strategies in place.
So we saw abnormally low, and again, this was industry-wide, you know, fraud relative to the purchase line. That is migrating back to what I say is a more historical level. This quarter, we did have one particular incident from a partner who had an exposure, which drove the cost up here a little bit, but there's an RSA offset to it. So...
getting operating leverage and you saw a pretty good year over year improvement in the efficiency ratio so that's the key measure for us that obviously we're very focused on.
the next question. Got it. Thank you. Thanks. Thanks, John . Thank you. We'll take our next question from Betsy Grace it with Morgan Stanley . Hi. Good morning. This is Jeff Allison. I'm for Betsy, Um, was just wondering if you could talk a little bit about the RSA sustainability at these lower
Thanks Jeff. The RSA does incorporate expenses in so expenses would flow through to our partners as well as.
you know, it's really impacting now is again some of the pressure you saw in the net interest margin from interest bearing liabilities costs. They pull through the partner as well. So I think you combine that with credit normalization and you really get the effect that we have. Again, the 4 to 4 accord will restore the year now the 390 to 415.
is at the lower end of a long-term guide. I think, again, a long-term guide has a slightly higher net charge-off rate but higher margin where you share. But again, we look at the RSA, and when you look at the performance, when obviously we had much lower net charge-offs and the profitability was higher, the RSA was higher. And now, as you see a little bit of this interest bearing liability cost increase net charge-off.
we'll be back. But again, we feel good about the long term guide and there hasn't been any fundamental shifts in the sharing of economics with our partners. And then just in terms of your new account acquisition profile, I know you talked in prior quarters about the relative tightening you guys have been doing. I was just wondering if we could get an update on any incremental actions you've taken over the last three months and
I know you already give an update on the student loan repayment side of things. Just wondering if that factors into how you're underwriting people today and then maybe what you're hearing from your folks who are calling in on that that repayment starting. Yeah Jeff, we haven't taken any broad-based actions with regard to account acquisition. We really look there at performance against risk-adjusted margin and probability defaults on a partner channel basis.
So we've been making more refinements there, but not broad-based action. So we feel good about it. You know, you've got to remember us as an issuer, you know, we get selected for credit versus others who do mailings and choose people to apply for credit. So we have to be, you know, hopefully smarter at the time of that decision in which we can gather more data, use data from our partners.
use unique data attributes, bringing it to make that smarter decision. So the other important point I'd say is during the pandemic period, we really don't open and close the acquisition ever. We make small adjustments as we see fit where relative to line assignments. But we try to be consistent with our partners.
and really managing exposure through line. So again, no significant changes on account acquisition. I think you can see that in the consistency of our new account origination both last year and through the first half of this year.
Thanks for taking my question. Thanks Jeff. Thank you. Our next question comes from John Hecht with Jefferies.
Good morning guys and thanks for joining my questions. How are you guys? First one is Brian Devils. You gave a little bit more color on.
the usage of the NPL and I guess the increased usage of the BNPL product in your portfolio, it sounded like you were emphasizing it in a sense as maybe a customer acquisition tool for some of your counterparties. I'm just wondering with respect to that, is it, you know, I guess how is it at the point now where it affects volumes overall?
and fee structures and margins overall? And if so, how does the impact of the BNPL product impact those metrics? Yeah, sure, John . So I think, you know, just to take a step back, I think the, you know, just to reiterate, what we think is this long-term strategy here is the multi-product.
So in some partners, this may be a customer acquisition tool, where we bring them in on a buy now, pay later product, and then we upgrade them over time into a revolving product and a dual card.
And when we look at the lifetime value of that customer, we can make that work. We can make the economics work. So I think that's kind of the power of this model is that you can make this more attractive to both us and our partners from an economic standpoint.
One of the things that we've talked about is we've seen a little bit of a shift in that through the pandemic you saw partners engaging in buyout pay later because they needed to drive sales, they wanted to bring in new traffic, new customers, and then they took a little bit of a step back in a higher interest rate environment. So a lot of these products are actually really expensive.
and maybe there's a different model here. And that's really the model that we're employing, which is, you know, for some customers and some purchases, an installment loan makes sense. For some purchases, a revolving product makes more sense. And so it really is partner by partner in terms of the strategy that we're employing. But the good news is that we can customize that completely for the partner.
given the economic sharing and the arrangements that we have with them. So we can really make this work in a number of different ways and customize it in a way that is economically attractive for the partner, but also helps us balance the risk and the return. That's very helpful, Kolar. Thanks. And then Brian Wenzel, I think you touched on this, so apologize for any redundancy.
the seasonality of Q3 and Q4 and NIM anything to consider there? Yeah Thanks, John for the for the question. I think as you think about managers margin. Again Some of the liquidity deploys as we begin to build assets going into the back after the year, plus some Tonyopoulos same from Jetpack
the first quarter. Uh some of the benchmark rate increase. You just you should see that that Nedris margin. Pick up a little bit in the third quarter and then kind of flatten out. Uh you know, in the fourth, so but again, I think short term you think you see a little bit of benefit from where we exit that's perfect. Thanks, guys.
the first quarter. And then you know, as we go down the quarter increase, you just you should see that that Nedrus margin. Pick up a little bit in the third quarter and then kind of flatten out, uh, you know, in the fourth, so but anybody got to be short term. You think you see a little bit of benefit from where we exit out of two to. That's perfect. Thanks,
Thank you. We have time for one more question from Dominic Gabrielle at Oppenheimer.
Hey, great. Thanks so much for taking my question. I was just curious about the debt collection fees. They seem to be going up a little bit. And I was wondering if there's anything we should read into within that line, not just for Synchrony, but for the general industry.
when we think about net charge off moving forward? And I just have to follow up. Yeah, so when I think about that product, I wouldn't, well, first of all, I'm not sure I can comment for the industry. I think when we look at it, what this represents, we primarily originate this through digital channels.
And I see as we have pushed more into digital challenges, you see a little bit more sign up as people have the ability to really understand the product. It's terms and conditions and sign up for it, number one. And two, I think as you see average balances increasing, you then get a rate impact on the higher balance that's being protected. So again,
a product that we feel good about the benefits that we offer to our consumers. And we do it in a way that's transparent to the digital channels, which obviously we pushed into in the last couple of years, a little bit more heavily. Great, thank you. And if we just talk about expenses a little bit, the incremental expenses between the guidance numbers, could you just talk about where you're kind of...
putting on the gas pedal, is it marketing, is it customer acquisition, or is it tech advancement? How do we think about the incremental spend that drove the increase in run rate of expenses? Thank you so much.
Thanks for the question. So I think when you think about where we're putting our expenses, first is going to be in some of the employee costs as we look to people to drive strategic initiatives inside our health and wellness platform and inside really our marketplace and some of the places where we're engaging with the consumer and products. So
Some of that requires headcount in order to drive some of the technology that's in there. There clearly is a technology component that leans in there as we have contractors who are building capabilities that really enhance our customers' experience. And then you are seeing a little bit on the marketing lines, we continue to lean into some of the direct-to-consumer businesses inside of.
health and wellness as we try to promote the product to, uh, to really drive the experience and manage, you know, what is a very difficult healthcare environment for folks is more cost or shifting towards them. So it's really across those three levels, employee cost, uh, as well as technology and marketing. And you will see that again, that normalization of, of operational losses as we move forward. And we've got a very disciplined approach on that. We make sure that we're getting the right return on those investments. You're seeing that.