Operator: Good morning, and welcome to the Synchrony Financial Third Quarter 2026 Earnings Conference Call. Please refer to the company's investor relations website for access to their earnings materials. Please be advised that today's conference call is being recorded. Currently, all callers have been placed in listen-only mode. The call will be opened up for your questions following the conclusion of management's prepared remarks. If at any time you should need operator assistance, please press star zero. If you wish to ask a question following the prepared remarks, please press star one. I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. You may begin.
Kathryn Miller: 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, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty really. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call.
Kathryn Miller: 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'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.
Brian Doubles: Thanks, Kathryn, and good morning, everyone. Synchrony delivered strong Q3 results, highlighted by broad-based purchase volume growth across each of our five sales platforms. Spend within our diversified value platform increased 13% compared to last year, primarily reflecting the impact of partner expansion and higher gas prices. In home and auto, purchase volume increased 9% compared to last year, primarily reflecting the performance of new programs, select furniture retailers, and the impact of higher gas prices. Purchase volume was 6% higher in our lifestyle platform, primarily reflecting strength in categories like other apparel and luxury, as well as the impact from our new programs. Meanwhile, digital platform sales grew 5%, driven by strong customer engagement across partners with broad diversified offerings and refreshed value propositions. In health and wellness, purchase volume grew 3%, primarily reflecting growth in pet.
Brian Doubles: Total purchase volume reached nearly $50 billion again this quarter, the highest Q3 level in our history and an increase of 8% compared to last year. Approximately 53% of that spend occurred through Synchrony's co-branded cards in Q3, which increased 23% versus last year and was driven by the combination of new programs and product upgrades, delivering enhanced value propositions and increased utility and higher broad-based spend across our card programs. Both discretionary and non-discretionary out-of-partner spend on our consumer co-brand cards grew by double digits. Strength in discretionary spend came from categories like electronics and entertainment, while in non-discretionary, gas station and discount store spend grew fastest.
Brian Doubles: As slide 3 shows, spend across Synchrony's portfolio is growing fastest among Gen Z and millennials, particularly in our diversified and value, digital, and home and auto platforms, where the strong value propositions and broad utility of our offerings resonate deeply. The significant growth across the younger age demographics has been enabled by our proprietary underwriting and data analytics platform, Prism. Synchrony leverages over 9,000 data variables in cash flow underwriting to responsibly deliver purchase power to credit-ready customers, even when they are earlier in their financial journeys and often overlooked by other traditional lenders. Because we can meet our customer wherever and however they want to be met with the right product for that purchase, Synchrony is building relationships and delivering experiences that can unlock greater financial flexibility over time.
Brian Doubles: To that end, we recently introduced CareCredit Pay Later, an enhanced and rebranded installment loan product that will appear alongside CareCredit's existing credit card as another way for eligible customers to plan and pay for health and wellness-related products and services. It is now available at nearly 20,000 health and wellness locations, including dental, cosmetic, vision, and audiology care providers. By providing tailored choices upfront after one seamless application, this multi-product experience empowers customers with financing flexibility and payment structure optionality that aligns their preferences. In addition, Synchrony and Venmo collaborated on a refreshed value proposition for the Venmo credit card with an industry-first feature that rewards social spending, offering cardholders more cashback for splitting purchases with friends on Venmo.
Brian Doubles: The Venmo credit card, issued by Synchrony, delivers unlimited daily cashback deposited directly into the account and offers a simple way to manage money and rewards together, all within the Venmo app. As we all know, the spending experience is constantly evolving. Digital wallets and agentic commerce are changing the way consumers discover, decide, and buy. Synchrony remains focused on the heart of what matters, connecting our customers, partners, merchants, and providers through seamless experiences and unmistakable value. Our new integration with Stripe, the programmable financial services company, will make it easier for both Synchrony's and Stripe's providers and health and wellness retailers to offer CareCredit financing as part of their online checkout experience. More than 12 million CareCredit cardholders, as well as new approved applicants, will have opportunities to access trusted CareCredit financing for health and wellness purchases through participating Stripe providers.
Brian Doubles: Synchrony is also integrating with Vetspire, a leading cloud-based veterinary practice management software provider, to embed CareCredit financing options directly within Vetspire's AI-enabled cloud-based platform and give veterinary practices a more modern way to offer real-time payment solutions at the point of care. Vetspire is used by more than 1,000 veterinary hospitals and clinics nationwide, and about 85% are already CareCredit-enrolled providers.
Brian Doubles: By operationalizing checkout workflows and making financial options easier to access, our collaboration aims to reduce administrative friction for clinic teams and support timely care for pets. Meanwhile, Synchrony's enterprise collaboration with OpenAI is designed to strengthen our positioning at the center of AI's next chapter in shopping and payments. We have launched our Synchrony ChatGPT plugin, which allows consumers to discover savings and offers within the Synchrony Marketplace directly within ChatGPT and browse promotional financing deals and everyday value from participating partners in a fast, conversational experience.
Brian Doubles: From a corporate perspective, we are deploying the latest OpenAI models like GPT-6 Astra to enable deeper engagement with advanced capabilities, more meaningful product development, and faster technology innovation. Of course, Synchrony's AI strategy extends beyond adopting emerging technologies to helping define how they will operate across the broader commerce ecosystem. We have joined the Personal Agent Protocol, PAPI initiative, led by Sierra and Meta as a design partner, reflecting our commitment to helping define the open standards that will underpin the future of agentic commerce. By contributing to the development of secure, transparent, and permission-based protocols for AI agents, Synchrony is helping advance in choice, trust, and scalability across digital commerce. As we look to the remainder of this year and the years ahead, Synchrony is executing on what we set out to do.
Brian Doubles: We are extending our reach, enhancing the experiences we deliver, and driving optionality for our customers and partners. As a result, we are delivering attractive growth and strong risk-adjusted returns that position us to drive significant long-term value for our stakeholders. With that, I'll turn the call over to Brian to discuss our financial performance in greater detail.
Brian Wenzel: Thanks, Brian, and good morning, everyone. Synchrony continued our focused execution and delivered another strong financial performance in Q3. We achieved record Q3 purchase volume, which grew across all five platforms. Ending loan receivables growth continued to accelerate while credit performance remained strong, resulting in attractive returns for our shareholders. More specifically, we generated net earnings of $892 million, or $2.68 per diluted share, a return on average assets of 2.9%, a return on tangible common equity of 25.2%, and a 6% increase in tangible book value per share. Focusing on our performance in more detail, purchase volume grew 8% versus last year and reached almost $50 billion. The second consecutive quarter at this level while maintaining our disciplined approach to credit. Ending loan receivables increased 3% to $103 billion as higher purchase volume more than offset ongoing effects of elevated payment rates.
Brian Wenzel: The payment rate of 16.9% was approximately 60 basis points higher than last year and approximately 180 basis points above the pre-pandemic Q3 average, primarily reflecting the impacts of new portfolio seasoning, shifts in portfolio and product mix, and our previous credit actions. Net interest income increased 2% to $4.8 billion, primarily driven by the combination of higher interest and fees and lower interest expense, partially offset by lower investment income. Interest and fees increased 1%, primarily reflecting growth in average loan receivables. Interest expense decreased 3%, primarily due to lower benchmark rates. Our Q3 net interest margin decreased 12 basis points to 18.5%, reflecting three key drivers. One, a 20 basis which was primarily driven by lower assessed late fee incidence resulting from our strong credit performance. The decline in loan receivables yield reduced our net interest margin by approximately 16 basis points.
Brian Wenzel: Two, a 62 basis point reduction in our liquidity portfolio yield, primarily due to lower benchmark rates. The decline in liquidity portfolio yield reduced our net interest margin by 10 basis points. And three, a 22 basis point decrease in the mix of loan receivables as a percent of interest-earning assets versus last year. This reduced our net interest margin by approximately five basis points. These factors were partially offset by a 27 basis point decline in our total interest-bearing liabilities cost, primarily due to lower benchmark rates, which contributed approximately 18 basis points to our net interest margin. On a sequential basis, net interest margin increased by 42 basis points, primarily due to two key factors. One, the decline in earned income reversals as net charge-offs decreased from the seasonal high in Q2 to the seasonal low in Q3.
Brian Wenzel: This increased net interest margin by 20 basis points. And two, the increase in the mix of loan receivables as a percent of interest-earning assets, which increased our net interest margin by approximately 17 basis points. This was generally due to accelerated receivables growth, which utilized some of the excess liquidity we held for pre-funding in the prior quarter. Next, let's turn to the remainder of our P&L. RSAs of $1.1 billion were 4.3% of average loan receivables in Q3 and increased $72 million versus the prior year, primarily reflecting program performance. Provision for credit loss was $2.3 billion, primarily driven by a reserve build of $30 million versus a $152 million release in the prior year, partially offset by a $62 million decrease in net charge-offs.
Brian Wenzel: Other income decreased $22 million to $100 million, reflecting the impact of higher loyalty costs resulting from the growth of new programs and refreshed value propositions. Other expense increased 10% to $1.4 billion, primarily driven by higher operational losses, technology investments, and increased marketing expenditures. The Q3 efficiency ratio was 35.9%, approximately 330 basis points higher than last year. This resulted from higher overall expenses and the impact of higher RSA. Turning to our portfolio credits on slide 8, both our 30-plus and 90-plus delinquency rates at the end of the Q3 were in line with the prior year. Our net charge-off rate was 4.79%, reflecting a decrease of 37 basis points from 5.16% in the prior year.
Brian Wenzel: Our allowance for credit was 10.01%, a decrease of approximately eight basis points from 10.09% in the Q2, and a decrease of approximately 34 basis points from 10.35% last year. Slide 9 shows Synchrony's funding capital and liquidity, which continues to be a core strength of our business. We grew our direct deposits by $2.4 billion versus last year, and our broker deposits by approximately $575 million. At quarter end, deposits represented 83% of our total funding, while secured debt represented 9% and unsecured debt representing 8%. Total liquid assets increased 7% to $19.5 billion and represented 15.9% of total assets, 33 basis points higher than last year. Turning to capital, Synchrony ended the quarter with a CET1 ratio of 12.9%, reflecting a 140 basis point reduction versus last year, a Tier 1 capital ratio of 14.5%, reflecting a 100 basis points reduction.
Brian Wenzel: A total capital ratio of 16.5%, reflecting 110 basis point reduction, and a Tier 1 capital plus reserve ratio of 24.3%, reflecting a 130 basis point reduction versus last year. Synchrony returned $1.2 billion to shareholders during the Q3, which included $1.1 billion in share repurchases and $110 million in common stock dividends. At quarter end, we had approximately $4.6 billion remaining of our share repurchase authorization. Finally, I would like to discuss our 2026 outlook on slide 10. Given the performance of our business through the course of this year, we now expect to deliver approximately $9.50 in diluted earnings per share for the full year, the high end of our original expectations. This reflects our continuing full-year expectations that year-end loan receivables will grow by mid-single digits, net interest income will increase, net charge-offs will be less than 5.5% with delinquency and losses following normal seasonality.
Brian Wenzel: RSAs will be higher for the full year but remain within our long-term target range of 4% to 4.5% of average receivables, and other expense dollars in the Q4 will generally be in line with the Q3 as we continue investing in Synchrony's capabilities and future growth opportunities. To conclude, Synchrony's core business drivers are strong and we remain focused on executing on our strategy. Our disciplined approach to growth positions us to deliver consistent market-leading returns, and we are investing in our competitive differentiation to drive long-term earnings power and intrinsic value while also returning significant capital to shareholders. With that, I will turn the call back over to Brian.
Brian Doubles: Thanks, Brian. Before I turn the call over to Q&A, I would like to leave you with three key takeaways. First, Synchrony is delivering sustainable growth.
Brian Doubles: Our products and experiences resonate across generations and spend categories amid a dynamic consumer landscape because we are constantly investing in innovation and evolving with our customers and partners. Second, Synchrony is strengthening our competitive differentiation by positioning ourselves at the forefront of digital commerce.
Brian Doubles: We are prioritizing strategies that embed our financial ecosystem within the ever-evolving frontier of commerce, whether that be at the point of sale through digitals or agentic purchasing paths. By meeting people wherever they choose to transact, Synchrony is expanding our reach, deepening relationships, and enabling greater choice, trust, and scalability as a leader in the evolving retail ecosystem. Third, Synchrony is delivering outcomes that matter. We are empowering more than 68 million customers with financial flexibility. We are powering loyalty and sales for the hundreds of thousands of merchants, and we are positioning our business to drive consistent market-leading returns for our stakeholders. With that, I will turn the call back to Kathryn to open the Q&A.
Kathryn Miller: 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 would 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.
Operator: Thank you. As just mentioned, that is star 1 to ask a question. Again, please limit yourself to one question and one follow-up. Our first question will come from Ryan Nash with Goldman Sachs. Please go ahead.
Ryan Nash: Hey, good morning, guys.
Brian Wenzel: Hey, Ryan. Good morning, Ryan.
Ryan Nash: So, Brian, if you look at the implied Q4 EPS guide, I think it points to a little bit of downside versus street expectations. Maybe can you just help us with a bridge for where you think the market's off, whether it's given how the market outlook has shifted, do you still see a path to double-digit EPS growth next year? Thank you.
Brian Wenzel: Yeah. Thanks for the question, Ryan. Let me just start with, we began the year with a range of $9.10 to $9.50. Which preceded a war in Iran, preceded the higher gas prices that Americans are feeling today, preceded inflation accelerating, and preceded a rise in the Fed funds rate. So sitting here today with a $9.50 full-year rate, we actually feel good about the performance which is ahead of, again depending upon which service you use, a $9.38 to $9.40 consensus estimate for the full year. So when we look at it, we think that obviously this is an increase rate relative to the performance of the business. Again, we're pleased about it.
Brian Wenzel: I think consensus, when you look at it between Q3 and Q4, the cadence on reserve was probably off. I am not sure people thought through enough about how the loss trajectory was moving Q3 and Q4. Again, I think that is the biggest delta as you think about what the estimates are for Q4 versus Q3. Again, we feel good about the year. When you think about next year, we are not going to get into 2027 guides on this call, Ryan, so I can appreciate that for a second. When you think about it, I guess the framework kind of remains the same. We want to be, which hopefully will mirror loan growth. I think you do get some benefit from the new portfolio seasoning year-over-year.
Brian Wenzel: Again, I think next year, we hope not to comp the operational losses and drive more operating leverages in there. Again, you will have some higher probably net charge offs. Again, taking all things equal, that combined with our capital return policy should give us a framework to get to double-digit EPS growth next year.
Ryan Nash: Got you. If I look at the payment rate, you mentioned in your remarks, Brian, was up 60 basis points year-over-year. It is almost up 200 versus the pre-pandemic. Maybe just sort of talk through the impacts on loan growth, margin, and credit if we continue to see an elevated payment rate. Are there any steps you can take to ease the pressure, or do you think it will naturally adjust just given these portfolio seasoning impacts? Thank you.
Brian Wenzel: Thanks, Ryan. When I think about the 60 basis points year-over-year change, if you pull that apart for a second, over 90% of that or 56 basis points is really mix related. Inside that 56, you have 35, which are the new portfolios, and 8 which really come from lower promotional balances. It is really a mix issue when I think year-over-year. The challenge that we have today is we are sitting down a couple of hundred basis points lower on non-prime. We have lower percent of promotional assets, which is really impacting the stickiness and the conversion from sales into assets. I think as we move forward, we would expect as credit probably more normalizes. So you slide up into the 5.5% to 6%, we would expect to see a little bit more non-prime in the book.
Brian Wenzel: Not higher than pre-pandemic period, but more normal for us. I think we want to see promotional balances begin to take hold, which really goes back to consumer confidences or consumer confidence, excuse me. When I look inside this quarter, though, we did see green shoots. When I look at dental, which had been flat through Q2, that was actually up year over year. Home specialty was up year over year. Select furniture is up year over year. Then when you look at overall smaller discretionary purchases, they continue to increase. We do have some headwinds in power sports, cosmetic and audiology. But again, I think we see green shoots which will help that promotional asset percent rise.
Brian Wenzel: Those are some of the biggest factors, Ryan, and I think we just got to be patient with how the portfolio returns back to what was closer to the pre-pandemic period.
Operator: Thank you. Our next question will come from Sanjay Sakhrani with KBW. Please go ahead.
Sanjay Sakhrani: Hey, good morning. Brian Wenzel, you've kind of walked through all the different aspects of what's changed over the course of the year. I'm just curious, and this is probably even more a question for Brian Doubles, but when we're thinking about the health of the consumer and the state of the consumer, the credit numbers look really strong, and obviously you've provisioned as such. But is there anything underneath it that you're seeing that's weighing on the consumer? Anything that concerns you, given all these pressures? Just curious to get a sense of what's happening on the front lines. Thanks.
Brian Doubles: Yeah, Sanjay, look, I'd say we still feel really good about the trends we are seeing at the moment. The consumer continues to show signs of strength. I think it has been a little bit surprising, not only to us, but to the industry more broadly. I think, higher gas prices, fairly broad-based inflation, and then you look at consumer confidence has been weak all year, but it is not impacting consumer behavior.
Brian Doubles: I think strong labor market, decent wage growth, there are some natural offsets there. Consumers continue to spend through it. As you mentioned, credit looks really good. We started to open up a bit earlier in the year, just given how good credit was looking. We think that will drive some nice growth for us as we get into next year. But yeah, we are really happy with purchase volume up 8%. We gave you by credit cohorts.
Brian Doubles: We gave you some data by generations, Millennials, Gen Z looking really good. So we are really not seeing any signs of stress at the moment, and I think that is fairly consistent across the industry.
Brian Wenzel: Yes, Sanjay, what I'd add in, just two points to augment what Brian just said. First, when you look at payment rate, and we look at payment rate by credit grade. When I look at the non-prime, the payment rate for non-prime is up 40 basis points quarter-on-quarter. That is the same rate it is up on the 780 plus. Again, we are seeing very good payment rates that strengthen the consumer, albeit inside of an affordability issue for some. So that is number 1. I think number 2, you see it on the spending behavior patterns. Again, we see strength there, and that has continued on. And maybe I'll just add the third thing is, when you look at entry rate, entry continues to be better than 2018 into delinquency and better than a couple of years ago.
Brian Wenzel: A lot of that is our pre-delinquency strategies as well as our credit actions. Again, whether you look at it spending, whether you look at it from payment rate, and you look all, continue to show strength.
Sanjay Sakhrani: Thank you. Just my follow-up question. Obviously, a bunch of announcements you guys made around agentic and working with a lot of the players that are involved. I am just curious because there has been just a lot of chatter on the back of the launch of Muse. Just how you guys see agentic commerce affecting private label, because there is all this talk about gamification of rewards and optimization. Just how you think it plays out for private label and Synchrony, and obviously you guys are doing things just to be on the offensive.
Brian Doubles: Yeah, obviously, this is a big area of focus for us. I think agentic is going to fundamentally change how consumers discover products, research, ultimately purchase. I think we have got a jump start on this. It is still very early, but we are working with all the leading AI platforms. We need to make sure that as that purchasing path changes, that our products are embedded in that experience.
Brian Doubles: I think, look, frankly, our partners have been very helpful here. They are pulling us into those discussions. They have got a big incentive to ensure that our cards are embedded in whatever that experience is because they want to make sure that obviously their customers get the benefit of the value prop. They get the benefit of any discounts or offers that we have on our cards. They want to make sure that their RSA is protected. So it is obviously getting more complicated.
Brian Doubles: But we are really excited about the longer-term opportunity here. I think ultimately, it is going to make it easier for consumers to use our products. I think shopping agents will be able to program certain purchases to use our cards. I think that reduces some of the historical friction that we have had, and I think that transparency overall benefits us. We think our products provide great value. Typically more savings, better discounts, better offers than general. If we can remove that friction in the process, that ultimately advantages us over time.
Operator: Thank you.
Brian Doubles: Thanks, Sanjay.
Brian Wenzel: Thanks, Sanjay.
Operator: Our next question will come from Moshe Orenbuch with TD Cowen. Please go ahead.
Moshe Orenbuch: Great, thanks. Thanks for the incremental detail on volume growth by segment. It is kind of interesting to see the acceleration in Prime. I am just wondering if you could kind of talk about whether that is driven by product mix or by different types of marketing or activation, and what you think that means in terms of or anything else that might happen as you do get to your balanced growth targets.
Brian Wenzel: Yeah. Thanks for the question, Moshe. It is somewhat product related when you think about Dual Card being a larger percentage of the book. They tend to be people who are going to be a 680-plus FICO score, so in the prime segment to super prime. Again, I think that's driving some of the behavioral patterns. Again, across the spectrum, one of the questions about our business is, are you attracting Gen Z and millennials into the book? We clearly are, but they're on the same type of bend, albeit at a higher rate, given that. Again, I think when you think about that payment behavior pattern, spending behavior pattern, the product is driving some of it. The more we push into Pay Later, for us, Pay Later is a higher ticket than most what I'd say buy now, pay later providers offer.
Brian Wenzel: It's a combination of product, really.
Moshe Orenbuch: Shifting gears for the follow-up question. The combination of technology investments and operational losses have kind of pushed your efficiency ratio higher. Can you talk about each of those and how you see, at what point do they sort of level off? Is it just a question of accelerating to match them? How do you think about each of those in the context of efficiency over the course of the next year or so?
Brian Wenzel: Yeah. Let's break it into two pieces. When I think about the operational loss piece for a second, Moshe, we came off a year that was probably our best year ever as a company. This year, we expected some level of that. We were impacted by a number of idiosyncratic events, which sometimes happen when you either launch new partners make changes, et cetera. We feel we had that contained. Now, unfortunately, with idiosyncratic events, you do have a tail, which has played through the entire year. I would say that the team has implemented well over 100 strategies to mitigate operational losses going forward. We expect that mitigation to happen in 2027 and kind of come down.
Brian Wenzel: On the technology front, we were at a place where, Moshe, it made a lot of sense for us to make investments given the acceleration, whether it is AI, cloud, our push into digital wallets, Pay Later product. It just made sense that we had to position the business for the long-term value and intrinsic value of the company. We decided to make those investments. We think they are the right investments and will better service our area over the medium and long term. Again, I would not expect that to continue to grow at an exponential rate, but it is going to be slightly elevated most certainly this year into next year. Then I think you will begin to see a tail off beyond that. Tail off from a growth rate perspective, Moshe.
Operator: Thank you. Our next question will come from Terry Ma with Barclays. Please go ahead.
Terry Ma: Hi. Thank you. Good morning. Just wanted to follow up on the payment rate. You called out new program seasoning as one of the key drivers. Can you maybe just give us a sense of where you are in the seasoning cycle for those new programs you added in the last year? At what point should that dynamic reverse and turn into a tailwind for receivables growth and earnings growth?
Brian Wenzel: Yeah. Good morning, Terry. When we think about, obviously the largest one is our OnePay Walmart portfolio, and that really takes about three vintages in order to get to a more steady state. This would be effectively the end of that first vintage at the end of 2026. We are probably in that first third. Again, I think you see some of the effects mitigating in the P&L as you step through year 2 and year 3. The other portfolios that we have in there are much smaller. Obviously, Bob's has a very different payment rate. Lowe's Commercial has a much more accelerated payment rate. Again, I think that they are going to vary a little bit. I still expect, we are very pleased with the growth that we have seen in Walmart, given the number of customers they serve and their presence in the retail ecosystem.
Brian Wenzel: So again, we continue that growth. Then hopefully, as you step through these vintages, the translation between sales and assets begins to narrow for those new portfolios.
Terry Ma: Got it. Thank you. On agentic commerce, can you just talk about what the ultimate opportunity is for Synchrony? Is it primarily about protecting your existing position at checkout, or is there an opportunity to expand and acquire customers outside traditional channels?
Brian Doubles: Yeah, look, I think it is a big opportunity for us, and I touched on it briefly, but there are a couple things that I think naturally advantage us here. First, it is just going to make it easier to use our cards. Back over time, one of the friction points just in co-brand and private label has been the consumer forgets their card, and they do not want to go through the process to look it up, or they do not have it stored in a mobile wallet. This makes that easier. If you could actually program an agent to say, "Hey, I am shopping at X partner, and anytime I shop at that partner, use this card so I get my 5% off." That makes that process so much easier than it has been historically. I think that is one big advantage.
Brian Doubles: Other thing is our products provide great value, and I think you are going to have these personal agents doing the comparison for consumers in terms of which card they should use. It will be a combination of factors, but one of those factors is going to be what offers are available to me, what is the first purchase discount, or what is my everyday cashback?
Brian Doubles: And we think all of our products are really advantaged in that comparison. If the agent is able to provide that level of transparency, we think that naturally advantages our business model. I think those are the two big things that we see, at least in the short term.
Operator: Thank you.
Brian Doubles: Thanks.
Operator: Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.
Don Fandetti: Hi, good morning. Can you talk a little bit about the competitive environment from your legacy lending or bank competitors, and then also the digital side and whether or not you feel like you need to make any bolt-on acquisitions or if there are any portfolio opportunities out there?
Brian Doubles: Yeah, I think, look, the competitive dynamics have been pretty consistent for the last three or four years, frankly, both in terms of the number of competitors who we see out there competing on RFPs and the traditional stuff that we do. If anything's changed, I would say over the last two years, it's in the, what I would call nontraditional partner base. We just announced a relationship with Stripe. Obviously they're a payment processor, they're not a retailer. I think that's kind of the new frontier as we go out and seek the one-to-many distribution. Probably the nuance, I would say the competitive set as we're out there competing for business with merchants and providers, that's been pretty consistent. I would say the competitive dynamics in terms of terms and price continues to be pretty rational.
Brian Doubles: I think part of that is driven by just a little bit of uncertainty as you look out into 2027 and 2028. So I think most issuers are being pretty disciplined around how we're bidding on stuff. I think we're clearly being successful. We renewed a ton of programs. We won a bunch of new programs this year. So I feel pretty good about that. On your second question, in terms of M&A, look, we continue to be really disciplined. You've seen that for the last decade. We like to buy companies that are relatively small, that we think we can grow leveraging our scale. There's obviously been a lot more bad M&A done historically than good M&A, and we fully appreciate that, and we're pretty disciplined buyers in that. That'll continue.
Don Fandetti: Got it. Thank you.
Brian Doubles: Thanks. Peace.
Operator: Thank you. Our next question will come from Jeff Adelson with Morgan Stanley. Please go ahead.
Jeff Adelson: Hey, good morning. Thanks for taking my questions. I just wanted to focus on the RSA a bit. It did step down a bit more than we were expecting this quarter. I think especially it was notable in light of the better operating and credit results you put up this quarter. I was just wondering, is there anything under the hood that maybe drove this quarter's stronger RSA? Maybe just help us understand how to think about that trajectory going forward from a quarterly cadence perspective.
Brian Wenzel: Yeah. Good morning, Jeff. When I look at the RSA, traditionally people try to look at it externally, when you think about PPNR minus net charge-offs, minus the RSA, and how does that percentage work? Generally speaking, it stays within a certain range. What drives it inside that range is really the mix of the portfolio. So you look at credit at the top of the house, depending upon where credit sits in one partner versus another has a slightly different RSA impact that flows through. So mix generally is the biggest driver. There's been no substantive changes to any of the agreements that would drive a structural change to the RSA, et cetera. So it's really just more mix. Again, when I look at it operates inside of what we think is a normal range when you look at that metric.
Brian Wenzel: You can also look at it, Jeff, as a percentage of total purchase volume, because again, there are portions of it that is driven by volume itself, and that is a more steadying effect. Again, consistent with typical ranges we see for the RSA.
Jeff Adelson: Okay, thanks. With rates stepping up here, can you just walk us through how you are thinking about the impact on your consumer at this point? I know from a NIM perspective, if you look at your 10-Q, you are more neutral, but you are slightly seeing a benefit there to your NIM. I know in the past you have talked about above neutral rates as a reason to stay tighter on your underwriting box. How are you thinking about the impact of rates here stepping up on your consumer and the credit quality into next year?
Brian Wenzel: Yeah. When you think about it, Jeff Adelson, majority of the financial obligations for consumers are fixed obligations. When you think about autos, mortgages, even though there is some more mortgages that reset over the last couple of years. Again, that is certainly fixed. So you do not see a direct impact to the consumer that flows through more immediately. It is the effects over time that happen. Broadly speaking, the interest rate environment can have a bigger effect on employment when you think about small, medium-sized businesses that may not have access to capital, et cetera. Most certainly, if mortgage rates stay elevated, the home housing market kind of slows down. You are going to see inflationary pressures through the housing, through rental rates that will go up. So it kind of have a circular benefit there. Obviously we benefit when there is a good and vibrant
Brian Wenzel: home sale market because people are willing to invest in furniture and other things as that goes through. Again, there is more, I would say, ancillary effects to the consumer than direct effects to the consumer from that rise in interest rates. With regard to our positioning, we are generally neutral. When I think about the interest rate, you think about what happens to our interest-bearing liability costs. We then look at the prime rate changes, the investment portfolio, and our merchant discount, where rates get passed on to some of either the providers or merchants. That is generally neutral. There are some lag effects when you are going up that can impact you. Again, I think over the long term, the bigger question becomes when you think about deposits, what is going to happen?
Brian Wenzel: We probably think that given this competitive environment, betas will be higher than the past rate hiking cycle, given the competitive dynamics in the fight over deposits that you are seeing today, particularly with a lot of promotional pricing. So that could have an effect, but again, we will be back in January to talk more about those assumptions.
Operator: Thank you. Our next question will come from Darrin Peller with Wolfe Research. Please go ahead.
Darrin Peller: Follow up for one more minute on NIM. When you think about Q4, if you could just give us a sense of how to frame some of the puts and takes, the loan yield, and funding costs. There is obviously a lot of questions around the path of future hikes that we just touched on, and you saw broader improvement this quarter. Again, deposit betas may shake out on the way up this time. A little more color and specifics on that would be helpful.
Brian Wenzel: Yeah. Thanks for the question, Darren. We do have one more rate increase in the back half of the year, but coming, I am sorry, the remainder of the year coming in December of this year. When I think about NIM, generally for Q4, again, we have indicated that NIM will increase quarter-on-quarter and obviously be the AEA mix. You are going to see more loan receivables as part of the equation than you did in Q3. So that will give you a benefit. When I particularly think about the interest side of that, so think about that interest expense, the prime rate increase that will flow through really in November and December, merchant discount. There is a slight negative. It is not really material. Where you are going to see some benefit is really on the core lines of interest and fees.
Brian Wenzel: Again, with losses being a little bit more moderated, you should see it benefiting. Again, we expect it sequentially to increase.
Darrin Peller: All right. That's great. Then just a quick follow-up. There's been elevated tech operational spend as you've ramped Walmart, OnePay, and other new partners. Employee costs have been up only 1% to 2%, though, over the past few quarters. Maybe just talk a little bit more about some of the internal efficiency initiatives, how they're continuing more broadly in the expense base.
Brian Wenzel: Yeah, you're right. When you think about the employee costs being up 1%, I think one of the things we've been focused on as a company is how do we introduce productivity into large portions of the business? Some of which is very small portion is AI-driven when you think about utilization of the call center for call taking or call summaries at the end or driving efficiencies inside of that. So we've been generally headcount neutral to down as a company from an employee base perspective, which we think is a good place to be as we try to drive that productivity. Technology spend, Darrin, though, I'd sit back and say it's not necessarily Walmart related. If you think about it, we're closing. We want to accelerate our investment in AI.
Brian Wenzel: We've invested more in some of the wallet technology, some of the things like Brian referred to Stripe earlier. Being involved with these digital wallets, that is a really important part of agentic commerce. Our continued building out of the Pay Later product and things like that that are driving it, our pre-qual process, things like that that are driving more technology build than I'd say the integration of a new partner. Those are investments that we think pay off here. We hope in the short term, but more in the medium to long term that drive the intrinsic value of the company. That's why we have to make those investments, that they're prudent. Again, that should decelerate, not necessarily next year, but as a growth rate, it'll decelerate hopefully 2028 and beyond.
Brian Wenzel: But again, we want to invest technology, and we think by maintaining a flat headcount and driving some of that efficiency there, we can fund those investments.
Operator: Thank you. Our next question will come from Mihir Bhatia with Bank of America. Please go ahead.
Mihir Bhatia: Hi. Good morning. Thank you for taking my question. I wanted to go back to, I think earlier in the Q&A you mentioned, Brian, that reserve and loss cadence was the main difference in the Q4 outlook. Can you talk a little bit more about that? Is that a step up in higher seasonal charge-offs, more of a reserve build? Then just maybe if you can also just touch on allowance coverage in that. I think typically you get 30, 40 basis points of allowance coverage benefit in the Q4. Should we expect something point as we head into 2027 on allowance coverage? Thanks.
Brian Wenzel: Yeah. Good morning, Mihir. Thanks for your question. My point earlier was really the reserve coverage, not necessarily the charge-off piece that I was referring to on a cadence between Q3 and Q4. So that's the first point. The second point, as you think about the coverage ratio, particularly in the Q4, you're right, there is a seasonal element. Typically you see a decline, probably not as wide as what you'd say. You say it's probably more in that 25 basis point range depending upon the more relevant time period, about 25 basis points. Again, given where we are at the end of the Q3 and of some of the new portfolio seasoning, some of the credit action seasoning, you shouldn't expect that same type of seasonal decline in coverage rate in the Q4, it'll be significantly less than that.
Brian Wenzel: But again it will be a pulse for the quarter. But again, just not as low on the seasonal decline of the rate. That's not necessarily a negative thing. I think it just kind of goes into how the loss rate will begin to build between 2026 to 2027 as anticipated online. Again, the credit actions we took in the end part of last year begin to season and mature and come through the portfolio. So again, we're pleased with the coverage and as I indicated throughout the year, we generally thought that the rate had a downward bias to it. This is all taking into assumption that we don't have any deterioration in the macro, or any significant improvement in the macro. It's kind of the steady state is kind of how we're thinking about it right now.
Mihir Bhatia: Got it. Thank you. Following up on the deposit beta comment, I think you said you expect deposit beta to be higher this cycle, but with a lag. As you think about the double-digit EPS framework, if you will, for next year, how much of that is already in the framework, if you will?
Brian Wenzel: Well, right now, here we are going through our 2027 plan and formulating what we think the betas will be for finalizing what we think the betas will be for next year. Again, to the extent that the betas are higher, we are going to have to figure out a way in which we can continue to drive. We are focused, Brian and I, and the executive leadership team on driving double-digit EPS growth. Most certainly we try to do it annually, but that is going to be a focus, and we will find ways to potentially offset any headwinds that it comes from higher deposit competitive environment.
Operator: Thank you. Our next with Autonomous Research, please go ahead.
[Analyst] (Autonomous Research): Hi, guys. Looking at some of the segment level data, purchase volume, loan growth, et cetera, in most of the segments actually accelerated from Q2 except for digital. From Q1 to Q2, the digital segment accelerated itself pretty nicely. I am wondering if there is anything to call out with respect to digital this quarter and why the slowdown there, because if that had held in, I think the loan growth and especially purchase volume would have looked even better.
Brian Wenzel: Yeah. As you think about the digital, there is timing. Brian talked about Venmo. There is timing when you have value prop relaunches and when things happen and occur from a marketing cadence perspective. I do not think there is anything structural or different in there. We just have a tremendous opportunity inside of that sales platform when you think about partners like Amazon, when you think about partners like PayPal that is in there and other positions. Again, it is probably just more timing of some of those campaigns and value prop refreshes than it is something that is structural or fundamentally different.
Brian Doubles: In Q3 last year, we did a fairly substantial upgrade in the PayPal book to the co-brand card, and I think that drives some growth. That is in the comp year-over-year.
Brian Doubles: It is all value prop driven.
[Analyst] (Autonomous Research): Okay, great. I appreciate all the comments on agentic commerce, the friction, and the value prop. The pushback that we get sometimes from clients is around the risk that agents have consumers optimizing to the point where they are squeezing every dollar from the card in terms of rewards, but also revolving less or managing credit better. Do you think that is a real risk too?
Brian Doubles: Yeah, look, obviously we are spending time on it. I think the first thing I would say is there is a lot of transparency around APRs today. There always has been. I think there is a lot of factors that go into how consumers pay down their outstanding balances. So they are not just looking at credit card APRs, they are looking at all the fixed expenses that Brian mentioned, mortgage, rent, payments, car loans.
Brian Doubles: When you look at just credit cards, generally, consumers, they look at more than APR. They look at where do I want to make a payment to create some utility in the short term. That tends to be on their top of wallet general purpose card, not necessarily on our product. So, obviously we are going to stay very close to this as it evolves, but I still see agentic broadly as a big opportunity for us.
Brian Doubles: Transparency broadly benefits us just given the value that we provide on our card. So overall, I think that we are positively biased on this and think it is an advantage for us over long term.
Operator: Thank you. Our next question will come from John Pancari with Evercore. Please go ahead.
Gerard Sweeney: Hey, good morning. This is Gerard Sweeney on for John. Just wanted capital. Clearly you remain active on the purchase front, CET1 progressing lower, but still a sizable cushion between the 12.9 coming out of Q3 and 11% target. I know unrealized losses are not really a factor if you are reporting CET1, but just given the elevated yield backdrop, is there any change in how you are thinking about the purchase appetite and broader progress towards your 11% target?
Brian Wenzel: Good morning. I would say we do not have any changes in our conviction and the cadence in which we would get closer to target. I think we have consistently said we want to be aggressive but prudent given the macro environment. We got $4.6 billion remaining under our current authorization, and we are going to continue to execute that. The only thing I would say is, I know we do not give quarterly guidance. I would not read into the Q3 that that is a new run rate. I think if you look at the more historical average is probably a better sense on what we will do. But again, we understand and want to get down to it. I think we have made very meaningful progress from where you go back. We were 14.3% on CET1 a year ago. We are down 12.9%, and we are growing assets. So again, we would like to grow assets first.
Brian Wenzel: But to the extent that we have excess capital, we will deploy it again in share repurchases on an aggressive but prudent nature.
Gerard Sweeney: Okay. Thank you very much.
Brian Wenzel: Thank you.
Operator: Thank you. We will take our last question from Andrew Bauch with BMO Capital Markets. Please go ahead.
Andrew Bauch: Hey, thank you for taking the question. A lot of my questions have been asked so far, but the only thing I could ask you to paint with some broad strokes on how you expect the holiday shopping season to shape up. Any behaviors that you are seeing from merchants that are different from prior years, special promotions that may be going on, just whatever you are seeing in the market today.
Brian Wenzel: Yeah, thanks for the question, Andrew. I will start out, and then if Brian has other comments. Obviously, the first thing that we watch is whether or not consumer behavior, confidence as they go in, what their spending pattern is going to be. I think NRF has a 4 percentage point increase in holiday sales that are coming through. I think the first read for us is when we look at the first 3 weeks, albeit a small sample size, sales have continued at generally the same rate as we have seen it as we exited Q3. So I think the consumer continues to be strong. I think the one positive for us is that we have a set of retail partners that are very attractive and offer strong offerings to consumers.
Brian Wenzel: They are gearing up for what would be a slightly higher promotional activity level across the board here as they fight for dollars. We have seen the trend the last couple of years where things have moved a little bit earlier into the cycle, into pre-Black Friday and pre-Thanksgiving week. Again, we will continue to watch it. It is about holiday growth rates, but again, early signs from the consumer is not tapering off. Again, some will begin to start spending here in October. So, we feel generally, again, cautiously optimistic with our partners and how they will develop.
Brian Doubles: Yeah, I wouldn't add much other than say that our teams are embedded with all of our partners actively working on a pretty robust schedule of holiday offers, promotions, discounts. We're very focused. We do that hand in hand with them, with our teams that are embedded with them every day. To Brian's point, I do think they're cautiously optimistic. They're looking at sales trends in October and probably weighting that a little bit more heavily than what they're seeing in terms of the headline on consumer confidence. As I mentioned earlier, for one of the first times that I can remember, those two things are pretty disconnected. If you're looking at consumer confidence, you don't feel great. But when you look at what the consumer's actually doing, you feel a lot better.
Brian Doubles: We're actively working with them on their marketing calendar, promotions, and offers, and I think we also share their cautious optimism for holiday.
Andrew Bauch: Great. Thank you, guys.
Brian Wenzel: Thanks.
Brian Doubles: Thank you. Have a good day.
Operator: This earnings conference call. You may disconnect your line at this time, and have a wonderful day. Thank you.
