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, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit 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 Wenzel:

Thanks, Brian, and good morning everyone. Synchrony's second quarter results continue to demonstrate the resilience of our differentiated business model through an evolving environment. While consumers are managing their cash flows and consumption and the impact of our credit actions are beginning the season, we remain focused on driving sustainable, risk-adjusted growth. Turning to our financial performance. Ending loan receivables grew 7.9% to $102 billion in the second quarter, benefiting from an approximately 80 basis point decrease in the payment rate and reflecting growth across each of our sales platforms. Net revenue increased 13% to $3.7 billion, reflecting higher interest and fees, lower RSA and an increase in other income. Net interest income increased 7% to $4.4 billion as interest and fees grew 10%, primarily reflecting growth in average loan receivables. Our loan receivable yield grew 14 basis points, benefiting from product repricing actions and lower payment rate, partially offset by the higher reversals as our net charge-offs increased. RSAs of $810 million in the second quarter were 3.21% of average loan receivables, down $77 million versus the prior year, driven by higher net charge-offs partially offset by higher net interest income. And the increase in other income primarily reflected a $51 million gain related to the exchange of our Visa B-1 shares, as well as initial fee-related impact of our product, pricing and policy changes, or PPPCs. These benefits were partially offset by the impact of the Pets Best disposition. Provision for credit losses increased to $1.7 billion, reflecting higher net charge-offs and a $70 million reserve build. Other expenses grew 1% to $1.2 billion, which was driven by technology investments, preparatory expenses related to late fee rule change and servicing costs related to newly acquired businesses, partially offset by the operational losses and cost discipline resulting from lower employee and marketing costs. The preparatory expenses related to the late fee rule changes reflected $23 million of incremental costs related to both the execution of our PPPCs and the implementation of the rule itself, should it become effective. Even with these incremental costs, Synchrony's efficiency ratio was 31.7% for the second quarter, an improvement of approximately 380 basis points versus last year. In sum, Synchrony generated net earnings of $643 million, or $1.55 per diluted share. This produced a return on average assets of 2.2% and a return on tangible common equity of 20.2%. Next, I'll cover our key credit trends on Slide 9. At quarter end, our 30-plus delinquency rate was 4.47% versus 3.84% in the prior year and 19 basis points above our historical average from the second quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.19% versus 1.77% last year and 18 basis points above our historical average from the second quarters of 2017 to 2019. And our net charge-off rate was 6.42% in the second quarter compared to 4.75% in the prior year and 62 basis points above our historical average from the second quarters of 2017 to 2019. Our allowance for credit losses as a percent of loan receivables was 10.74%, up 2 basis points from 10.72% in the first quarter. The reserve build in the quarter primarily reflected loan receivable growth. As shown on Slide 10, the credit actions we've taken thus far are improving our delinquency trajectory as the rate of year-over-year growth continues to decelerate. We will continue to closely monitor our portfolio performance and the credit trends for the broader industry given our share consumer and we will take additional credit actions as necessary. While these actions are reducing new account and purchase volume growth in the short term, we expect they will strengthen our portfolio's positioning as we exit 2024 and support our ability to deliver our targeted risk-adjusted returns over the long term. Turning to Slide 11, Synchrony's funding, capital and liquidity remain a source of strength. We grew our direct deposits in the quarter as consumers responded to our strong offerings while reducing our broker deposits. Deposits represented 84% of our total funding at quarter end and a secured and unsecured debt, each representing 8% of total funding. Total liquid assets and undrawn credit facilities were $23 billion, up $3.6 billion from last year, and represented 19.1% of total assets, up 124 basis points from last year. Moving on to our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony will make a final transitional adjustment to our regulatory capital metrics of approximately 50 basis points in January 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Under CECL transition rules, we end the second quarter with a CET1 ratio of 12.6%, 20 basis points lower than last year's 12.8%. Our Tier 1 capital ratio was 13.8%, 20 basis points above last year. Our total capital ratio increased 10 basis points to 15.8%, and our Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 23.9% compared to 22.8% last year. During the second quarter, we returned $400 million to shareholders consisting of $300 million of share repurchases and $100 million of common stock dividends. As of quarter end, we had $1 billion remaining of our share repurchase authorization for the period ending June 30th, 2025. Synchrony remains well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. Combining those results, Synchrony delivered a second quarter performance largely within our expectations. We remain focused on taking appropriate actions to prepare our business for years to come, including our ability to deliver our long-term targeted loss rate between 5.5% and 6% and average return on assets of at least 2.5% on average over time. We've been closely monitoring our performance and taking prudent credit actions in support of these objectives. And in preparation for the pending new rule on late fees and our desire to offset the impact on our business as soon as possible, Synchrony has completed the first phase of our PPPCs. Most of these actions will begin to go into effect in the second half of 2024 and we'll continue to track their financial and operational impact on our customers, partners and portfolio to determine alongside our partners whether any refinements to our strategies are warranted to achieve our shared objective. As a reminder, specifically related to the framework around the pending late fee rules and our PPPCs, there continues to be uncertainty regarding the timing and outcome of late fee-related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of late fee rule changes and any potential changes in consumer behavior in response to the PPPCs we implement as a result of the new rule. Outcomes and actual performance related to these uncertainties could impact our outlook. With that framework, let's turn to the outlook for the second half of 2024. We expect the consumer to continue to manage their cash flows and consumption, which, when combined with our credit actions, should result in flat to low-single-digit decline in purchase volume. We continue to expect payment rates to moderate, which, when combined with our purchase volume expectations, should contribute to more moderate loan receivable growth in the second half. Excluding the impact of late fee rule implementation, we expect net interest income and other income to progressively grow in the third and fourth quarters as our PPPCs take effect. From a credit perspective, delinquencies should continue to trend in line with or better than seasonality. We expect our net charge-off rate to be lower in the second half of this year than the first half. Our reserve coverage ratio at the end of 2024 is expected to be generally in line with our year-end 2023 reserve rate. RSA will continue to align with program and company performance. And finally, we expect other expenses to trend in line with the first-half average on a dollar basis. When you combine these factors and include the impact of the late fee rule assuming an implementation date of October 1st, 2024, along with the various offsets from the implementation of our PPPCs and the $1.96 per share gain on the sale of our Pets Best business in 1Q '24, Synchrony expects to deliver fully diluted earnings per share between $7.60 and $7.80 for the full year. This consolidated and updated EPS range is in the upper end of our prior guidance and reflects Synchrony's dedication delivering optimized outcomes for our many stakeholders, including strong risk-adjusted return for our shareholders. I will now turn the call back over to Brian for his closing thoughts.

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'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.

Mihir Bhatia:

Good morning. Thank you for taking my question. I wanted to start with just the health of the consumer. It sounds like the consumer is coming in a little weaker than you had maybe anticipated between purchase volume being lower, reserve rate a little higher. First, I guess, is that a fair statement? And if so, can you just comment on what other changes that is driving? Is it signaling that you need to tighten underwriting? Are you continuing to tighten underwriting? Is that broad-based? Is it about tweaking around the edges? Just how are you thinking of the consumer heading into like back-to-school season here? And just trying to understand your view on the consumer -

Mihir Bhatia:

Maybe just staying on credit then. Just on the reserve rate guidance, it changed to be -- I think now you're saying year-end '24 in line with '23. I think earlier it was a little bit better than '23. That said, you did call out and we see the data, right, the delinquency rate is trending in line to better than seasonality. Were you expecting more improvement than you got? I'm just trying to understand the factors driving the higher guide on reserve rate and if that implies '25 net charge-offs will be similar to '24.

Mihir Bhatia:

Thank you for taking my question.

Operator:

Thank you. Our next question comes from Terry Ma with Barclays. Please go ahead.

Brian Wenzel:

Yes. Thanks for the question, Terry. I'll start where you ended. As we sit here today, there continues to be activity in the Texas courts. And as Brian indicated and I indicated in our remarks, that is uncertain. So the best guess we have now is an October 1st implementation date. And until we get some more definitive view with regard to whether or not that rule becomes effective on that date or a different date, we don't really have an update with regard to the impact and its effect if it doesn't go into play. So again, when we have greater certainty with regard to that implementation date, we'll certainly come back. With regard to the impact of the PPPCs, we provided updated guidance today. Again, if you take the midpoint of the -- both the core as well as the late fee assuming October 1st implementation date and add the Pets Best, you're at the midpoint to high end of the range from an EPS, which should give you a perspective on how we feel about both the core business as well as the actions we're taking with regard to the potential change in late fees.

Brian Wenzel:

Yes. A framework to think about it, Terry, is to think about the pieces that are going to flow through here. Obviously, we indicated that the second-half loss rate will be lower than the first-half loss rate. So obviously that's a upward bias on the RSA percent. Most certainly, I think in the third quarter, you're going to see some of the PPPC actions roll through. That's going to create an upward bias in the RSA. And then that turns around in the fourth quarter is -- again, assuming an October 1st implementation date of late fees that comes into play. And then I think it's just going to track with NII growth, which will be a little bit beneficial with slightly lower purchase volume. So there'll be some puts and takes, some of which will create headwinds, some of which create tailwinds.

Brian Wenzel:

Thanks, Terry.

Mark DeVries:

Yes. Thanks. Look, I appreciate there's a lot of moving pieces on the NIM for the second half of the year just given the implementation of some of the PPPCs and then -- and the potential rolling of the late fee impact. But could you just, Brian, maybe just give us a sense of kind of what the moving pieces are and what kind of your expectations are for NIM in the back half of the year?

Mark DeVries:

Okay. That's helpful. And are there any contemplated PPPC measures that you've yet to put in place and are waiting for either to see how the consumer behaves or for actual implementation of the changes to the late fee rules?

Mark DeVries:

Got it. Thank you.

Brian Doubles:

Thanks, Mark.

Operator:

Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. Please go ahead.

Brian Wenzel:

Yes. Thank you, Moshe, for the question. We have a detailed monitoring dashboard that's in place that looks at a lot of different measures. Moshe, it starts with purchase active rate, sales per account, as you can imagine, includes closure rates -- voluntary closure rates. It includes call volume, complaint volume, all sorts of different measures that we would look at relative to this. I think it's important to understand why -- the first wave is complete now. We only have the CITs that we mailed in December having a full quarter. When we look at that dashboard in its entirety, it's generally in line with our expectations. As we step into the third quarter, I think we're going to get a greater view with regard to consumers' adoption with regard to it. I think we've seen some positive things around e-bill adoption, et cetera. So we closely monitor it gets produced and distributed to a wide variety of people inside the organization as we closely look at that and share that with our partners.

Brian Wenzel:

Yes. So I think it's important, Moshe, to take -- to really take a step back. First of all, we've lagged the industry with regard to normalization. I think when you look at the amount that we are above our '17 to '19 range, I think outside of maybe one or two issuers, we actually are performing pretty well, being our 30-plus is 19 basis points higher than historical average and our 90-plus being 18 basis points higher than our historical average. And then again, you're right. When you look at the second quarter on a 30-plus basis, we're a couple of basis points favorable to seasonality and 90-plus, I think we were from range of 1 basis point to 2 basis points less than, so, generally in line to slightly better than seasonality. So I think we look at that -- I think we're going to look at how the macro environment develops. And again, the consumer is managing today as we start to see relief kind of come to them, I think we'll reevaluate it. I would not have an expectation that we're going to adjust those refinements in the near term here until we get greater clarity on the environment.

Brian Wenzel:

Thanks, Moshe. Have a good day.

Ryan Nash:

Hi, good morning, everyone.

Brian Wenzel:

Morning, Ryan.

Brian Wenzel:

Yes. First of all, good morning, Ryan. The first thing I think we have to have certainty, right, relative to whether or not the late fee rule, if it is delayed or ultimately overturned by the courts, whether or not the CFPB would continue down the path of pursuing some type of limitation on late fees. So I think you have to have some level of certainty beyond that. I think as you think about the pricing change, first and foremost, we're going to look at consumer behavior and whether or not consumer behavior changes here and whether or not changes would be warranted. I think when you step beyond that, there's probably two buckets, Ryan. The first bucket is one that involves our partners and RSAs. And there we would go and share the data with our partners and have a discussion with regard to pricing and make some decisions with their input. And then bucket B is things that are inside our brand and control. So you think about our Synchrony Mastercard, our Home & Auto cards, things like that, that we would control, but obviously we do that. It's fair to say not everything would ever get rolled back. But to be honest with you, Ryan, we have not spent a lot of time as a team going through this scenario. Right now, we're really focused on implementing the PPPCs and following the developments in the court being prepared, I think, for the outcome that the late fee rule goes into effect.

Brian Wenzel:

Yes. So first, let me just focus for a little bit on new accounts, the 14%. There's probably two big buckets there, Ryan. The first is, we are seeing, and Brian talked about this with discretionary spend and some of the things where the consumer is managing their spend levels. We are seeing lower foot traffic and lower retail traffic, both in a physical footprint as well as in a digital orientation. So the through-the-door population most certainly is limiting some of the opportunities to generate new accounts. And then obviously you've had a modest impact from credit actions with regard to doing that. That will impact growth more so in '25 than it does really in '24, right? So you think about an account build that probably takes about 12 months or so to kind of get to a average balance per account that's more mature. So I think you're going to feel a little bit of pressure here. I do think given our position with most of our partners, you would see probably something above GDP level and will continue to grow. Most certainly, when you look at the platforms, we're excited about the Health & Wellness growth we continue to experience, even though there's some pullback there in cosmetic and LASIK, for example. But that is a strength for us. We continue to have strength in some of the other platforms, like our Home Specialty business and Home & Auto. So, again, we're not going to necessarily give guidance, but I think there are some positive things inside of the sales platforms that will hopefully bridge us into a better economic period.

Ryan Nash:

Awesome. Appreciate the color.

Brian Wenzel:

Thanks, Ryan.

Sanjay Sakhrani:

Thanks. Good morning. Maybe just to follow up on some of the questions around credit quality. Brian Wenzel, if we -- I know I've heard you talk about some of the moves you made to sort of refine the underwriting some time ago. I mean, is the -- are the benefits of that in front of us so that we should see some more stepped-up improvement in that second derivative on delinquency rates? And then I'm trying to think through some of the questions that were asked before, like shouldn't that really -- that coupled with the tighter underwriting and the slower loan growth should help credit quality? Shouldn't it? So, I mean, is that just built-in conservatism in your credit outlook or what for this year in terms of the flat reserve rate? Thanks.

Sanjay Sakhrani:

Okay. And I have a question for Brian Doubles' follow-up. Maybe you could just talk about the state of potential partnership opportunities or deals for portfolios. Anything changed relative to the previous quarter? Thanks.

Sanjay Sakhrani:

Great. Thank you.

Brian Wenzel:

Thanks, Sanjay.

Rick Shane:

Good morning, everybody, and thanks for taking my questions.

Rick Shane:

Look, I'd love to talk a little bit, you've moved guidance to sort of the upper end of your prior range, and I'm curious how much of that is a function of timing, favorable timing with PPPC implementation versus late fee, how much is a function potentially of slower loan growth into the second half of the year and a favorable impact on reserves and whatever other fundamental factors might be driving that.

Rick Shane:

Great. Brian, thank you very much. It's incredibly helpful.

Operator:

Thank you. Our next question will come from Bill Carcache with Wolfe Research. Please go ahead.

Brian Wenzel:

Yes. Thanks, Bill, for the question. We've been on a journey. You've heard me talk about this a number of times. When we separated from our former parent, we started out and got to a peak of CET1 of 18%. And then there's been a journey down where today we're at 12.6%. We have an excess relative to the target. We're continuing on the path, right? But our first priority is always going to be organic RWA growth. Our second is going to be the dividend. And then third will be what we do with share repurchases or inorganic. And Brian talks about the discipline we have around inorganic growth. So we have the ability to do that. I think we're going to be prudent with regard to the way in which we return it back to shareholders. We're not going to just drop it tomorrow because obviously, we have many stakeholders here who would not necessarily agree with that action. But we are on a trajectory and moving towards our target, which has always been our long-term goal.

Brian Wenzel:

Yes, most certainly it's not going to be 2024 event, right? As I said, it's flattish to last year. It really goes back to when do we have greater clarity. Across the industry, everyone has greater clarity with regard to the macroeconomic. When are we going to get back to a more normalized interest rate environment, more normalized inflation environment, which makes the everyday cost for our consumers, a shared consumer across the industry much more manageable? It's that uncertainty that I think will give people pauses in how they run the different scenarios and have their qualitative assessments. That's probably the largest wildcard. Obviously, you're going to have to watch how your portfolio delinquencies develop and mix, but it's really getting clarity on that environment. So again, I think being prudent now is a better course.

Brian Wenzel:

Thanks, Bill. Have a good day.

Dave Rochester:

Hi, good morning, guys.

Dave Rochester:

By the time we get to October the 1st, will you guys have implemented your PPPC at substantially all of your partners at that point or is there a segment that opted to wait on those until the rule actually takes effect? And how large is that segment, if you have a sense?

Brian Wenzel:

The only thing I'd add, Dave, is there is a tail, right, with regard to this, right? Because accounts that we originated in the back half of last year, we wouldn't give them a change in terms six months after we just originated account or three months after we originated the account. So there will be a tail that goes on here for a long period of time as well as the number of inactive accounts that become active. Once they become active, they'll get a CIT. So it takes a long time to get to 100% under any scenario, but this will go on. That's part of normal course. And any time we do a CIT, that is kind of a regular course of action.

Brian Doubles:

Yes. Look, I think, like Brian said earlier, this will be a discussion with the partners. We'll look at for the portion of the book that we control. We'll look at consumer behavioral changes. It's still really early. These CITs are now just working their way through the statements, and we're just starting to see the customer behavioral changes, which at this point are very slight, but we need to continue to monitor that. As Brian said, we're all over it, and we'll adjust along the way if we feel like we need to. But we're not preparing for a scenario where the rule doesn't go into effect. I think we have to control what we control, and we control the pricing and policy changes and that's what we've done. And we're obviously -- we think we've got a great case in terms of litigating the rule, but it's uncertain. So we've got to focus on what we can control.

Brian Doubles:

Yes. Thanks.

Operator:

Thank you. Our next question will come from John Hecht with Jefferies. Please go ahead.

Brian Doubles:

Yes. So let me start and I'll ask Brian to comment. Look, first, we're very excited to launch what we think is a very unique, one-of-a-kind program with Virgin Red. It'll span air travel, hotel, cruises. We're tapping into a very strong, loyal customer base. So we could not be more excited to partner with Virgin Red on this new product. Equally as excited to renew Verizon. It's been a strong program for us, great relationship, and so we're really excited about that as well. Certainly, the late fee issue has crept its way into negotiations, new business, renewals, unsurprisingly, but there are ways to structure around this. So we have certainly contemplated an $8 late fee in every program that we've renewed since the rule was published, as well as anything that we've extended.

John Hecht:

Great. Appreciate the color, guys. Thanks very much.

Brian Wenzel:

Thanks, John. Have a good day.

Don Fandetti:

Yes. Can you talk a little bit about the '23 vintage, just how that's performing? You've got another quarter under your belt relative to your expectations, and maybe '22. And I know you haven't had as much sort of volatility versus general purpose.

Don Fandetti:

Thanks, Brian.

Operator:

This does conclude Synchrony's earnings conference call. You may disconnect your line at this time and have a wonderful day. Thank you.

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, and actual results could differ materially.

Brian Wenzel:

Thanks, Brian, and good morning, everyone. Synchrony's first quarter results reflected the combination of our differentiated business model and a resilient consumer in an evolving macroeconomic environment. We generated $1.3 billion in net earnings or $3.14 per diluted share on a reported basis. Excluding the $802 million after-tax gain from the sale of our Pets Best business, we generated $491 million in net earnings or $1.18 per diluted share. Ending loan receivables grew 12% to $102 billion. This growth reflected the impacts of the continued purchase volume growth, an approximate 90 basis point decrease in payment rate and the completion of our Ally Lending acquisition.

Brian Doubles:

Thanks, Brian. Synchrony's first quarter results were driven by our differentiated business model and our commitment to delivering sustainable, strong results for our customers, partners and stakeholders. We are leveraging our proprietary industry and consumer insights, our diversified products and platforms and our advanced data analytics to consistently provide access to responsible financing solutions for our customers, sales and loyalty for our partners and sustainable growth as strong risk-adjusted returns for our stakeholders. We're confident that Synchrony is operating from a position of strength as we navigate the year ahead.

Kathryn Miller:

That concludes our prepared remarks. [Operator Instructions]. Operator, please start the Q&A session.

Ryan Nash:

So it seems like charge-offs are coming in a little bit higher than expected, but we've now seen delinquencies potentially inflect and starting to follow seasonal patterns. So can you maybe talk about what this means for the full year loss rate? And where do you see losses in the allowance settling out over the intermediate time frame if your forward view proves accurate?

Brian Wenzel:

Yes, Ryan, as I look the RSA trend, the first quarter was it that clearly, when you look at year-over-year on the higher net charge-offs, which was a substantial amount of the decrease in the RSA partially offset -- about 1/3 of it offset by really NII growth. And the NII was a little bit suppressed because you had the last full impact on your interest-bearing liabilities. If I take a step back for a second and think about the core business, Ryan, I believe we're at a point where we have peaked on assuming no rate increases and peaked on our interest-bearing liability costs as I talked about the net charge-off rate peaking in the first half, you should see an upward bias than in the RSA as we step through the remaining quarters of the year, the other variable will be volume. So even if you looked on a linked quarter basis, volume being down and being down a little bit year-over-year for some of the RSA clients will play a factor, but it should trend upwards as we step through, given the peaking nature of the interest-bearing liability costs and charge-offs.

Sanjay Sakhrani:

I guess my first question is on purchase volume. Obviously, that continues to remain weak. Could we just talk about sort of how we get it back to a baseline that accelerates? I know inflation is sort of weighing in on the consumer. But maybe just talk about what's driving that and how and when we get it back to a baseline that's higher.

Brian Wenzel:

The first thing, Sanjay, I want to remind people, we're comping off of what I'd say is a really strong quarter last year. So when you look at a 2% up, that is very strong. It's a record for our company for the first quarter. Brian highlighted some of the differences, I think you're plus 8% on the higher [freight cost], down a little bit year-over-year in lower [freight cost]. We are seeing most certainly the consumer step back in certain bigger ticket areas, right, either going down in transaction values, which I think you see reflected in the home and auto purchase line being down and really in lifestyle. But what you see strengths in those pockets.

Sanjay Sakhrani:

Okay. Very helpful. And I couldn't let you guys get away without a late fee question. So maybe just as we're waiting here on the courts at this point. Maybe you can just talk about how you're planning for a mid-May implementation and how much flexibility you have if there's an injunction after the current planned implementation period? And any early observations on the PPPC behavior changes? I know most of that will be in the second half.

Operator:

We'll take our next question from Terry Ma with Barclays.

Brian Wenzel:

Yes. Thanks, Terry. I'll take this and see if Brian has a follow-on. I think what you should expect to see is beginning an impact in a little bit in the second quarter, more in the third quarter with regard to the mitigants and then it continues to build from there. I've gotten the question in the past, and we really hadn't talked very much about it. When you think about how the APR phases in for the consumer. So when the APR becomes effective, which again, think about that as 60 days after notice, you'll begin to feel the effects of that, I'd say 50% in the first 12 months if you roll that out, 75% in 24 months. So you begin to fill that out. Now some of the other fees that come in and some of the other policy changes, they are more immediate when it comes in through there.

Terry Ma:

Got it. That's helpful. And then for my follow-up, I just had a question on your cash balances. It looked quite elevated this quarter relative to last year. Any color you can provide there on how we should think about that going forward?

John Hecht:

I guess just a little bit more on the net interest margin, Brian, I know there's always a seasonal impact in Q1 as you gather deposits to kind of prefund for growth later in the year. And then you mentioned the PetSmart kind of causing incremental cash balances. But maybe could you give us some sense for like the -- parse out the -- what drove the margin decline this quarter relative to, say, 1Q '23? And then maybe talk about marginal deposit pricing and where you're kind of in the CD markets and the savings account markets and when deposit costs should level out.

John Hecht:

Okay. And then maybe this is a little sticky of a question, but if -- and I know you've pulled EPS guidance, but ex rate fees with the -- your original $5.75 to $6 EPS still hold? Or are there other changes that we should consider reflective of kind of just the trend changes that we want to consider in terms of modeling?

Operator:

We'll take our next question from Jeff Adelson with Morgan Stanley.

Brian Wenzel:

Yes. Maybe I'll try to simplify this, Jeff, but thanks for the question. Everything is seasonally adjusted. So we built our plan. It has a seasonal overlays, which have been muted for last couple of years, given the normalization to happen as we move back to the pre-pandemic levels of delinquency. I would think about it in this way in just free and fairly simple. First half losses will be higher than second half losses and I think if you just kind of rolled most certainly our 30-plus and 90-plus out, you can kind of see how that will play through if you believe that you're going to get a band here in April, further than in dollars. You can see how it flows out. So I just think about it in half to simplify versus trying to get to an exact date when it peaks.

Brian Doubles:

Yes, I'll take the first part of that. So operationally, it's very challenging from a number of different angles. And obviously, it's for the issuer, but also the vendors that the issuers rely on. I think it's important to note, too, that this is across the industry. It's not specific to us. Everybody has got the same challenges. If any event we do have to implement this on May 14. I think we were prepared to make the systematic changes and things like that. The real challenges come around terms changes and updating collateral and things like that. So that's where a lot of the operational complexity sits. And I'll turn it over to Brian.

Brian Doubles:

And then just on your last question on consumer behavior and impact. I'd say we haven't seen anything yet that's different than our expectations. I'd say it's largely in line. But the only caution I would have is it's very early. There's a bleed in period for a lot of these terms changes. But so far, what we're seeing from the consumer side is generally in line with what we expected.

Saul Martinez:

So just a follow up on the response to the last question on the PPPC impact. So if I hear you right, the March 5, 8-K, the guidance that -- or the estimates that you gave there of the offsets ranging from $650 million to $700 million pretax, which does imply a pretty significant ramp given the time horizon today into the fourth quarter. We should assume -- those are still good benchmarks to use and -- because it obviously does imply a pretty significant ramp in the back end of the year in terms of NII. That's the other late fee impact. So I just want to make sure that those numbers are still applicable or am I missing something there?

Saul Martinez:

Okay. Okay. That's helpful. And I guess just a broader -- I guess a broader question. You do -- you did in your presentation reiterate the long-term target, 2.5-plus percent ROA, 28-plus percent [ RPC ]. I get the offsets and you guys are working to fully offset that. But it is a pretty significant -- if it gets implemented, it is a pretty significant reduction or the source of revenue that effectively goes away and we'll see what happens with Basel III, but at least maybe it's not going to be an impact. But the direction of travel at least on capital is moving higher. I'm just curious like how you're thinking about the long-term targets for profitability going forward, your degree of confidence in how you -- where you think those are still applicable targets?

Operator:

We will take our next question from Don Fandetti with Wells Fargo.

Brian Doubles:

Yes. Look, we're always on the lookout for potential acquisitions or new programs, Ally fit our business model perfectly. It's exactly the type of acquisition that we look for. It's in industries that we know really well. We understand the products, a great cultural fit, like it just -- it checked all the boxes. So we do -- we have excess capital today. We generate a lot of capital over the calendar year. And if we have the opportunity to do something opportunistic, we certainly have the financial resources to do it.

Brian Doubles:

Yes. The only other point I'd make on this is we are very disciplined when it comes to accretive acquisitions that have a really good strategic fit. I mean, I think you've seen that discipline over the years. We haven't done really large-scale M&A. We've been very thoughtful about finding things that are relatively modest from a capital outlay perspective, but our businesses that we can grow really well. That's a great example of that, a perfect example of that, a leg row I think Ally is going to be a home run for us. So we are very disciplined in terms of what we look for.

Richard Shane:

Two questions this morning. First, on the CFPB, one of the consequences that the industry has raised in terms of the rule changes, the loss of deterrents, would suggest that DQs will be higher. I'm curious if you guys have had discussions with your accountants related to how you will treat reserve policies if you have higher delinquencies but potentially assume lower pull-throughs?

Richard Shane:

Got it. And then in terms of the concept of charge-off peak in the middle of the year, seasonality works in your favor really steadily over the next 6 months and then starts to reverse in the fourth quarter. When you're talking about a peak, are you suggesting that as we move into the fourth quarter, charge-offs will continue to decline or that they will normally seasonally rebound but perhaps not quite as much as they have in the past.

Operator:

We'll take our next question from Brian Foran with Autonomous Research.

Brian Wenzel:

Yes. Thanks, Brian. So first, let me just be clear. We have submitted our capital plan to the Fed. We're part of the horizontals, we're part of the CCAR group, albeit we do not get a stress capital buffer until 2026. So the process remains somewhat the same as in prior years other than will engage a little bit differently with the Fed than we have in the past. But again, the stress capital buffer comes in 2026. When you specifically look at the capital plan that our Board just approved and management presented to them, there were scenarios or scenario in there around late fees and the impact of late fees that put it there.

Brian Foran:

That's very helpful. And maybe if I could sneak in on competition. Are you generally seeing competitors in the market respond in common ways on these kind of PPPC efforts? Is there any evidence of any point to big divergence or people breaking from the pack? Or is kind of everyone doing different combinations of similar things?

Brian Wenzel:

The only thing I'd add, Brian, I do think the one thing you will see, we probably have been a little bit more -- or surprise showed a little bit more sense of urgency and gotten out ahead of this based upon discussions with our partners. So that may pay a little bit, but I think Brian is right over the medium term here. That's where you're going to see the convergence.

John Pancari:

Good morning. Some of your -- on that very last point, they just brought up some of the peer card vendors that have somewhat smaller private label and Co-Brand card businesses that have begun to indicate maybe a willingness to absorb the late fee -- the foregone late fees as a result of the rule change. Can you talk about if we do see that happen at some players where late fees are a smaller piece of their overall revenue, but they're in the private label in Co-Brand business, do you view that as a competitive threat if they do absorb the impact?

John Pancari:

Got it. No, that makes sense. And then separately, back to the EPS, sorry to deliver that, but the -- I know you're not reiterating that $5.70 to $6 guide. And I just want to understand, it's just because it was only 45 days ago, and the underlying components that you had baked in at that point in March have not changed materially enough to change how you're thinking about your underlying trends? I know we've had moves in rates, had some development on the late fee dynamics. But I just want to make sure that the core expectations that were part of that $5.7 to $6 have not changed at all.

Operator:

And we are almost at our allotted time. We will take one final question from Mihir Bhatia with Bank of America.

Brian Doubles:

Yes, we do. We track it by partner. We look at the penetration rate, sales on our card versus other products. I'll tell you, generally, we're very pleased that inside of the majority of our partner programs that we're gaining share. I think one of the things that helps us do that as we think about a multiproduct strategy, we see our partners engaging more on being able to offer a revolving product, maybe a secured card, buy now pay later. And I think that's helping us gain share. If you stick to a one product strategy, I think over time, that's a losing strategy and I think you will lose share, which is why we think the multiproduct strategy over time is a winning one. So we feel really good about our ability to continue to take share inside of our partner programs, but also just more generally and even some of the smaller to midsized space.

Brian Doubles:

Well, I definitely think that's an underappreciated part of our business model. I think people tend to focus on the large partner programs, but we do -- we serve hundreds of thousands of providers and small- to medium-sized businesses. And sometimes that gets lost a little bit. So we're definitely leaning in more there. I'd say the -- we've shifted investment dollars into the health and wellness space, you see that paying off when you look at the health and wellness numbers, I think receivables were up 20%, like we're really reaping the benefits of those investments. So that's a very attractive space for us. The large partner space is still very attractive as well, but I think that part of the business always gets a lot of attention. We're trying to make sure that we talk enough about all the small- to medium-sized businesses and the hundreds of thousands of dentists and pet care specialists across the country that we serve.

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 and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the Company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit 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 Wenzel:

Thanks, Brian, and good morning everyone. Synchrony's fourth quarter results demonstrate the power of our differentiated business and financial model performing as designed. Our diversified sales platform and spend categories enabled record purchase volume growth as our disciplined underwriting and credit management kept credit performance in line with our expectations. Our retail share arrangements ensured alignment of economic interest between Synchrony and our partners. As credit normalized towards historical pre-pandemic levels, and funding costs increased from higher benchmark rates, our RSA payments were lower, providing a partial buffer to the economic environment, and enabling Synchrony delivery of consistent attractive risk-adjusted returns. And our strong balance sheet provides the flexibility to return capital to shareholders, while investing in opportunities to achieve our longer-term strategic goals, all while delivering for our customers and partners and their evolving needs today. Overall, our prudent business management and differentiated financial model have positioned Synchrony to deliver sustainable outcomes for our customers, partners, and shareholders through an uncertain macroeconomic backdrop this past year and as we move forward in 2024. Now, let's turn to our fourth quarter results. Purchase volume increased 3% versus last year and reflected the breadth and depth of our sales platforms and the compelling value our products offer to bind with a resilient consumer. In Health & Wellness, purchase volume increased 10%, reflecting broad-based growth in active accounts, led by dental, pet, and cosmetic verticals. Digital purchase volume increased 5% with growth in average active accounts and strong customer engagement. Diversified value purchase volume increased 4%, reflecting a higher in and out of partner spend. Lifestyle purchase volume increased 3%, with stronger average transaction values in Outdoor and Luxury. In our Home & Auto, purchase volume decreased 4%, as lower customer traffic, fewer large ticket purchases, and lower gas prices more than offset growth in Home Specialty, Auto network, and commercial. Purchase volume across Synchrony Dual and co-branded cards grew 9% and represented 43% of total purchase volume for the quarter, reflecting the broad utility and value that these products deliver for our customers. As we've discussed in the past, our out-of-partner spend is split roughly evenly between discretionary and nondiscretionary categories. And this trend held steady throughout the year. In the fourth quarter, we saw assumptions in categories, as consumers shifted from travel spend to clothing for instance and from gasoline and automobiles towards spend at grocery and discount stores. We've not seen any meaningful changes in the overall composition between discretionary and non-discretionary spend. The combination of broad-based purchase volume growth and approximately 110 basis-point decrease in payment rates drove ending loan receivables growth of 11.4%. Our fourth quarter payment rate of 15.9% still remains approximately 115 basis points higher than our five-year pre-pandemic historical average. Net interest income increased 9% to $4.5 billion, driven by 16% growth in interest and fees. The increase in interest and fees reflected the combined impact of higher loan receivables and benchmark rates, as well as a lower payment rate. Our net interest margin of 15.10% declined 48 basis points compared to the prior year. The decrease largely reflected higher interest-bearing liability costs, which increased 169 basis points to 4.55% and reduced net interest margin by 138 basis points. This impact was partially offset by 66 basis points of growth in loan receivables yields, which contributed 55 basis points to net interest margin. Higher liquidity portfolio yield added 29 basis points to net interest margin. And our loan receivables growth improved the mix of interest-earning assets, contributing 6 basis points to net interest margin. RSAs of $878 million in the fourth quarter or 3.49% of average loan receivables, a reduction of $165 million versus the prior year reflecting higher net charge-offs, partially offset by higher net interest income. Provision for credit losses increased to $1.8 billion, reflecting higher net charge-offs and a $402 million reserve build, which largely reflected the growth in loan receivables. Other expenses grew 14% to $1.3 billion. The increase primarily reflected growth-related items as we continue to see strong growth in volumes as well as the return of operational losses to pre-pandemic average levels as a percent of our purchase volume. Expenses in the quarter also included several notable items, including $43 million in employee costs related to a voluntary early retirement program, $9 million in real-estate-related restructuring charges as we continue to adjust our physical footprint in favor of hybrid working environment, $9 million for the FDIC's special assessment, $7 million of preparatory expenses in anticipation of a potential late fee rule change and $5 million of transaction-related expenses related to the sale of Pets Best. Our efficiency ratio for the fourth quarter improved by approximately 120 basis points compared to last year to 36%. Excluding the impact of the notable items in the quarter, our efficiency ratio would have been approximately 200 basis points lower in the fourth quarter. All-in, Synchrony generated a net earnings of $440 million or $1.03 per diluted share, a return on average assets of 1.5%, and a return on tangible common equity of 14.7%. Next, I'll cover our key credit trends on Slide 10. Overall, we see the consumer remaining resilient as we managed through inflation and higher interest rates. The external deposit data we monitor also supports this view, as it shows average savings account balances return closer to pre-pandemic levels during 2023 and remained relatively steady through the third and fourth quarters. At year-end, average industry savings balances remained approximately 9% above levels from 2020. Our disciplined through-cycle underwriting and active credit management has positioned us well as we enter 2024. Our delinquency ratios finished the year slightly above average levels from 2017 to 2019 prior to the pandemic. At year-end, our 30 plus delinquency rate was 4.74% compared to 3.65% in the prior year and 12 basis points above our average for the fourth quarters of 2017 to 2019. Our 90 plus delinquency rate was 2.28% versus 1.69% last year and 4 basis points above our average for the fourth quarters of 2017 to 2019. And consistent with our expectations, Synchrony's net charge-offs reached 5.58% in the fourth quarter compared to 3.48% in the prior year and an average of 5.49% in the fourth quarters of 2017, 2018, and 2019. We continue to monitor our portfolio and implement actions as necessary to proactively position our business for 2024 and beyond. Moving to reserves, our allowance for credit losses as a percent of loan receivables was 10.26% down 14 basis points from 10.40% in the third quarter. The reserve build of $402 million in the quarter was largely driven by receivables growth. Turning to slide 12, Synchrony's balance sheet continues to be a source of flexibility and strength. Our consumer bank offerings continued to resonate with customers in the fourth quarter, driving over $3 billion of growth in total deposits in the quarter or 13% compared to the prior year. At quarter-end, deposits represented 84% of our total funding, while securitized debt comprised 7% and unsecured funding 9%. Total liquid assets and undrawn credit facilities were $19.8 billion, up $2.6 billion from last year and at quarter-end, represented 16.8% of total assets, up 42 basis points from last year. Moving on to our capital ratios, as a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony will continue to make its annual transitional adjustments to our regulatory capital metrics of approximately 50 basis points each January until 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Additionally, in the fourth quarter, Synchrony made a change to its balance sheet presentation of contractual amounts related to our retailer partner agreements. At year-end, assets of approximately $500 million, which were previously classified as intangible assets, were reclassified to other assets and prior periods were reclassified to conform to this presentation. This change in presentation had a corresponding impact to each of our regulatory capital metrics and resulted in an increase of approximately 50 basis points to our capital ratios in both the current and prior years. Under the CECL transition rules and including this balance sheet change, we ended the fourth quarter with a CET1 ratio of 12.2%, 110 basis points lower than last year's 13.3%. The Tier 1 capital ratio was 12.9% compared to 14.1% last year. The total capital ratio decreased 60 basis points to 14.9%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 22.1% compared to 22.8% last year. During the fourth quarter, we returned $353 million to shareholders, consisting of $250 million of share repurchases and $103 million of common stock dividends. At the end of the quarter, we had $600 million remaining in our share repurchase authorization. We remain well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan. We will also continue to seek opportunities to complete the development of our capital structure, through the issuance of additional preferred stock as conditions allow. Synchrony remains committed to our capital allocation framework, which prioritizes investment in organic growth and payment of our regular dividends, followed by share repurchases and investments in inorganic growth opportunities where the rates of return meet or exceed that of our other potential uses of capital. To that end, as Brian mentioned, Synchrony announced the acquisition of the Ally Lending point-of-sale financing business, which we view as a great opportunity to expand our leadership position in home improvement and health and wellness verticals, while leveraging our industry expertise and scale to unlock still greater value. We've agreed to purchase approximately $2.2 billion of loan receivables at a discount. Upon closing the transaction and subject to completion of purchase accounting, we expect our CET1 ratio to be reduced by approximately 50 basis points inclusive of our provision for credit losses of approximately $200 million relating to the initial reserve builds. Synchrony expects this acquisition to be accretive to full-year 2024 earnings per share excluding the impact of the initial reserve build for credit losses. Upon integration of our business, conversion to our PRISM underwriting model and execution of our strategy, we expect to achieve attractive internal rate of return with approximately 3.5-year tangible book value earn back. Additionally, the sale of our Pets Best business will result in approximately $750 million gain net of tax in 2024, which will contribute to an approximately 80 basis-point increase to our CET1 ratio, inclusive of the capital required to be held on minority interest in IPH. Excluding the gain on sale, we expect the transaction to be neutral to earnings. We're excited about the opportunities we’ve identified to continue to drive consistent growth at appropriate risk-adjusted returns, and have established a long track record of execution across both strategic and financial objectives. During 2023, we drove strong growth in purchase volume, which combined with the payment rate moderation to deliver solid growth in loan receivables. We were opportunistic in funding net growth and continue to expand our deposit franchise and in turn delivered attractive net interest income. Credit normalized in line with our expectations and our RSA functioned as designed. And finally, we fulfilled our commitment to deliver positive operating leverage. Turning to Slide 14, let's review our outlook for 2024. Our baseline assumption for this discussion include a stable macroeconomic environment, full-year GDP growth of approximately 1.7%, a year-end 2024 unemployment rate of 4.0%, and an ending Fed funds rate of 4.75% with cuts beginning in the second half of 2024. This outlook also assumes the closing our Pets Best and Ally Lending transactions in the first quarter of 2024. And given the uncertainty of timing and implementation of a potential final rule regarding late fees, we've not assumed any related impact to our 2024 financial outlook. In the event that the final late fee rule is published, we will provide an update with the associated impact to our financial guidance. Starting with loan receivables, we expect our compelling value propositions and the broad utility of our products will continue to drive purchase volume growth. We also expect payment rates to continue to moderate although we anticipate they will remain above pre-pandemic levels through 2024. Together, these dynamics should deliver ending loan receivables growth of 6% to 8%. We expect full-year net interest income of $17.5 billion to $18.5 billion. Net interest income should follow typical seasonal trends through the year, adjusted for several impacts. One, higher interest-bearing liabilities expense as our fixed-rate debt re-prices with higher benchmark rates. Two, the impact of competition for retail deposits and pace of deposit repricing once rate cuts begin. Our expectation is for betas to trend near 30%, as rates begin to decline later in the year, thereby reducing impact to interest expense during 2024. And three, interest and fee yield growth, partially offset by higher income reversals. We expect net charge-offs of 5.75% to 6%, within our targeted underwriting range of 5.5% to 6%. Losses are expected to peak in the first half before returning to pre-pandemic seasonal trends following the normalization of delinquency metrics in 2023. We expect RSAs of 3.5% to 3.75% of average loan receivables for the full year. This reflects the impact of continued credit normalization, higher interest expense and the mix of our loan receivables growth, partially offset by purchase volume growth. The reduction in RSA demonstrates the functional design of the RSA and the continued alignment of interest with partners. And finally, we expect to reach an operating efficiency ratio of 32.5% to 33.5% for the year driven primarily by the optimization of our loan yields as credit normalization occurs. This outlook excludes the impact of the Pets Best gain on sale, which we recognized in other income. We remain committed to delivering operating leverage for the full year and continuing to invest in our long term success of our business. As demonstrated again this past year, Synchrony's purpose-built business and financial model is performing as designed. Through an evolving backdrop, our diversified portfolio of products and platforms continue to drive growth. Our leading credit management ensures attractive risk-adjusted returns, our RSA provides a buffer against changes in economic performance and our stable balance sheet creates opportunity. Taken together, our business continued to deliver value for each of our stakeholders in 2023 and positioned well for 2024. I'll now turn the call back over to Brian for his closing thoughts.

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'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, Investor Relations team will be available after the call. Operator, please start the Q&A session.

Terry Ma:

Thanks, good morning. Can you maybe just talk about the cadence we should expect for delinquencies in 2024? Should the fourth quarter or first quarter be kind of peak delinquencies? And then as we look forward out to 2025, can you maybe just talk about your confidence level that you'll stay within this net charge-off range of 5.75% to 6%?

Terry Ma:

Got it, thank you. And then my follow-up on just the NIM and NII guide. It looks like you assumed about two rate cuts. Can you maybe just talk about what we should expect if we get more than two rate cuts for the year?

Terry Ma:

Got it. Thank you.

Operator:

Our next question comes from Rick Shane with JPMorgan. Please go ahead.

Brian Wenzel:

Sure. Thank you, Rick. First thing, I am going to continue to point you to Page 4 of our materials this morning, which shows the risk-adjusted return, really the relationship between NCOs and RSA, which generally trend in line with each other. You are right. As you think about 2024, you do see some lift continuing on the net charge-off line which pulls back through the RSA, you continue to get headwinds as the interest-bearing liabilities will reset. We have -- 92% of our CDs will reset in 2024, 74% of our debt will reset in 2024. So you're going to have a full-year effect of the rate increases that we've seen in 2022 and 2023 flow through the book. And again, we're expecting -- I think in the guidance, we said, listen, payment rate does not get back to pre-pandemic levels. So you're not getting the full interest and fee yields going back through, you have higher interest-bearing liabilities, which will in theory benefit the company through a low RSA to the extent that interest-bearing liabilities comes down faster through other resets, you would see an increase to the RSA.

Brian Doubles:

Thanks, Rick.

Operator:

Our next question comes from Ryan Nash with Goldman Sachs. Please go ahead.

Brian Doubles:

Good morning, Ryan.

Ryan Nash:

Brian, maybe as a follow-up to the first question. I just wanted to flush out the NII and NIM guide a little bit more. Can you maybe just talk about, one, what gets us to the bottom end of the range to the top of the range, obviously, it's a pretty wide range and maybe just explain a little bit further, what is the 30% beta? Is that a point-to-point? Is that a downside? I just want to make sure we fully understand that. And lastly, just given that you are liability-sensitive on the way up, do you still see a path to a 16% NIM and over what timeframe? Thanks.

Ryan Nash:

Got it. And maybe as a follow-up on credit, you talked about starting to see delinquencies follow more normal patterns and also [charge-offs] (ph) speaking by the second-quarter. Brian, if your outlook proves to be correct, when do we start to see the allowance coming down? When does it peak and come down? And maybe just help us understand the potential magnitude that it could come down over the course of the year. Thank you.

Ryan Nash:

Thanks for the color, Brian.

Operator:

Our next question comes from Moshe Orenbuch with TD Cowen. Please go ahead.

Brian Doubles:

Yeah, sure, Moshe. I'll start on this. We're obviously still waiting for the final rule to be issued, but with that said, while there still some unknowns in terms of the implementation period and other things that we'll see in the final rule, we've been working on this for almost a full-year now at this point. It's very complicated. Our teams have done a lot of work in preparation for this. We spent a lot of time with our partners. We've agreed on pricing actions and offsets that we would deploy when we see the final rule. So it's really all the work that has been going on over the past year. I mean it's systems work. You've got to issue a lot of CITs, change in terms. And so it's really that kind of stuff. I will say that the conversations with our partners have been very constructive. They fully recognize that without these offsets, that a meaningful portion of their customers that we approve today and that we underwrite and give credit to would no longer have access to credit. And that's something clearly we do not want, they do not want. So really no change to what we said in the past. Our goal is to protect our partners, fully offset the impact of the final rule when it does come. And we want to continue to provide credit to the customers that we do today.

Brian Doubles:

Yeah, I think, look, generally we would continue to expect outsized growth in Health & Wellness. That's a platform where we've accelerated investment in the past year or two. We're seeing really good growth from our acquisition of Allegro Credit. It's a big market. We've got a leading position. This is dental, vet, cosmetic, great engagement with partner network. And so that's a platform we'll continue to invest in, and we would expect to see growth there on the higher side relative to the other platforms. The other one I would mention is digital. That's where we've got Venmo, Verizon, PayPal, Amazon, and so I think you'd continue to see some outsized growth there. And then maybe a little bit softer in lifestyle and home and auto. I don't know, Brian, if you’d add anything to that.

Moshe Orenbuch:

Thanks very much.

Brian Wenzel:

Thanks, Moshe.

John Hecht:

Good morning, and thanks for taking my questions guys. Most of my questions have been asked and answered, but I guess one other question I have is, I think we've had depleted recoveries on the charge-offs side, part of that equation over the past couple of years. I'm wondering, Brian, to what degree does maybe a recovery and recoveries impact the NCO guide?

John Hecht:

Okay, and maybe kind of a higher-level question. I think, Brian, I think you mentioned non-discretionary versus discretionary purchase activity was consistent. I'm wondering, I mean, given inflation is stabilizing, we got student loan repayment turn back on, are you seeing anything on the margin that would reflect changing consumer behaviors? Is it just sort of been steady-as-she-goes given those changes in the macro?

John Hecht:

Great. Appreciate the color.

Brian Wenzel:

Thanks, John. Have a good day.

Mihir Bhatia:

Good morning, and thank you for taking my questions. Maybe to start with, I wanted to ask about portfolio renewals and just portfolio movements. And I apologize, a two-part question. But firstly, can you just remind us of your renewal cadence? Are there any large programs coming up for renewal here in the next 24 months? And then second part is just we've gone through a period of credit normalization, you still have the late fee rule outstanding. So I was wondering what the environment is like for renewals and RFPs currently as you talk to retailers? Are retailers waiting for a little bit more certainty or -- I mean I know you announced J.Crew this morning, you also buying the Ally portfolio. But, like, what about the other big retail programs? [indiscernible] like, can you put your pipeline in context maybe, like, what it looks like and just put that into context for us relative to last year or few years ago or normal environment? Thanks.

Brian Wenzel:

Yeah, the only thing I'll answer is or just add, but you'll see in February, again, we'll continue to update the revenue that's under contract in ‘26 and beyond. So expect that in February.

Brian Wenzel:

Yeah, here we are again, it’s gotten a lot of issues and troubles they've tried to underwrite growth in ‘21 and ‘22 vintages, which people are paying the price for now. Some refer to it as growth mass. Some refer to it as losing standards and lower returns. So we're not going to use credit as a mere growth lever for us, we are more proven than we were a year ago. Again, we talked about we do idiosyncratic actions on partners and channels, I don't want to say every day, but most certainly we watch it every day. We took broader based actions both in 2Q and 3Q given the shared consumer and what other people have done from an underwriting basis. We were slightly encouraged in the fourth quarter as we've seen at the bureaus that other issuers have begun to take credit actions, which will benefit the industry in the latter part of 2024. But I think we're going to be cautious as we move throughout the year. We're going to continue to watch the trends of the consumer. Again, we haven't seen the consumer stretch. When we look at payment rates, the payment rate movements by credit rate have been relatively consistent, and probably the biggest mover has been in the [6.60 to 7.20] (ph) range, which you'd see in a non-prime person. So again, we look at it and say, okay, I don't see the consumer stretching from a spending standpoint and struggling. We don't see the payment rate changing. We're going to continue to watch the flow and the delinquency. Again, entry rate continues to be better than 2019, which again, the flow to loss gets worse whenever entry rate goes down. But we generally -- we're generally cautiously optimistic on credit, and which is reflected in the guide of 5.75% to 6%.

Brian Wenzel:

Thanks, Mihir. Have a good day.

Sanjay Sakhrani:

Thanks. Good morning. Brian Doubles, you were pretty active on the transactions front with the sale of the pet insurance business and part of the business and then the acquisition of the Ally Lending business. Could you just maybe a little bit more on what drove those decisions and then what the pipeline for other deals look like? I mean, I think there's one big fish at least out there in terms of a portfolio. So, can you just talk about what the positioning is there?

Sanjay Sakhrani:

Other deals? What else is out there?

Sanjay Sakhrani:

Yeah, you were saying -- I asked, sir, what else might be out there? One big portfolio out there right now.

Sanjay Sakhrani:

Got it. And just one follow-up. I guess, Brian Wenzel, like in your reserve coverage, what do you -- or for the year, what are you assuming for the unemployment rate specifically?

Sanjay Sakhrani:

Got it. All right, great. Thank you.

Operator:

Our next question comes from Jeff Adelson with Morgan Stanley. Please go ahead.

Brian Wenzel:

Yeah, when I look at the growth rate, Jeff, what gets you to the lower end of the range is a couple of things potentially, right? A softer consumer, right? The macroeconomic environment softens up, number one. Number two, payment rate remains more elevated than we anticipate. You'll be at the low -- could be at the lower end of that range. If we -- if the credit actions we've taken deliver more of a sales impact than we expect, again, it's not material in whole, that could put you lower than range. Conversely, as you think about the high end of the range, if payment rates decline faster than we think, number one. If you see the economy maybe be a little bit more robust than what we're seeing on -- we gave you GDP growth rate there, but the economy's a little more robust, and we see spending elevate. You can see some more there. With regard to, well, certainly the home specialty, that's been a vertical inside of Home & Auto that has grown nicely for us, will continue to grow nicely for us. It's really not going to move the company average, so it's a nice acquisition. The acquisition itself is not necessarily generally going to be material enough to move a lot of the underlying metrics. You'll get the pop day one and most certainly it will grow as we create the synergies between our home specialty platform and what's a very attractive Ally Lending point of sale platform. So the combination will grow a little bit faster, but it shouldn't move the overall needle of the company.

Brian Wenzel:

Yeah, so first of all, on the switch to really efficiency ratio, Jeff, if you recall a number of years ago, we were actually on efficiency ratio and that's what we guided long term. We pivot during the pandemic because of the implications to revenue, because of the payment rate dislocation that we saw. So we're trying to be more helpful to investors and analysts by going to dollars. Now we're just really migrating back to where we should be from an efficiency ratio standpoint and where the industry generally operates, number one. With regard to the expense dollars, if I look at controllable dollars, so if I take operational losses out, we can control them, but take that out for one second, and you remove marketing, which is more contractual for us based upon volume. We are growing expense at a slower rate. So we're getting operating leverage inside the company. We need several investments as you saw in our notable items, both on a voluntary early retirement program as well as some smaller but again, meaningful impacts to our facilities that will drive a benefit in 2024. So I think from a controllable expense standpoint, they're going to be -- you're going to see operating levers when it comes to that. With regard to operational losses, we've invested in some incremental tools that have there some new strategies. So we expect that growth rate to really flatten out as we move ‘23 to ‘24.

Brian Wenzel:

Thanks, Jeff. Have a good day.

John Pancari:

Good morning. Just have a couple of follow-ups on the late fee topic. I guess in terms of the offsets, can you just remind us what is likely to be the most material mechanism in offsetting the impact of the late fees? Is it incremental fees or the underlying interest rates that you're dialing in? And then, secondly, how -- can you talk about the competition for negotiating the offsets that you indicated are in place? Is it, how heavy is it in terms of competition? Are there competitors out there willing to eat the cost? And could you possibly see any relationships move as a result of this?

Brian Wenzel:

Yeah. So, obviously, John, we have a set of pricing strategy changes that will come through, some of which come through with a faster cadence in 2024, which will be fee oriented as well as some policy orientation. And then there will be APR increases that build with some of which you'll see in 2024 if the rule gets issued and then build into 2025. So we'll be back if the rule does get issued. We'll come back and probably provide a little bit more color with regard to how to think about that in the context of 2024. Some of these will have a bigger short-term impact, some of them will have a bigger long-term impact. And so, we'll be in a position to provide a little more clarity when we have a final rule and we start to roll out some of these actions.

Brian Wenzel:

Yeah, so I'd say, we're not specifically guiding, John, on purchase volume. Obviously you've seen the rate of asset growth decline from 2023 to 2024, there was some impact last year really around that asset growth of -- stemming from payment rates decline, which again, we don't think it will have as big an impact in 2024. So I think you're going to see something generally consistent with probably last year. I mean, a good benchmark is sit back and say, we do see GDP at 1.7%. We grow multiple of that. So again, probably generally consistent with the last year. You've got to remember, too, our purchase volume at $185 billion for 2023 was a record high for this company. So we are facing a difficult comp as we move into 2024. But again, we're proud of the sales platforms and the differentiation and diversification that's inside of those platforms.

Brian Wenzel:

Thanks, John. Have a good day.

Mark DeVries:

Yeah, thanks. I wanted to ask about your thoughts around preferred equity issuance for this year. Brian, does that need to be additive to total capital levels or does it free you up to replace some of that with or return some common? Talk a little bit about potential timing, what you kind of need to see from a market perspective and also how much you might look to issue?

Mark DeVries:

Okay, great. And then just to follow up on kind of your updated thoughts on plans for how to deploy the capital created by the Pets Best sale.

Mark DeVries:

Got it. Thank you.

Mark DeVries:

Thanks.

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 and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the Company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast 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 Wenzel:

Thanks, Brian. Good morning everyone. Synchrony's third quarter results reflected the strength of our financial model demonstrates to our consistent growth and strong risk deducted returns. The compelling value propositions of our broad product suite continue to resonate with our 70-plus million customers and drove broad-based growth across our sales platforms, ending loan receivables grew 14% versus last year, benefiting from the combination of approximately 120 basis point decrease in payment rate versus last year and 5% growth in purchase volume. Our third quarter was 16.3%, still remains approximately 130 basis points higher than our five-year pre-pandemic historical average. Manage interest income increased 11% to 4.4 billion, reflecting 21% growth in interest in fees. The increase in interest in fees was due to the combined impact of higher loan receivables and benchmark rates as well as lower payment rate. Our net interest margin was 15.36% declined 16 basis points compared to the prior year as higher funding costs more than offset the benefit of higher yields and favorable asset mix. Specifically, loan receivables yield grew 114 basis points and contributed 95 basis points to net interest margin. Higher liquidity portfolio yield contributed an additional 46 basis points to net interest margin, and our mix of interest earning assets improved net interest margin by approximately 28 basis points, reflecting our strong growth in loan receivables. But these gains were more than offset by higher interest bearing liability costs, which increased 229 basis points to 4.34% and reduced interest margin by 185 basis points. RSAs of $979 million in the third quarter or 4.04% of average loan receivables, a $7 million decline from the prior year, reflecting higher net charge-offs, partially offset by higher net interest income. Our RSAs continue to perform as designed. They provide a critical alignment with our partners as we navigate the evolving environment together and support greater stability in our returns. Provision for credit losses increased to $1.5 billion, reflecting higher net charge-offs and a $372 million reserve build, which largely reflected the growth in loan receivables. Other expenses grew 8% to $1.2 billion, primarily driven by the growth-related items as well as technology investments and operational losses. Our efficiency ratio for the third quarter improved by approximately 330 basis points compared to last year to 33.2%. Summarizing our financial results, Synchrony generated net earnings of $628 million or $1.48 per diluted share, a return on average assets of 2.3% and return on tangible common equity of 22.9%. Next, I'll cover our credit trends on Slide 8. Our delinquency performance in the third quarter continued to reflect normalization towards pre-pandemic behavior with both the 30-plus and 90-plus delinquency rates approaching 2019 levels. Our 30-plus delinquency rate was 4.40% compared to 3.28% last year and approximately 7 basis points lower than third quarter of 2019. Our 90-plus delinquency rate was 2.06% and versus 1.43% in the prior year and approximately 1 basis point lower than our third quarter 2019. Our net charge-off rate was 4.60% versus 3% last year. Synchrony remains approximately 115 basis points below the midpoint of our underwriting target of 5.5% to 6%, where our risk-adjusted returns are more fully optimized. Overall, our credit performance remains within our expectations and has benefited from investments in our advanced underwriting platform as we expect to continue on a path towards our long-term operating targets. Focusing on our more recent vintages, they continue to perform in line with those from 2019. While we're pleased with how these vintages are developing, we're continuously monitoring our portfolio and have implemented further credit actions include some tightening of our origination criteria. These proactive refinements are intended to position our business for 2024 and beyond. Moving to reserves, our allowance for credit losses as a percent of loan receivables was 10.40% up 6 basis points from 10.34% in the second quarter. The reserve build of $372 million in the quarter was largely driven by receivables growth. Turning to Slide 10. Our stable funding model and strong management of capital and liquidity continue to position Synchrony well for any environment. In the third quarter, customers continue to be attractive to our consumer bank offerings as we grew both direct and broker deposits to fund our anticipated receivables growth, deposits represented 84% of our total funding at quarter end. The remainder of our funding stack is comprised of securitized and unsecured debt at 7% and 9% of our funding, respectively. We completed a $1 billion securitized issuance in the quarter, and we'll continue to be active in both markets as conditions allow. Total liquidity, including undrawn credit facilities, was $20.5 billion, up $275 million from last year. At quarter end, liquidity represented 18.2% of total assets down 192 basis points from last year as we manage our liquidity portfolio and fund strong loan receivables growth. Moving on to our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony made its annual transition adjustment of approximately 60 basis points in January, and we'll continue to make annual adjustments of approximately 60 basis points each year until January of 2025. The impact of CECL has already been recognized in our income statement balance sheet. Under the CECL transition rules, we entered the third quarter with a CET1 ratio of 12.4%, 190 basis points lower than the last year's level of 14.3%. The Tier 1 capital ratio was 13.2% under the CECL transition rules compared to 15.2% last year. The total capital ratio decreased 120 basis points to 15.3%, and the Tier 1 capital plus reserves ratio on a fully phased in basis decreased to 22.5% compared to 24.1% last year. During the third quarter, we returned $254 million to our shareholders, consisting of $150 million of share repurchases and $104 million of common stock dividends. And at the end of the quarter, we had $850 million remaining in our share repurchase authorization. Synchrony well positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. We will also continue to seek opportunities to complete the development of our capital structure through the issuance of additional preferred stock as conditions allow. Now, please refer to Slide 11 of the presentation for more detail on our outlook for 2023. We expect our ending loan receivables to grow approximately 11% versus last year, reflecting the combined impact of payment rate moderation and slowing purchase volume growth. We expect a full year net interest margin of approximately 15.15%. Net interest margin in the third quarter benefited from strong growth in interest and fees and receivables in addition to payment rate moderation and lower deposit betas. In the fourth quarter, we expect net interest margin to be impacted by higher average liquidity to prefund seasonal loan receivables growth impacting the mix of interest-earning assets, higher deposit betas driven by competition and movement in benchmark rates and interest and fee growth, partially offset by rising reversals. From a credit standpoint, delinquencies nearly reached 2019 levels at quarter end, and should file seasonal trends from this point. With the increased visibility into delinquency performance this year, we are tightening our forecasted with net charge-off rate to approximately 4.85%, we continue to anticipate our loss rate reaching a fully normalized level between 5.5% and 6% on an annual basis in 2024. And as we noted, we will continue to monitor and position the portfolio for 2024 and beyond. We expect the RSA to trend at the low end of our prior outlook and to be approximately 3.95% of average loan receivables for the full year. This improved outlook reflects the impacts of the continued credit normalization, lower net interest margin and the mix of our loan receivables growth. And as we generate higher-than-anticipated growth, we are maintaining our expectation for operating expenses at approximately $1.15 billion per quarter while we continue to make selective investments in our business. We're committed to delivering operating leverage for the full year. As Synchrony continues to leverage our core strengths, our advanced data analytics, our discipline approach to underwriting and credit management, and our stable funding model, we're confident in our ability to execute on our key strategic priorities and deliver market leading returns over long term. I'll now turn the call back over to Brian for his closing thoughts.

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'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.

Ryan Nash:

Maybe a two-part question on credit. First, can you -- if the full year guide implies a decent acceleration in charge-off performance in the fourth quarter. So, you can maybe just talk a little bit about what's driving that? And then second, maybe just tease out what gives you confidence that we're going to follow, seasonal patterns from here given a handful of moving pieces, inflation, resumption of student loan payments. And then obviously, we have the growth math impacts from '22 and '23 but offsetting that, you guys obviously were one of the more conservative in underwriting given some of the tightening that you have done. So can you maybe just walk through all of those moving pieces and what you think it means for the trajectory of credit losses?

Ryan Nash:

Got it. Maybe as a follow up, Ryan, so you know, the RSA seems to be coming in better than had initially been forecasted given the guidance for $395 million for the year. And we look forward, losses are on a continued normalization and loan growth seems to be slowing. So, can you maybe just tease out some of the moving pieces as we head into '24? It feels like we're kind of back in an environment similar to where we were in the 2018, 2019 timeframe when credit was normalizing and the RSA was coming in well below that 4% threshold. So, can you maybe talk through some of those pieces? Thank you.

Operator:

Thank you. We'll take our next question from Erika Najarian with UBS. Please go ahead.

Brian Wenzel:

Yes. Thanks, Erika. So I think as we think about the margin as we move forward here, there's a little bit of tailwind still to go on prime rate. That flows through the book here in the fourth quarter. I think the second thing you're going to continue to see a benefit on the margin coming from higher revolve. We're still paying rates that are 130 basis points above the pandemic period. So again, there should be some push up there. There should be a little bit of a headwind relative to reversals that go against that. So that's really, as I think about the yield side of the equation. On the interest-bearing liabilities side of the equation, Again, there are a lot of assets that were put on -- excuse me, a lot of deposits that were put on this year, they're going to have to reset next year. So a little bit of tick up next year in the interest-bearing liabilities as those shorter days CDs hopefully renew. I think when you get to the backside of the cycle, that's really to be seen, right? There's a case that can be made where betas will be a little bit slower coming down for some of the folks that want to try to gather deposits and get the yield side of their investment portfolio is up. There are some that are going to want to try to push down the cost of fund base or NIM sensitive. So, I think as we get closer to that, we can probably give you a better perspective of which way that will turn.

Brian Wenzel:

Yes, great question, Erika. So when we look at the rules, the first thing I'd say, probably along with others, we're clearly disappointed with the proposed rules around capital, both from the process in which the fed went through as well as certain elements that we don't think we're clearly thought through fully if you thought about a holistic review of the capital stack, right? You combine that with what I would say some apparent gold plating. It's very difficult, I think, for the industry as a whole. And I think you're seeing that in bank's feedback, I think you're seeing it through the trade group feedback. And I think there's some even level of concern with the fed governors with regard to that. And then finally, when you think about Synchrony before I get to the details, we're clearly disappointed that the tailoring rules effectively have been eliminated by treating us on the same level as a lot of the other banking institutions. With that said, Erika, if we looked at just taking those rules as they are, again, we're not sure that they will stay as they are. The impact to us is probably between the 15% to 20% higher impact to capital. And the range there depends really upon how you treat some of the RSA when you found the operational risk pieces with the RSA offset, the fraud and some of the revenue items. When I think about the unfunded commitments that is a fairly significant add back to the RWA. The good news for us, I think we have a path where through mitigation strategy, we think this would be very manageable. It's an active the way it was today. And part of it, we think about the unfunded commitments, a good bulk of that is with accounts that are deemed and active. So, we can adjust line strategies without impacting current customers in our business. So, I'm not sure as we look at it and we talk about as a company, we believe there is a significant aspect with how we manage the growth side of the business.

Sanjay Sakhrani:

I guess my first question, Brian Wenzel for you in terms of the reserve rate going forward. We've seen some of the card issuers make adjustments to kind of what's inside the reserve and what's not. And there's some risks associated with inflation and the fact that behaviorally things are trending a little bit different than they have in the past. Maybe you could just talk about the migration of reserve rate going forward and you feel comfortable in the methodology at this point?

Sanjay Sakhrani:

Okay. Great. And then maybe one for Brian Doubles. Brian, can you just talk about sort of the backdrop for portfolio acquisitions, any renewals that kind of stuff? And then maybe just the competitive environment in general?

Operator:

Thank you. We'll take our next question from John Hecht with Jefferies. Please go ahead.

Brian Doubles:

Yes. John, I would say consistent kind of trends on new accounts, both in terms of absolute magnitude as well as where the accounts are coming from. One of the things that Brian mentioned as we think about underwriting, we don't expand the credit box in really good times, and we try not to really restrict it in more uncertain times. And that means that we have more of a steady trend in terms of both, new accounts, active accounts, et cetera. I would tell you that the new programs that we recently launched or performed really well. We're seeing really good growth there. So, we continue to be encouraged on that front. And you're seeing, I would say, really good trends across all of the platforms. As we look at growth, it's not one platform that's really outperforming. You're seeing that a little bit with Health & Wellness, but it's pretty broad-based and that's encouraging. I think the consumer has been much more resilient than any of us anticipated a year ago, and you're seeing that across the board, whether you look at purchase volume, receivables, new accounts, active accounts. If we had to pick a metric, that's one that's probably a little bit more important than new accounts because keeping that consumer engaged offering them more than one product, like that's a big part of our strategy. And so, we've been pleased so far all year.

Brian Doubles:

Yes, I mean, look, we're always opportunistic when it comes to potential M&A opportunities. You know, at the same time, John, you know, we're extremely disciplined around the financial return of those opportunities making sure that they're accretive. We weigh that against buying back our stock and other opportunities. So look, we're always in the market. We've done some really nice smaller acquisitions over the last couple years. Pets Best has been an absolute home run for us. Since we acquired that business I think the pets and for us is up 5x just between 2019 when we acquired it and now. Allegro has been a great acquisition for us. Again nice acquisition, relatively small in terms of the capital outlay for that, but we've been able to leverage the scale at health and wellness to grow that. We picked up some new products as part of that. So those are the types of acquisitions that we really like to do. But with that said we look at larger opportunities, but they've got to make sense. We balance those against other uses for our capital and they've got to have, a nice return profile for us and a good path to EPS accretion.

Kevin Barker:

Have you seen any particular shifts in payment rate trends for the near prime to prime consumer? Appears some of your competitors mention that there's a little bit more weakness, primarily due to household net worth or even savings rates within that cohort, are you seeing any changes in payment rates there?

Kevin Barker:

Okay. And then, I know it's very early, but are you seeing any impact on payment rate trends for folks with federal student loans? I know it's, first few weeks…

Operator:

Thank you. We'll take our question from Jeff Adelson with Morgan Stanley. Please go ahead.

Brian Doubles:

Yes. Thanks, Jeff. So look, we're obviously still waiting for the final rule to be issued. So, there's plenty of unknowns out there until we see the final rule. We got to see things like the implementation period, the final amount. We also believe that will be litigated. So, we're going to watch that carefully, and that could impact the timing as well. So I guess what I would say is, look, we're prepared for multiple scenarios in terms of timing. We've been -- we've been working very closely with our partners for over six months now. We're working on pricing offsets really with the goal of offsetting the impact here and putting us in a position with our partners where we can underwrite a large cross-section of the customers that we do today. We're obviously goes without saying we're disappointed in the rule. Obviously, we think it has unintended consequences that weren't properly evaluated. Late fees are a very important incentive to pay $8 just clearly is not an incentive. So without those offsets, it would restrict access to a pretty significant cross-section of consumers. And no change to what we've said in the past. Our goal is to protect our partners, fully offset the impact and continue to underwrite and approve the majority of the customers that we do today.

Brian Wenzel:

Just to be clear to lean back into loosening credit or….

Brian Doubles:

Yes. Listen, we have a very good credit team that's consistently evaluating performance of the portfolio by partner, by vertical, by channel. And I think to some degree we want to see how cred develops across the industry. Again, I talked about a shared consumer, so what other issuers are doing or not doing can have a flow through effect to us. So, again, we will watch those things. There's not a telltale sign to say, once this happens, we will go. But our team, you has a lot of tools. We use a lot of data. We're using much more decision tree and non-core based measures in order to assess that. And again, the data elements that we get from partners will tell us how the consumer's performing. So we'll continue to look at that. And again, Brian said it, I said, we don't move the credit box around that often because our partners want consistency and origination. Our customers want to have consistent underwriting from us and that's part of our lower line low and growth strategy.

John Pancari:

Regarding the back to the late fees, can you maybe just give us a little bit of color how do you think about the timing of the offsets that you're negotiating at this time with your partners? You mentioned pricing and I'm assuming there's other factors, maybe if you could just talk about the once the rule goes in place, what type of timing should we expect in terms of being able to see some of the offsets of that initial impact?

John Pancari:

And then my second question is kind of a two-parter. First on the incremental credit actions that you implemented in the third quarter, maybe just elaborate there around what exactly you did in the third quarter versus what you've been doing previously. And then separately, you mentioned that the RSAs are not as heavy in the health and wellness sector or business line. Can you talk about how much lower and then other product areas that may also have a lower RSA?

Operator:

Thank you. We'll take our next question from Mihir Bhatia with Bank of America. Please go ahead.

Brian Wenzel:

Yes, well, good morning, Mihir. The first thing I'd say, and I don't think we've got enough credit for it as a company. But we still haven't reached, and again, I know it's seven basis points and one, we still not have reached our pre-pandemic delinquency metrics. I think there's only a couple of issuers that are in that category. So I wouldn't, I think we shouldn't undersell that, number one. I think number two, when you look at the performance I'm not sure I would characterize as accelerating in the fourth quarter. If you go back and look at the growth on a dollar basis, in ‘17 and ‘18 on average, versus this, they grew on average 18 to 19% in the ‘17 to ‘18 period. And we grew, you know, in this quarter 18 to 20% on a 30 plus and 90 plus basis. So, probably in line, I'd say with seasonality, when you look at the relative percentages, if you think about bps, they were 40 and 20 or 50 and 20 we're 56 and a little bit over 20. So there is not, there's not a big deterioration, I'd sit there and say, characterize it that way. You know what, as I, as we look at the performance for net charge off next year as a full year basis, one of the reasons why I think we've tightened a little bit here, again, given the share of consumers, we're trying to maintain losses inside that five and a half to six and setting up the portfolio well to perform there. Cause that's where we think the optimized risk adjusted margin is for us as a company. I know others, you know, clearly are thinking now that they're going to, they're willing to take a higher net charge off rate and a lower margin. That's not where we want to operate this company and deploy capital it's not as effective for us. So we're going to be disciplined around that. So again, when I look at that, and if you go back to earlier in the call, I talked about some of the vintage performance and other things that we've seen, it gives us, you know, some level of comfort that, that we have a pretty good view of the trajectory.

Brian Doubles:

Yes, sure. So maybe to start more broadly. I think this has been an area where we been investing with our partners. I think the pay later products that we offer. It's a great way really just to engage more customers and offer them a new financing offer that's got really nice utility. We are seeing proof that the product does provide both value to us and to our partners. If you look at the results this quarter, year-over-year, we've grown installment and pay later products 29%. So we're clearly over-indexing in that product. So we can feel pretty good. I think the multiproduct strategy that we've been talking about for well over a year now is starting to pay off, and you're seeing that with what we announced and launched with Lowe's. The lowest pay is a white label version of that. And so one of the things that's really important to our strategy is flexibility both in terms of how we offer the product inside of our partners but flexibility to the consumer as well. So we're willing to offer that as Synchrony pay later, and we do that for a number of partners. We're also willing to white label it, which I think is a real competitive advantage for us because a lot of partners or a lot of competitors are not willing to do that. We're seeing really good traction on the launch so far, and we're just really pleased to be able to offer another product inside of our Lowe's partnership

Don Fandetti:

Talk a little bit more about the health of the consumer in terms of the lower end versus the higher end, and also do you feel more comfortable on one or the other based on what you're seeing going forward?

Operator:

Thank you. We'll take our next question from Rick Shane with JP Morgan. Please go ahead.

Brian Wenzel:

It really is mixed between the platforms and between the portfolios and their each of these arrangements are different. They're unique by partners, so certain partners are performing better than others. Certain ones have volume-based measures as well. So it really depends upon where that volume goes and the performance of the individual portfolio. So, that is the main driver.

Saul Martinez:

Most of my questions have been asked, but maybe if you could just go back to your comments on reserve levels and reserve adequacy and where we go from here. I get that your reserves, you seem to be indicating that, that you feel comfortable with your reserve ratios and you are, I think still about 40, 50 basis points, if I'm not mistaken, above your day one CECL allowance levels. But you are expecting NCOs to normalize and, and move higher. I would expect your losses that'll flow through your reasonable supportable period will be moving higher as we move forward. But just maybe you can comment on your reserve outlook going forward and what would induce you to maybe build reserves. What would need to happen for some additional reserve builds above and beyond what you need for growth?

Operator:

And we are allotted time for questions today. So we will take our final question from Arren Cyganovich with Citi.

Brian Wenzel:

Yes. First of all, Arren, glad we were able to get your question in. With regard to the backs, we generally do not give or we have not given quarterly guidance with regard to how their purchase flow out for the quarter. At the end of the quarter, we had $850 million remaining under the current share repurchase authorization as we move to the end of the capital year in June of next year. What I probably want to be clear about with regard to that level for a second is what's not really driving the dollar amount. So I just really want to be clear that it's not related to a change in the macro environment for us, number one. Two, it's not related to any potential proposals on late fees. And then three, it's not related to Basel III end game. We have a set of mile markers that we've set out in the capital plan that's more RWA based and then how our income kind of comes in versus planned. So those are the factors. And again, we consider the other factors but that was not purchases.

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 and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsive 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 Wenzel:

Thanks, Brian, and good morning, everyone. Synchrony'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 Synchrony 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, ending 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 pay 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 and fees grew 25%, driven by loan receivables growth, higher benchmark rates and a lower payment rate 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. Offsetting these improvements was higher interest-bearing liability cost, which increased 263 basis points to 4.04% and reduced 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. RSAs 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 in 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 $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 basis points compared to last year to 35.5%. In total, Synchrony generated second quarter net earnings of $569 million or $1.32 per diluted share, a return on average assets of 2.1% and return on tangible common equity of 21.7%. Next, I'll cover our key credit trends on Slide 8. As payment behavior continues to revert towards pre-pandemic historical averages, our delinquency in net charge-off rates continue to normalize towards pre-pandemic performance. Our 30-plus delinquency rate was 3.84% compared to 2.74% 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. Our 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 Synchrony'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 material impact on purchase volume. 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 build of $287 million in the quarter was largely driven by receivables growth. Our provision did not include any material 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 was partially offset by lower broker deposits. Deposits at quarter-end represented 84% of our total funding. The remainder of our funding stack is comprised of securitized and unsecured debt at 6% and 10% of our funding respectively. We remain focused on being active issuers in both markets as conditions allow. Total liquidity, including undrawn credit facilities, was $19.4 billion, up $521 million from last year. As a percent of total assets, liquidity represented 17.9%, down 198 basis points from last year as we manage our liquidity portfolio and fund strong loan receivables growth. Focusing on our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony 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 CECL has already been recognized in our income statement and balance sheet. Under the CECL 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 1 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 repurchase authorization for 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 $0.25 per share from $0.23 per share beginning in the third quarter. During the second quarter, we returned $399 million to shareholders, reflecting $300 million of share repurchases and $99 in common stock dividends. At the end of the quarter, we had $1 billion remaining in our share repurchase 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've also continued 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, Synchrony remains focused on actively managing the assets we originate and prudently 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 payment rates to normalize but remain above pre-pandemic levels through the remainder of this year. We now expect our net interest margin within a range of 15% to 15.15% for the full year. Net interest margin in the first half was influenced by higher liquidity due to stronger-than-anticipated deposit flows and receivables gross prefunding. Deposit betas also trended 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 betas 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-planned growth resulting in variation in the mix of interest earning assets and interest and fee 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 mid-year. Net charge offs should follow a similar but lacked 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% and 4.10% 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 $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 to 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.

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'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.

Arren Cyganovich:

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% where it's been recently to kind of closer to 10% plus that you've talked about for year-end?

Arren Cyganovich:

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?

Brian Doubles:

Okay. Thanks, Arren.

Operator:

Thank you. We'll take our next question from Don Fandetti with Wells Fargo.

Brian Doubles:

Yeah, I'll start on this one. I think, look, the consumer is still strong. I think there's obviously still spending, excess savings are coming down a bit, but they are still trending above 2020 levels. So 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%. So everything we're seeing on the consumer is still pretty positive. With that said, we're still operating cautiously. We're monitoring this 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 through the balance of this year and into next.

Brian Wenzel:

Thanks for that, Don. The first half of the year, I think when we look at the reserve provisioning, there have really been growth from provisions, I think 2.85% and 2.86% respectively for the first quarter and the second quarter. Again, we continue to expect that migration back down towards CECL day one. I think the 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. So again, it will migrate -- continue to migrate down as long as we believe the macro backdrop comes in line with our expectations.

Brian Doubles:

Thank you, Don.

Mihir Bhatia:

Good morning. Thank you for taking my question. Maybe to start, I think the first question I have is just on the regulatory front. Specifically thinking around CFPB's late fee rules and also the inquiry into the deferred interest medical costs. Maybe just talk about your perspective on those issues, where things are shaking out and if there's any updates to share and how you're just preparing. [indiscernible]

Mihir Bhatia:

It was just on the medical, if there's anything to -- do you have any comments on the inquiry into the deferred interest of the medical comps that they've also been talking about?

Mihir Bhatia:

And then, just if I could switch here to the credit side, right? Your guidance for delinquency rates, and I think you've talked about consumer being resilient, delinquencies taking a little while to get back to pre-pandemic levels, which obviously is a good thing. But your guidance talks about it approaching pre-pandemic levels here in the next, I guess six months. What happens after that? I mean, your charge-off comments for 2024 suggests you think delinquencies will stabilize at those pre-pandemic levels. So maybe just talk about what gives you confidence that that will happen versus going through those pre-pandemic levels and continuing to grind higher? Thank you.

Mihir Bhatia:

Great. Thank you.

Operator:

Thank you. We'll take our next question from Ryan Nash with Goldman Sachs.

Brian Doubles:

Hey, Ryan.

Brian Wenzel:

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 was a little bit more price increases from competitors. And I think that comes from a couple of 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, 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 really merged, I'd say late May into June. So as we think about that mid-70s, low-90s, in our back half assumptions we have it moving up, call, roughly 10 percentage points. So you'd see savings in the mid-80s and you see CDs around 100%. I think as you think forward about deposits, generally speaking, assuming that the market remains, what I'd say rational, we would expect it to be fairly stable. And then hopefully when you start to see rate decreases in the future that the betas will be in a similar type 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. Most 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. And then clearly some of the liquidity we both up in the first half will get deployed. The second half will also be impacted potentially how liquidity portfolio plays out in 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, Ryan.

Brian Doubles:

Yeah, Ryan. So again, Vice Chair Barr has indicated they will put out proposed rules around capital, which may have a comment period before a final rule is issued in -- then a implementation period a couple of years out to fully transition in. We've obviously been preparing and have run different scenarios relative to the different outcomes when you think about financial changes towards 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 actions. I think it's manageable for us. I think if the Fed decides to extend some of the long-term debt or TLAC requirements, from based on the rule that exists today, we feel like we're in a good position. We're in surplus position to know. So I think we feel good about what potentially can come, but obviously we'll look at the rules, we'll evaluate it and most certainly we'll 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.

Brian Doubles:

Thanks, Ryan.

Operator:

Thank you. We'll take our next question from Kevin Barker with Piper Sandler.

Brian Doubles:

Yeah. 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, paying rates for us or others will be fundamentally different as we look out you'll call it a year for 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 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, I'd say, the pre-pandemic period. We're going to have to wait and see whether that happens. The other dynamic that we have seen is, it has been arising in auto pay, which is a good thing for us. So we've had about 4 percentage point shift up to about 20% of the accounts paying on auto pay. And there, 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 [case sheet] (ph) recovery and part of the exit out of the pandemic period for now until we get more clarity with regard to when the excess savings or money that's been accumulated during the pandemic totally burns off of those higher credits.

Brian Doubles:

Yeah, Kevin. So, again, we understand the population of people who have student loans. We understand the magnitude relative to the amount of the ones that they have outstanding of what is currently in forbearance and non-forbearance. I think when we look at that population and the mix of that population, first of all, they're very close to the FICO range we have, I think they're about 10 points different on event discourse, excuse me, difference. They're within 10 basis points of delinquency. So they look like the regular book, 46% of those people we have underwritten pre-pandemic that we're making payments. So 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 in the call, Kevin, I don't think we see purchase on a dollar basis really decelerating, it just goes back into, we have 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 in demand both for goods and services. So we feel good about the volume. Brian highlighted health and wellness and digital, which are really pulling the engine forward here and we expect that to continue.

Brian Doubles:

Thanks, Kevin.

Rick Shane:

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've 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?

Rick Shane:

Great. Hey, Brian, that's very helpful. As you think about the wholesale market, can you talk a little bit in this rate environment and supply and demand, is there -- what is the potential arbitrage in terms of funding versus the deposit market?

Rick Shane:

Perfect. That makes sense. Thank you very much.

Operator:

Thank you. We'll take our next question from Sanjay Sakhrani with KBW.

Brian Doubles:

Yeah, sure, Sanjay. Look, I would say, with a couple exceptions, most of what's in our BD pipeline right now are smaller start-up, 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 we’re extremely disciplined as well. In terms of risk return, making sure we got the right balance, the right alignment with partners, I think that's just absolutely critical. So 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 in alignment with the partner.

Brian Doubles:

Yeah. So look, clearly, think that this proposal has a lot of unintended consequences to consumers, even the 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 comment 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 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 in those. That's really where we've been focused for the last, kind of, 12 months.

Brian Doubles:

Yeah. thanks, Sanjay.

John Pancari:

Good morning. Regarding the credit actions that you've mentioned you're taking into 2024 given some migration on the non-prime side, can you give us more color on what portfolios you're seeing this migration and what actions you're taking, if you can give us a little more detail on that front? Thanks.

John Pancari:

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 bumped that up a bit and mentioned growth in operating losses. So maybe can you help give us more color there and maybe break it out and kind of set out what drove the revision?

Brian Wenzel:

I think adding to that is we're clearly getting operating leverage and you saw a pretty good year-over-year improvement in the efficiency ratio. So that's a key measure for us that obviously, we're very focused on.

Brian Wenzel:

Thanks.

Operator:

Thank you. We'll take our next question from Betsy Graseck with Morgan Stanley.

Brian Doubles:

Yes. Thanks, Jeff. The RSA does incorporate expense in. So expenses would flow through to our partners as well as truly impacting now is again some of the pressure you saw in the net interest margin from interest-bearing liabilities cost. They flow through their 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 4.25% where we started the year, now at 3.90% to 4.15% is at the lower end of a long-term guide. I think again, long-term guide has a slightly higher net charge off rate by 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 is higher, the RSA was higher. And now as you see a little bit of this interest-bearing liability cost increase, net charge off increase, slightly higher expenses, the RSA is performing like it should and is designed to where it's a little bit lower than expectation. Again, we updated the guidance to be 3.90% to 4.15% and we believe that that is for this year a good estimate of where the performance is going to be and we'll be back. But again, we feel good about a long-term guide and there hasn't been any fundamental shifts in the sharing of economics with our partners.

Brian Doubles:

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 to default on a partner channel basis. So we've been making more assignments there but not broad-based action. So we feel good about it. You got to remember us as an issuer, we get selected for credit versus others who do mailings and choose people to apply for credit. So we have to be hopefully smarter at the time of that decision in which we can gather more data, use data from our partners, usually 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 lever. We make small adjustments as we see fit, we're relative to line assignments, but we try to be consistent with our partners and really managing exposures 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.

Brian Doubles:

Thanks Jeff.

John Hecht:

Good morning, guys. And thanks for…

John Hecht:

…taking my questions. How are you guys? First one is Brian Doubles. I think you gave a little bit more color on the usage of BNPL and I guess the increased usage of the BNPL product in your portfolio. It sounded like you're 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 -- I guess how does it -- is that at the point now where it affects volumes overall and fee structures and that margins overall? And if so, how does the impact of the BNPL product impact those metrics?

John Hecht:

Okay. That's very helpful color. Thanks. And then, Brian Wenzel, I think you touched on this, I apologize for any redundancy, but maybe quick color on the seasonality of Q3 and Q4 NIM, anything to consider there?

John Hecht:

That's perfect. Thanks, guys.

Operator:

Thank you. We have time for one more question from Dominick Gabriele at Oppenheimer.

Brian Doubles:

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 push more individuals, how do you see a little bit more sign up as people have the ability to really understand the product, its 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.

Brian Doubles:

Yeah, thanks for the question. So I think when you think about where we're putting on 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 place 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 wise, we continue to into some of the direct-to-consumer businesses inside of health and wellness as we try to promote the product to really drive the experience and manage what is a very difficult healthcare environment for folks who have more costs or shifting towards them. So it's really across those three levers, employee costs as well as technology and marketing. And you will see that again, that normalization of operational losses as we move forward.

Dominick Gabriele:

Perfect. Thank you.

Brian Doubles:

Thank you.

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, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit 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 Wenzel:

Thanks, Brian, and good morning, everyone. Synchrony's first quarter performance highlighted the continued strength of the consumer paired with the power of our diversified sales platforms, compelling value propositions, and prudent financial position. Consumers continue to deepen their engagement with our products. On a core basis, ending loan receivables growth of 16% was fueled by 11% stronger purchase volume along with 3% higher spend per active account. Net interest income increased 7% to $4.1 billion as the growth in loan receivables and an increase in loan receivable yields drove 15% higher interest and fees. This was partially offset by the impact of the portfolio sold during the second quarter of 2022. On a core basis, interest and fees increased 23% reflecting the impact of credit normalization as payment behavior trends toward pre-pandemic levels. Pay rate for the first quarter when adjusting for last year portfolio sales was 16.7%, approximately 85 basis points lower than last year and approximately 150 basis points higher than our five-year pre-pandemic historical average. First quarter net interest margin of 15.2% declined 58 basis points, primarily reflecting the higher impact of interest rates on our funding cost, partially offset by better yield trends. Loan receivables yield declined 97 basis points and contributed 83 basis points to net interest margin. Incremental liquidity portfolio yield also contributed an additional 54 basis points. These gains were more than offset by higher interest-bearing liability costs, which increased 219 basis points to 3.43% and reduced net interest margin by 179 basis points. And our mix of interest-earning assets reduced net interest margin by approximately 16 basis points as we built liquidity to fund anticipated growth. RSAs of $917 million in the first quarter or 4.10% of average loan receivables. The $187 million decline from the prior year reflected the impact of portfolio sold in the second quarter of 2022, and higher net charge-offs, partially offset by higher net interest income. RSAs provide important alignment with our partners and continue to function as designed by providing a buffer to the financial results of the company and supporting greater stability in our returns. This was highlighted in the first quarter as RSA provided a buffer to increased net charge-offs and higher funding costs. Provision for credit losses was $1.3 billion for the quarter, which reflected higher net charge-offs and a $285 million reserve build. The build included consideration for the potential macroeconomic effects of industry credit contraction and the potential impact on consumers, though we do not see any related impacts in our delinquency performance today. Other income decreased $43 million driven primarily by higher loyalty costs as well as the impact from investment gains and losses, partially offset by higher debt cancellation income. Other expenses increased 8% to $1.1 billion, primarily driven by higher employee costs, operational losses, and technology investments. Our efficiency ratio for the first quarter was 35% compared to 37.2% last year. In total, Synchrony generated first quarter net earnings of $601 million or $1.35 per diluted share delivering a return on average assets of 2.3% and a return on tangible common equity of 23.2%. Next, I'll cover our key credit trends on Slide 8. We continue to see credit metrics performing in line with or better than 2019 performance as credit normalization continues at a measured pace. Delinquency rates remain at approximately 80% of pre-pandemic levels and recent vintages continue to perform better than those of 2018 or 2019. The continued tapering of accumulating consumer savings is contributing to a slow moderation of payment behavior towards prepay anemic levels, -- as we noted last quarter, the trend of normalization has gradually shifted into higher credit grades, where balances tend to be larger. As a result, we saw payment rate declines versus prior quarter of approximately 30 basis points while delinquencies and losses increased in line with our expectation. Our 30-plus delinquency rate was 3.81% compared to 2.78% last year or 4.92% in the first quarter of 2019. Our 90-plus delinquency rate was 1.87% versus 1.30% in the prior year or 2.51% in the first quarter of 2019. And our net charge-off rate increased to 4.49% from 2.73% last year, still approximately 100 basis points below our underwriting target of 5.5% to 6%. Our allowance for credit losses as a percent of loan receivables was 10.44%, up 14 basis points from 10.30% in the fourth quarter. The sequential increase in the reserve rate primarily reflected the impact of the additional reserve discussed earlier and seasonally lower receivables. The allowance also reflects a previously announced $294 million reduction of reserves for troubled debt restructurings recorded through equity as we adopted updated accounting guidance. This guy has reduced our reserve coverage rate by approximately 30 basis points for the quarter. In the quarter, Synchrony's management of funding, capital, and liquidity remained a source of strength. We set and maintain appropriate target levels of common equity, liquidity, and reserves. We generally manage our funding strategy to be interest rate neutral and to minimize duration risk. And the vast majority of our liquidity portfolio is in cash and short-term U.S. treasuries, largely maturing in under one year. So as depositors across the country navigate the uncertainty of several bank failures and pronounced deposit flows during mid-March, Synchrony Bank was well positioned as a reliable source of stability for both our customers and our business. Our stable direct-to-consumer deposit base is largely insured, with no concentration in geographic areas or high-balance accounts. Our outage depositor has banked with us for approximately five years, and nearly 80% of our deposit balances are more than three years old. The foundation of this loyalty is Synchrony Bank's award-winning platform and industry-leading customer satisfaction scores, depositors are attracted to our seamless digital first experience as well as our competitive rates. In fact, as customers sought to either balance exposure to their banks or remix their balances to take advantage of available FDIC insurance limits during the last three weeks of March, Synchrony Bank saw a net deposit inflow of nearly $700 million as we generated double-digit account growth sequentially. This contributed to first quarter deposit growth of 17% versus last year and $2.7 billion sequentially to reach $74.4 billion. At quarter end, over 91% of Synchrony Bank direct deposits were fully insured. And looking at April trends, Synchrony Bank activity has returned to more seasonal flows, highlighted by continued growth in new accounts and deposits. Our deposit base provides a strong foundation for our business, representing 83% of our total funding, and is complemented by our securitized and unsecured debt, which represented 7% and 10% of our funding, respectively, and increased by $1.7 billion versus the prior year. This increase included the issuance of 10-year subordinated debt, an important milestone as we continue to more fully develop our capital stack, and reach target capital levels. Total liquidity, including undrawn credit facilities, was $21.7 billion or 20.2% of our total assets, up 148 basis points from last year as we grew deposits and prefunded our projected loan receivables growth. Moving on to discuss Synchrony's capital position. As we previously elected to take the benefit of the CECL transition rules issued by the joint banking agencies, Synchrony made its annual transitional adjustment of approximately 60 basis points to our regulatory capital metrics in January, and we will continue each year until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Further, the TDR reserve reduction mentioned earlier was recognized net of tax and equity adding approximately 25 basis points to our capital ratios. We ended the first quarter at 12.5% CET1 under the CECL transition rules, 250 basis points lower than last year's level of 15%. The Tier 1 capital ratio was 13.3% of the CECL transition rules compared to 15.9% last year. The total capital ratio decreased 180 basis points to 15.4%. And the Tier 1 capital plus reserves ratio on a fully phased-in basis decreased to 22.5% compared to 24.5% last year. Synchrony continued our track record of robust capital returns in the first quarter. In total, we returned $500 million to shareholders through $400 million of share repurchases and $100 million of common stock dividends. As of quarter end, our remaining share repurchase authorization for the period ending June 2023 was $300 million. Synchrony remains well positioned to continue to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan. We'll also continue to seek opportunities to complete our fully developed capital structure through the issuance of additional preferred stock. Finally, please refer to Slide 12 of our presentation for more detail on our full-year 2023 outlook. Overall, first quarter purchase volume came in ahead of our expectations, which, when combined with slightly faster payment rate normalization than anticipated, deliver stronger receivables growth for the quarter. As a result, we now expect any receivables to grow by 10% or more by year-end, although we anticipate paying rates ending the year well above pre-pandemic levels. We continue to expect net interest margin of 15% to 15.25% this outlook reflects the benefit of favorable trend in our deposit betas and payment rates during the first quarter, balanced by anticipated impacts of the broader market uncertainty. These potential impacts include holding higher liquidity levels in anticipation of growth funding needs as well as competitive dynamics within the industry that could lead to higher betas. Meanwhile, credit normalization continues on track in line with our expectations in terms of both our delinquency and loss trends. As a reminder, we expect delinquencies to continue to rise and approach pre-pandemic levels by midyear. Net charge-offs should follow a similar but lagged progression relative to the normalization and delinquencies. Lost dollars will rise through 2023, but will not reach fully normalized levels to approximately six months following the peak and delinquencies. As such, we continue to expect the net charge-off rate for the full year 2023 of 4.75% to 5%, and that our portfolio will not reach an annual underwriting loss target range of 5.5% to 6% until 2024. Given our unchanged outlook for net interest margin and net charge-offs, the RSA remains unchanged between 4% and 4.25% of average loan receivables. We remain committed to delivering operating efficiency for the full year with a target of approximately $1.125 billion in operating expenses per quarter. In sum, Synchrony's model is built for sustainable performance at strong risk-adjusted returns as we grow to meet the needs of our customers, our partners, and our shareholders. As conditions normalize, we remain on track to achieve our long-term financial operating targets. I'll now turn the call back over to Brian for his closing thoughts.

Kathryn Miller:

That concludes our prepared remarks. We will now begin the Q&A session. [Operator Instructions] Operator, please start the Q&A session.

Moshe Orenbuch:

Great. Thanks, and thanks to Brian and Brian. The -- I guess the first question I'd like to ask is, given that you're now seeing this normalization of profitability as you're going through this process of losses normalizing. And you do have the current economic outlook with the variability around it. Can you just talk a little bit about how you're thinking about growth in new accounts and the discussions that you're having with your partners both about your ability to continue to grow and their -- how they're thinking about the RSA that they receive?

Brian Doubles:

Yes. I would just add, Moshe, we talked about this in the past that, I think in periods of uncertainty, and clearly, we're in a somewhat uncertain period right now. This is when we see our partners engage even more in the card programs and that's great for us. The level of engagement, I would say, across big partners and small partners has never been higher than it is right now. They're very engaged. They are working with us on really trying to understand what the consumer is doing, how they're going to behave over the next 12, 24 months. And we're seeing great engagement in the multiproduct strategy as well, that's something that we anchored on a couple of years ago, a lot of momentum across the business on it. And I think as partners are kind of taking a step back and trying to figure out the macroeconomic environment and the consumer trends, they're also rethinking the financial products that they offer and kind of rationalizing their point of sale. And I think that definitely plays to our strengths.

Brian Wenzel:

Yes. Thanks, Moshe. So, as we entered the year, we anticipated our betas to rise from last year. There was a shift in the end of last year were got highly competitive, particularly with some of the regional banks. So, when you looked at our betas at the end of last year, they were roughly low to mid-70s on high-yield savings and around 80% on CDs. As we came into 2023, we anticipated probably a 10- to 15-point beta rise in high-yield savings and probably 20 basis points or essentially 100% or more data on CDs, right? That's how we came into the year. I'd say the market for the most part since the third week of December through the end of the first quarter was very rational and the betas performed better than our expectation, right? So, if you look at betas now, they're probably mid-70s on savings and about 90 on CDs. Our outlook, though, Moshe, is what's baked into the NIM guidance is that we still go back to those original points where you're going to be mid-80s on high-yield savings and over 100 on CDs just because of the fact that there may be other banks who have seen deposit outflows may get more aggressive. Again, we haven't seen that yet, but that's what's in the outlook. So hopefully, that doesn't develop, which would give us some potential upside.

Operator:

Our next question comes from Ryan Nash with Goldman Sachs.

Brian Wenzel:

Yes. Let me try to unpack that question, Ryan. Good to talk to you this morning. So first, when you think about the TDR account change, this is one where we, like many others, have chosen retroactive treatment. So, there was a reduction to the reserve that went net of tax through equity on January 1. As we came into the quarter, the reserve is fundamentally two things. One, the seasonal pay down and purchase -- seasonal pay down was lower than our expect or lower than expectations. And then purchase volume was higher than our expectations, which gave us a greater asset position at the end of the quarter, which led to the growth-driven reserve provision. When you think about the components of what's in the reserve from a macroeconomic standpoint, effectively, what we have in -- when you look all the way through the baseline model through the qualitative reserves, our unemployment is effectively 6%. So isn't this reasonable forecastable period, if unemployment stays below 6%, we should not have rate-driven reserve provisions. Again, during this quarter, though, given the banking turmoil and the potential contraction of credit, we did add to the macroeconomic overlay to deal with the potential flow-through effects to consumer. As I think about it stepping forward, what I'd say is we expect really generally growth-driven reserves. I mean, provision increases, and that should be in line with what we thought about. That said, we still believe that we're going to trend downward over time as we move out through the end of the year and into next year down to that adjusted CECL day one reserve post.

Brian Wenzel:

Yes. Ryan, the thing I try to get -- try to convey is that when you run your loss stress testing models under the severe and idiosyncratic events, unemployment was up to 10%. So, in theory, you go through and you run those stresses. So, we look at -- even if you had some form of recession that came about in the short to medium term, in theory, your -- our capital provision and our buffers would be able to withstand that. So, we don't necessarily look at that as something where we would sit back and say, we should stop or curtail some of the repurchases or the level of repurchases on it safe. So, the economic event is really baked into our capital forecast and our capital plan. As we think about the priorities, you hit it right. The first thing we think about is the organic growth of the company. Second is dividends. And third comes down to whether or not we have inorganic opportunities and/or share repurchases. So, some of the cadence that might come about over the next couple of years, are there assets that come available that we want to deploy capital into. But right now, again, we're going to continue to return shareholders to -- return capital to shareholders in line with what we've been doing historically and target down towards the 11%. Again, I highlighted in my prepared remarks that we do have to finish development of our preferred stack, but that's not necessarily something we need to do today.

Operator:

Our next question will come from Erika Najarian with UBS.

Brian Wenzel:

Good morning, Erika. So again, we gave you the range of 4% to 4.25%, it's going to really depend upon how net interest margin plays out, right, when you think about the funding cost of the business. Losses again, is in that same range as the 4.75% to 5%. So, it's really going to play really on how the deposit betas play through and how that -- the benchmark interest rates flow through to our partners, but we expect it to be in the 4% to 4.25%.

Brian Wenzel:

Yes. Thanks for the question. So first, let me just talk about credit for a second. We ended the quarter, if you look back at historical delinquency rates, we've been trending about 10 basis points a quarter up on the normalization curve. When we ended fourth quarter of '22 at roughly 80%. And we ended the first quarter of '23 or roughly between 75% and 77%. So, credit is normalizing in the way in which we expected and to stay on that trajectory. As you slide into '24, we expect the loss rate to back to our underwriting target at 5.5% to 6%. The other dynamics that play through, you're right, if you believe you go back to that type of environment, which would have a slightly normal -- higher or more normalized unemployment rate, you're then going to see your payment rate come back in line, which should give you a tailwind relative to interest and fees. But then we also expect the prime rate and the interest-bearing liabilities cost to come down. Those all kind of work. You have two effective tailwinds, headwind with net charge-offs, that goes -- all goes back through the RSA. So, when you think about that, you have pluses and minuses, there could be a period of time which we dip below 4% for a quarter or two, and then you should come back in line with what I would think the longer-term financial framework which we gave you, which is in that 4% to 4.25%.

Operator:

Our next question comes from John Hecht with Jefferies.

Brian Doubles:

Yes, John, I'll start and then ask Brian to add some color. I think the dual card co-brand strategy has been one that we've leaned on heavily over the last decade. And what we really like about it is the ability to migrate our best customers and our partner's best customers into a product that has world spend capabilities. And the way that they earn on that card typically gives them a reason to go back into the partner's store. So, we like the synergies there, and we are seeing above-average growth in dual card and world sales, which is great for us, great for our partners as well. Just taking a step back, as we think about the multiproduct strategy, it really is one that you can envision starting with at the kind of lower end of the spectrum, a secured card buy now pay later shorter-term installment loan migrating into a revolving product PLCC and then ultimately into a dual card or co-brand card. We think that strategy is a winning one. We think that economically to us when we think about the risk and return profile that allows us to cater to a very wide cross-section in terms of our partners' customers. And so that's where I think we've seen a real change just in the last two or three years as we've been engaging with our partners on the multiproduct strategy, a lot of engagement, a lot of momentum there. And I think that over time, that's a winning strategy for us. And maybe, Brian, just to add a little color if there's any changes in terms of the...

John Hecht:

Okay. That's very helpful color. And then Brian Wenzel, I apologize if you gave some of this color on the prepared remarks, but any -- I know you kept your guidance for NIM, for instance, and RSAs, but is there any seasonal considerations we should think about those over the course of the next couple of quarters?

John Hecht:

And then anything with respect to NIM fluctuations just as a part of that question.

John Hecht:

Thanks, very much, guys.

Sanjay Sakhrani:

Thanks, good morning. Maybe to follow-up on Moshe's question previously. Obviously, the cycle is very different from previous ones. I'm just curious if the dislocation in the regional banking space and the implications of it working through the economy might be assisting and sort of rethinking how you guys are underwriting? I know you mentioned, Brian Doubles the slower spending in March and lower tax refunds. Can you just talk about those different dynamics and sort of how it's affecting the way you guys are thinking about underwriting?

Sanjay Sakhrani:

Okay. And then a follow-up is it sounds like a former partner of yours might be looking for change. I'm just curious of your appetite to take on large portfolios like that specific one. And obviously, the stock price is still very attractive here. I'm just considering -- thinking through the trade-offs here and sort of how you guys are looking at the outlook for portfolio acquisitions and such? Thanks.

Sanjay Sakhrani:

Thank you.

Betsy Graseck:

Hi. I just want to dig in a little bit more on NIM. I understand the expectation on the forward look is it's going to bounce around, and I get that we're at the high end of the range right now on NIM. But I did want to understand a, what kind of rate outlook is baked into your NIM guide? And then b, if the mix shift is going to materially change as you look through this year from what it was in 1Q. Thanks.

Betsy Graseck:

Okay. And then just as a follow-up, you spoke a little bit about loan growth and you did raise the guide from 8% to 10% to 10% plus. But at the same time, you've got in the reserving discussion, potential tighter lending standards from the industry. Could you just address how you're thinking about lending standards? And is that -- is the increase in the loan growth that you're looking for? I mean, I would assume it's within the credit box that you've got but maybe you could speak to what's driving that increase in loan growth and how your lending centers are playing into the outlook? Thanks.

Betsy Graseck:

Okay, thank you.

John Pancari:

Good morning. On the charge-off expectation, I know you kept it unchanged at 4.75% to 5%. And you don't expect it to reach the more normalized level until '24. Can you just give us a little more granularity on where you are seeing mounting stress and in what product areas and vintages specifically? Is it still the more recent vintages and the continued expansion across income cohorts? I believe you mentioned that earlier, but I just want to get a little more clarity on that. Thanks.

John Pancari:

Got it. Okay. And then just getting back to Ryan Nash's question on the reserve, just to confirm again that the addition this quarter was more growth-driven and rate driven. And as you look at the outlook if the unemployment rate remains as in your expectation at that below the 6% level, you would expect a migration lower in the reserve ratio from here? Is that correct?

Operator:

Our next question comes from Dominick Gabriele with Oppenheimer.

Brian Wenzel:

Hi. Good morning, Dom. What's interesting about CECL is, in theory, what it tells you is if you see your peak losses inside of your reasonable supportable period, in theory, you can begin to release reserves prior to peak losses, which I think is very uncommon for the industry, but that's a byproduct of CECL. So, there could be a situation where we released reserves, even though we have not gotten to big losses because you'll hit the peak and then begin to come down in that forecasting period. We haven't seen that yet. We don't contemplate that in how we look at 2023, and we'll have to get back to you as we think about 2024 and how delinquency plays out for the remainder of this year.

Brian Wenzel:

Yes. No, great question. We don't think the current environment changes our long-term framework getting down to that 32% to 33%, which is, I think, best in class when it comes to efficiency ratio. I think one of the things that Brian and Margaret did during the pandemic, they drove us to drive digital efficiencies in our collections and in-sourcing of other things that drove productivity. Again, the efficiency ratio was negatively impacted with the decline in interest and fee yield. But again, as we drive those efficiencies and get operating leverage, and Brian and I are committed to delivering operating leverage as we step through the periods, that should bring us back into that long-term framework. And again, if the macro environment gets tougher, I think the investments we've made digitally with regard to our collection activities, but across our entire business, we'll help to bolster that where we can control expenses. This would be a very different play than what happened back in a great financial crisis, where you do a lot about that and just started calling people that that's not what would happen even under any form of recession.

Operator:

We have time for one last question. That question will come from David Scharf with JMP Securities.

Brian Wenzel:

Thanks, David. Why don't I take that question? We did submit our capital plan. It went through our same process. We actually included some additional stresses given some of the developments in the first quarter into that capital plan, it was approved by our Board, and we submitted it to our regulators on target with past years. Again, they go through that and provide what we believe will be a non-objection to that. That non-objection can come anywhere from later this month into May based upon their timing and how long it takes to get through that. So, we don't anticipate, given the capital plan and what we put in it that anything to read into that other than they're just working through their process, and we'll be back probably later April in May to kind of as soon as we get it, we'll let people know through that. With regard to the magnitude of it, unfortunately, I can't really comment until we get our non-objection from our regulators.

Brian Doubles:

Yes. So, look, I would say it's still a pretty competitive environment out there. I think it's a little bifurcated. I think the more established players are still competitive in our space. I'll just put direct-to-consumer side for a second. So, I think we're still seeing it as a pretty competitive environment. The one thing that is encouraging though is I think just given the uncertainty on the horizon, there's pretty good discipline across the more traditional competitors. And I think that's generally the case anytime you enter a period like this, nobody is factoring in credit environment like we've experienced over the last couple of years, I think that's encouraging. So pretty good discipline. I do think you've seen some of the fintech players and some of the newer players pull back a bit. I do think direct-to-consumer direct mail, some of that will pull back a little bit. But generally, in our core space, it's still pretty competitive out there, but with pretty good discipline.

Operator:

This concludes today's Synchrony's earnings conference call. You may disconnect your line at this time, and have a wonderful day.

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, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for, and does not edit 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 Wenzel :

Thanks, Brian, and good morning, everyone. Synchrony's strong fourth quarter results demonstrate the power of Synchrony's purpose-built business model at work. The diversification of our portfolio across industries and spend categories supported by sophisticated underwriting and disciplined credit management enabled continued purchase volume growth that surpassed last year's record level. In addition, the alignment of economic interest between Synchrony and our partners through our retailer share arrangements is performing as intended. Excluding the impact of portfolio sales, our RSA declined as credit losses continue to normalize and funding costs began to rise, enabling Synchrony's delivery of consistent, attractive risk-adjusted returns as we have done for many years. The scalability and efficiency of our dynamic technology platform is enabling operating leverage even as we invest in our business. And Synchrony's strong balance sheet continue to support our customers and partners as their own needs evolve. In combination, these business drivers have continued to uniquely position Synchrony in our ability to deliver sustainable outcomes for our customers and our partners and consistent returns to our shareholders even as market conditions change. Let's now discuss Synchrony's fourth quarter financial results in greater detail. Purchase volume grew 2% to $47.9 billion, reflecting a 3% higher spend per account versus last year. On a core basis, purchase volume grew 11%. This continued strength in purchase volume was broad-based across our portfolio, demonstrating the breadth and depth of our five sales platforms, the compelling value propositions we offer and continued consumer demand. At the platform level, Synchrony achieved double-digit growth in our Diversified & Value, Health & Wellness and Digital platforms and single-digit growth in our Home & Auto and Lifestyle platforms. More specifically, in Diversified & Value, purchase volume increased 15% driven by higher out-of-partner spend in addition to partner performance and penetration growth. The 10% year-over-year increase in digital purchase volume reflected the growth in average active accounts and greater customer engagement. Health & Wellness purchase volume grew 15% compared to last year as we experienced broad-based growth in active accounts as well as higher spend per active account. In Home & Auto, purchase volume increased 9%, generally reflecting strong spend in home and higher prices in furniture. And in Lifestyle, purchase volume was 2% higher, driven by higher out-of-partner spend. Turning to Synchrony's dual and co-branded cards where we continue to experience strong growth. Core purchase volume on these products grew 21% versus last year and represented approximately 40% of our total purchase volume for the quarter. As we discussed in the past, our customers derive great value from our dual and co-branded cards because they combine best-in-class rewards with broad utility. Generally speaking, approximately half of our out-of-partner spend is comprised of nondiscretionary spend by billpay, discount store, drugstore, healthcare, grocery, and auto and gas. And while we observed some minor category shifts during December, for example, from T&E related spend towards more clothing and other retail as well as a reduction in auto and gas-related spend towards more grocery and discount spend, Synchrony's relative mix of discretionary and nondiscretionary out-of-partner spend has remained essentially unchanged. Consistently strong consumer spend, coupled with some moderation in payment rate contributed to 10% higher average balances per account versus last year and 15% growth in ending receivables. Our dual and co-branded cards accounted for 24% of core receivables and increased 28% from the prior year. Net interest income increased 7% to $4.1 billion, primarily reflecting a 13% increase in interest and fees due to higher average loan receivables and higher loan receivable yields, partially offset by the impacts of the portfolio sold during the second quarter of 2022. On a core basis, interest and fees increased 21%. Payment rate for the fourth quarter, when normalizing for the prior year impact of the portfolios recently sold, was 17%, approximately 75 basis points lower than last year and approximately 160 basis points higher than our five-year historical average. The net interest margin was 15.58% in the fourth quarter, a year-over-year decrease of 19 basis points. The primary driver of the decrease was higher interest-bearing liability costs, which increased 168 basis points to 2.86% and reduced net interest margin by 136 basis points. The mix of interest-earning assets also reduced net interest margin by roughly 6 basis points. These headwinds were partially offset by a 92 basis point improvement in loan yields, which contributed 79 basis points to net interest margin, and our liquidity portfolio yields, which contributed 44 basis points. RSAs were $1 billion in the fourth quarter and 4.68% of average loan receivables. The $224 million year-over-year decrease was primarily driven by the impact of portfolios sold in the second quarter of 2022 and higher net charge-offs, partially offset by higher net interest income. Provision for credit losses were $1.2 billion for the quarter. The year-over-year increase reflected the impact of a growth-driven $425 million reserve build and higher net charge-offs. Other income decreased $137 million, primarily reflecting the impacts of the prior year's venture investment gain and the current quarter's higher loyalty costs driven by our strong purchase volume. Other expenses increased 3% to $1.2 billion, primarily driven by higher employee costs, technology investments and transaction volume, partially offset by $75 million of asset impairments and certain incremental marketing investments recognized in the prior period. The fourth quarter employee cost included certain additional compensation items of $21 million, higher stock-based compensation and higher headcount driven by growth and in-sourcing. Total other expense included $12 million of additional marketing and growth reinvestment from second quarter's $120 million gain on sale proceeds. As detailed in the appendix of our presentation, the $120 million gain on sale and reinvestment made in the second, third and fourth quarters of this year were EPS neutral for the full year 2022. Our efficiency ratio for the fourth quarter was 37.2% compared to 41.1% last year. Putting it all together, Synchrony generated fourth quarter net earnings of $577 million or $1.26 per diluted shares. We also generated a return on average assets of 2.2% and return on tangible common equity of 22.1%. Next, I'll cover our key credit trends on Slide 10. The external deposit data we monitor continues to reflect a slow reduction in consumer savings. Average deposit balances at the end of December were down approximately 5% from their peak in March of 2022, but still approximately 1% higher than 2021's average and 12% higher than 2020's average. On an annualized trend basis, the savings decline that began around that March 2022 peak appears to have started to slow in December, primarily in terms of its intensity. Turning to Synchrony's portfolio, credit normalization continued as expected during the fourth quarter. These digits are still performing better than 2018. And delinquency entry rates remain lower than the historical average at approximately 80% of their pre-pandemic levels. That said, as consumer savings rates has decreased, borrower payment behavior is reverting towards pre-pandemic levels with normalizing entry rates into delinquency and higher roll rates in early delinquency stages following the charge-offs. This trend continued in the fourth quarter as payment rate normalization trends expanded from the nonprime segments of our portfolio into the prime and super prime segments, where the average outstanding balances tend to be larger. Relative to period end receivables, our 30-plus delinquency rate was 3.65% compared to 2.62% last year and our 90-plus delinquency rate was 1.69% versus 1.17% in the prior year. And our fourth quarter net charge-off rate increased to 3.48% from 2.37% last year, still remaining well below our underwriting target of 5.5% to 6%, at which point portfolio credit risk is better optimized relative to profitability. Our allowance for credit losses as a percent of loan receivables was 10.30%, down 28 basis points from the 10.58% in the third quarter, primarily reflecting the impact of an asset growth-driven reserve builds, which was more than offset by the impact of receivables growth in the denominator. Moving to another source of Synchrony's strength, our capital, liquidity and funding. Deposits at the end of the fourth quarter reached $71.7 billion, an increase of $9.4 billion compared to last year. Our securitized and unsecured funding sources decreased by $316 million. Altogether, deposits represented 84% of our funding, while securitized and unsecured debt represented 7% and 9%, respectively, at quarter end. Total liquidity, including undrawn credit facilities, was $17.2 billion or 16.4% of our total assets, consistent with last year. We maintain a diversified approach to both our deposit base and our secured and unsecured debt issuances and prioritize a strong and efficient funding foundation of at least 80% deposits. We expect to continue to grow our deposits to fund our growth, and we'll maintain an opportunistic approach to secured and unsecured issuances when market conditions are supportive of efficient funding. We manage our balance sheet to be interest rate neutral. That said, as we continue to grow our deposit base, and given the level of interest rates, consumers are actively rotating from savings to CDs. This has had the effect of extending our deposit duration while making our balance sheet slightly liability sensitive. We will continue to manage interest rate risk through term maturities. It's also important to note through its mutual alignment of economic interest and delivery of a minimum return on assets at the partner program level, Synchrony's RSA will provide some offsetting support to the impact of rising interest rates on our business. Moving on to discuss Synchrony's capital position. Note that we previously elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. As a result, starting this past January of 2022, and continuing in January of 2023, Synchrony makes an annual transition adjustment of approximately 60 basis points to our regulatory capital metrics until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet. It should also be noted that the FASB CECL update for the accounting of TDRs becomes effective for Synchrony as of January 2023. This accounting standard update eliminates the separate recognition and measurement guidance for TDRs, which previously followed a separate process using a discounted cash flow methodology to quantify the TDR-specific reserve requirement. Synchrony is adopting this update on a modified retrospective basis as of January 1, 2023. Based on our current estimate, the adoption will result in approximately $300 million reduction to our reserve balance, which we recognize net of tax and equity. The netted impact of the adoption will contribute approximately 25 basis point increase to our capital ratios. From a capital metric perspective, we ended the quarter at 12.8% CET1 under the CECL transition rules, 280 basis points lower than last year's level of 15.6%. The Tier 1 capital ratio was 13.6% under the CECL transition rules compared to 16.5% last year. The total capital ratio decreased 280 basis points to 15%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 22.4% compared to 24.4% last year. Synchrony continued our track record of robust capital returns in the fourth quarter. In total, we returned $803 million to shareholders through $700 million of share repurchases and $103 million of common stock dividends. As of quarter end, our total remaining share repurchase authorization for the period ending June 2023 was $700 million. Synchrony remains well positioned to continue to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. As we make further progress toward our targeted capital levels, we look to develop our capital structure through the issuance of additional preferred stock and the issuance of subordinated debt. Finally, let's turn to our 2023 outlook for the full year, which is summarized on Slide 13 of our presentation. We expect strong consumer demand for the wide variety of products and services we finance to support continued broad-based purchase volume growth. As excess consumer savings continue to decline, year-over-year purchase volume growth rate should slow. Payment rates should also continue to moderate but we’re still expected to remain above pre-pandemic levels throughout 2023. Together, these dynamics should contribute to ending receivables growth between 8% and 10%. We expect our net interest margin to be between 15% and 15.25% for the full year and follow typical seasonal trends. This outlook is based on a peak Fed funds rate of 5.25% and incorporates the following five impacts during 2023. One, the increase in interest-bearing liabilities cost due to higher benchmark rates and the potential competitive pressures or higher retail deposit betas to address funding needs; two, higher interest and fee yields, partially offset by higher income reversals as delinquency and charge-offs continue to normalize; three, an increase in our liquidity portfolio yields, primarily reflecting the higher benchmark rates; four, the fluctuation of mix of average loan receivables relative to average interest-earning assets as driven by the seasonal growth trends and timing of our funding; and five, the full year impact of the portfolios sold during second quarter 2022. Before we turn to our credit outlook, it's important to note there are a number of uncertainties that could change our expectations and the trajectory of credit normalization. We have greater visibility for the first half of this year and any significant changes in the medium-term macroeconomic backdrop would more likely impact portfolio credit trends in 2024. With regard to our portfolio's credit trajectory in 2023, we expect most of the portfolio delinquency metrics to have reached normalized levels or equivalent to pre-pandemic levels by midyear. Accordingly, the associated charge-offs will reach pre-pandemic levels approximately six months later. The seasonal impact of tax refunds and bonuses in the first half, and the third quarter's acceleration of receivables growth will likely lead to a decline in net charge-off rate for Q3 before credit losses rise and continue the normalization path through the fourth quarter. Given our expectation that delinquency metrics will reach their pre-pandemic levels by midyear, we expect net charge-offs to be between 4.75% to 5% for the full year, still considerably below our pre-pandemic annual loss rate target of 5.5% to 6%. We run multiple economic scenarios to inform our credit outlook as part of our normal business process. Our baseline reserve assumptions include an unemployment rate of approximately 4.2% by year-end. We have qualitative overlays for the current uncertainty and possibility of a mild recession. In this scenario, we'd expect the unemployment level closer to 5%. This is reflected in our fourth quarter 2022 reserve rate, which is still higher than our day 1 CECL rate. Barring any significant changes in the macroeconomic environment, we do not expect our portfolio to reflect our fully normalized annual loss rate target until 2024. Accordingly, we continue to expect reserve builds in 2023 to be generally asset-driven and that the reserve rate will gradually migrate towards approximately 10% as credit normalization brings our portfolio net charge-offs back to that mean annual loss rate to which we've been underwriting. RSA expense will continue to serve as a functional alignment of economic interest with our partners, reflecting the strength of our program performance and purchase volume growth, offset by rising net charge-offs. As a result, we expect RSA as a percent of average loan receivables to be between 4% and 4.25%. Should credit normalize at a slower rate than we expect, RSAs will likely come closer into the high end of that range. And the extent that funding costs or net charge-off rise to the high end or beyond of our current assumptions, we expect the RSA to come in to the low end or lower than this range. In terms of other expense, we remain committed to delivering operating leverage, such that expenses grow at a slower rate than net interest income. Our full year expectation that expenses will run approximately $1.125 billion per quarter to the extent that receivables or revenue growth is not tracking ahead of expense growth for the full year will moderate our spending where appropriate while still prioritizing the best long-term prospects for our business. As we demonstrated throughout this past year, Synchrony's business and financial models are performing as it's designed to do. Our proprietary data and analytics, diversified product suite and dynamic tech stack allow us to reach and improve more customers for the same level of risk while leveraging low customer acquisition costs and driving greater customer lifetime value. Our retailer share ranges are effectively aligning our partners' economic interest with our own, and in doing so, enabling Synchrony to deliver consistent risk-adjusted returns through changing market conditions. And our robust balance sheet is providing funding flexibility as we seek to provide continuity to our customers and partners when they need it most. In short, Synchrony is uniquely positioned to deliver sustainable growth and resilient risk-adjusted returns even as market conditions change and the needs of our customers and partners evolve. We remain on track to achieve our long-term financial operating targets as market conditions stabilize. I'll now turn the call back over to Brian for his closing thoughts.

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.

Moshe Orenbuch :

Great. Thanks very much. And thanks for all of the detail around the guidance and the performance. I think the -- Brian -- I guess, Brian Doubles, you talked a lot about some of the enhancements to your products. Maybe could you just amplify a little bit as to how you're thinking about Synchrony's role with your partners in this current environment? I mean, it seems like this is an environment in which you're -- and what I hear from the retailers that they're going to need your help more. Just talk a little bit about how to think about the things that you talked about that you're doing and how that's going to help Synchrony and the shareholders?

Moshe Orenbuch :

Great. And maybe just to flip this over to Brian Wenzel. As you kind of factor all of that into the financial aspects, where are the areas you think that this could kind of help either already embedded in that guidance or where it could -- things could be better as we go through 2023?

Operator:

We'll take our next question from Ryan Nash with Goldman Sachs.

Brian Wenzel :

Yes. So thanks for the question, Ryan. So I think as you think about our asset growth, there's two dynamics that come into play. One is, you will see a slowing payment rate. Now, again, we don't expect the payment rate for the entire business to get back to historical levels during 2023. So that is one that will help you from an asset perspective. But if you believe that the economy is going to get a little tougher, the headwind then becomes, will the consumer pull back on spending a little bit? So I think those two dynamics kind of play with each other and how we think about it. Again, if the economy doesn't -- is stronger than we think, again, I think -- I still think you'll see slowing payment rate, but you'll see stronger sales kind of going in and you could have upside in that scenario to the outlook.

Brian Wenzel :

Yes. Thanks. First, Ryan, just to make sure we're on the same page. The guidance for full year 2023 is 4% to 4.25%. And again, I think you have a couple of things. One, you do have a little bit of the net interest margin coming down that plays through the RSA, #1, with the interest-bearing liabilities cost going up. Two, you have the increase in that charge-off rate kind of coming through. Three, you have a little bit of the OpEx piece coming through. And four, you have growth in the denominator with really receivables. So I think that plays through -- to the extent your question, can it operate below a 4% level? Yes, it can operate at 4% level, but that would be more dependent upon trajectory of net charge-offs and how much of that is offset through net interest margin. Again, given the timing of losses, we're sitting here mid-January, which we have pretty good visibility really through mid-July now. So there is an opportunity for it. Again, we've given you the guidance we think is the best estimate for 2023 as we sit here today.

Donald Fandetti :

Can you talk a little bit about regulatory risk specifically around what the CFPB might do on late fees, any timing or kind of your updated thoughts?

Donald Fandetti :

Got it. And can you talk a little bit about the relative health of the low-end consumer versus prime, what you're seeing?

Brian Wenzel :

I think you covered it.

Sanjay Sakhrani :

Brian Wenzel, I wanted to dig into some of the commentary on credit quality. You mentioned you're assuming 4.2% unemployment rate, but the qualitative assumption is in the 5% range for the reserve rate. I'm just curious what kind of impact would there be to the charge-off rate if the unemployment rate reaches 5%? And then you mentioned -- or I guess, does this mean that there's no impact to the reserve rate if we migrate to the 5% unemployment?

Sanjay Sakhrani :

Okay. So really no change to the reserve rate, just timing on the charge-off rate?

Sanjay Sakhrani :

Okay. And just a follow-up question for Brian Doubles. Maybe you could just help us think about how you're managing the business as you're thinking about loan growth, obviously, very undecided on where the economy is going as a whole, I think. And then any flexibility you might have on expenses to the extent that we have a more adverse scenario?

Operator:

We'll take our next question from Erika Najarian with UBS.

Brian Wenzel - CFO:

Yes. Thanks, Erika. So to your first question on the macroeconomic environment, right now, we're going through the early stages of developing our capital plan that we'll submit to the Federal Reserve in the latter part of March. So we go through that. With that capital plan, we run a number of different loss stresses and severe loss stresses in the idiosyncratic stresses in order to inform us really of what the range of outcomes are and how comfortable we feel with the environment. And again, as we said, throughout 2022, we feel very comfortable in the environment continuing on the capital plan that we laid out and submitted to the Fed last March and got approved in April. So we will use that to inform it. Again, during the year, we go through multiple stress scenarios. So we continue to feel good even under a stress scenario that the targets and the environment that we will continue to operate with a very good capital plan. So we'll do that to inform us. With regard to the level of capital, 11% is our target. Now the first thing to remind you and others of is we have to continue to fully develop our capital stack right through incremental Tier 1 through a preferred or -- and then obviously through Tier 2, whether that be sub debt or incremental preferred. So we have to continue to develop the capital stack to even be able to achieve the Tier -- the CET1 target. And then secondarily, I think every company operates with a little bit of operating range. The real positive part of our business, Erika, is that we generate a lot of capital each year, which we employ back in. And obviously getting down to 12.8%, the growth that we've anticipated when we talked to you back in October, 12%, we came in at 15%. So we're able to fund that growth, and that's really, we think, very attractive returns that will continue to generate capital as we move into '23 and beyond. So yes, there is some type of operating range. But again, the target also has a buffer to it, so you can most certainly go through that buffer a little bit if you wanted to do an acquisition. So that's not a floor, it's just a range in which we operate with, and we'll continue to try to deploy capital in a manner that's in the best interest of our stakeholders.

Brian Wenzel :

Yes. Yes, thanks for the question, Erika, and I'll try to be clear here. The 4.2% is the baseline, which we take from Moody's. Effectively, when we run through the model, you're probably more like 4.5%. There are qualitative overlays that bring it effectively to 5% right? Or closer to 5%? So in theory, if you were to hit that, there should not be rate related provisioning. It should just be growth-related provisioning at that point. It's only if your outlook changed above 5%, which you would anticipate more rate-related increases.

Arren Cyganovich :

In your press release, you noted that you had added or renewed 25 programs, including Lowe's, which has historically been one of the largest partners that you have. Can you just talk a little bit about, are you starting to push some of these renewals past 2025, which I know you had a lot of them locked in through 2025? And what's the competitive environment for these renewals today?

Operator:

We'll go next to Betsy Graseck with Morgan Stanley.

Brian Wenzel :

Yes. So as Brian mentioned earlier, not many will talk about it, but there is, what I would say, a more K-shape recovery or we're seeing it, where the lower end consumer has been normalizing at a faster rate both, I'd say, from a payment rate behavior standpoint as well as a delinquency and charge-off standpoint. And as you continue to move away from the pandemic and stimulus, you begin to see the other cohorts, which is the prime and super prime, which had already started to normalize, continue to add normalization trends. I think the important part for us, Betsy, is as we take a step back and think about the entire portfolio for a second, if you looked at historical 30-plus and 90-plus-day delinquencies to pre-pandemic levels and applied it to our balances as you step through this year, what you'd see is a very linear normalization of delinquencies for us. And again, that's really the bottom end normalizing a little bit quicker. And now you're starting to see the top end. So -- but if you look at that linear pace beginning in the first quarter last year, I mean, we're about 80% of our pre-pandemic delinquencies and it's moved about 10 percentage points each quarter. So we're not seeing an acceleration in normalization. It just kind of is flowing through and that's on top of a larger balance, but it is normalizing in a manner in which we expected. But again, there is a little bit of a K-shaped recovery where we're starting to feel -- again, moving back, all our vintages from '20 on are performing better than our vintages in 2018. So we feel good that the normalization that we're expecting is happening on a path that we expect.

Brian Wenzel :

Yes. I mean, if you break it apart for a second, Betsy, the '20 vintage and obviously, the early part of 2021, that's performing the best, right, because that's when we put in refinements at start of the pandemic because no one knows what's going to happen. Latter part of '21 and '22 performing between that vintage and 2018. So I think, in all cases, they're doing better, but again, they're slightly different under different underwriting standards. I don't envision, and Brian talked about this, the consistency that we have both in underwriting for origination, but account management that we're going to use that as a growth lever. I think we have a really diverse and attractive set of partners, so we get spend across a multitude of different verticals and categories. And then when you look at the fact that we're really having -- have compelling value propositions and are aligning to our most loyal customers at our partners, we don't have to use credit or growth engine as opposed to others. So I don't envision us using credit and opening up the credit box from here forward. Right now, what we're doing is we're making modest refinements when we see things that concern us, but we're not doing anything across the board because we don't see it across the board in our portfolio.

Kevin Barker :

I just wanted to follow up on some of the capital questions. If we did see a rapid increase in unemployment from a base rate of 3.5% to roughly 5% or maybe somewhere around that level as we approach year-end '23, I mean would you start to consider your capital levels to have already embedded that type of unemployment rate or those types of assumptions of economic deterioration just given the stress test? Or do you feel like you need to be a little bit more cautious given the outlook could change rapidly in that type of environment?

Kevin Barker :

Okay. And then in regards to -- maybe a follow-up to that on M&A. I think you've mentioned that the valuations are finally normalizing. Are you seeing any attractive opportunities start to develop, whether it's portfolios or other acquisition potential targets given what we see out there today?

Operator:

We'll take our next question from John Hecht with Jefferies.

Brian Wenzel :

Yes, thanks for the question, John. So I will deal with the latter part of the question first. So yes, we have seen an extension of the duration a little bit. People have rotated into CDs and we see people into, call it, that 18 month, 19 month duration. So it’s split out a little bit, I wouldn’t say materially. With regard to pricing as we move forward, I mean obviously when we gave the NIM guidance here, what we saw in 2022 was really a change in the landscape, right? You had a lot of people trying to manage betas in the beginning part of 2022 and then when they fell at the outflow of deposits during the year, got more aggressive with regard to price. I think you saw a lot of that happen in the latter part of the year. It's been very stable now. So our outlook includes deposit betas getting a little bit worse than they have been from here, particularly on the CDs. So again, this is going to be something that we're really going to watch relative to the Fed's actions at the next couple of meetings and what their guidance is with regard to the terminal rate that they have out there. But we plan for in this guidance to have betas deteriorate in 2023.

Brian Doubles :

Yes. Well, so obviously, we serve a very broad range of partners, as you indicated. And clearly, you saw really strong growth in Digital, strong growth in Health & Wellness. We would expect that to continue. I'll tell you where you see the biggest differences, John, is actually in how we engage with those partners. And our solutions inside of those partners differ quite a bit. Venmo and PayPal is a great example where we're completely integrated through our API architecture. And if you're inside of the PayPal or Venmo app, you don't know if it's something that we built or something that PayPal built. It is really seamless to the customer. And that's really important. And I think that really helps make that experience a good one for the customer and helps us drive growth over the long term. And you compare and contrast that with what we're trying to do in the one-to-many space like with Clover and other solutions where we want to make it really easy for our smaller partners to leverage the financial products that we have, and we have to do that by building it once and then scaling it across the enterprise. So you really run the gamut from highly customized, fully integrated API architecture to a one-to-many solution, which just makes it really easy for our partners to offer our financing products. So that's where you see the biggest difference between our partners and the partner set that we have today. I'll tell you, at any given time, you're going to have some partners that are doing really well and just crushing it, and you're going to have some partners that are maybe struggling a little bit. As I said earlier, heading into uncertain times like this, the credit program becomes even more important, and that's consistent across the board. So heading into an environment like this, we feel like we're really well positioned to help our partners succeed.

Richard Shane :

I just want to talk a little bit more about the reserve rate outlook. End of the quarter, 10.3%, day 1 was 9.9% There was a suggestion that it will sort of trend back towards 10% over time, roughly in line with day 1 levels. I think what that implies to me is that as we've gone through the learning process on the CECL models versus day 1, that there has not been a material evolution in terms of sort of loss expectations that the reserve rates will sort of, on an apples-to-apples basis, be consistent with day 1. Is that the right way to think about things? And can we just put that in the context of the normalization over the next 18 months?

Richard Shane :

Got it. Okay. That's very helpful. And I think, like everybody, we're all exhausted of living through unprecedented times and returning to normal would be nice.

Brian Doubles :

Agree with that.

Operator:

This concludes Synchrony's earnings conference call. You may disconnect your line at this time, and have a wonderful day. Thank you.

Kathryn Miller:

Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition, 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, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit 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 Wenzel:

Thanks, Brian, and good morning, everyone. Synchrony's strong third quarter results reflected continued strength in consumer and broad-based demand for the wide range of products and services that our ecosystem seamlessly delivers. Purchase volume of $44.6 billion reflected a 6% increase compared to last year or 16% on a core basis. Continued strength in consumer spend, coupled with some moderation in the payment rate, contributed to 8% higher average balances per account versus last year and 13% growth in ending receivables or 14% on a core basis. Our Dual and co-branded cards accounted for 23% of core receivables and increased 29% from the prior year. Net interest income increased 7% to $3.9 billion, primarily reflecting a 10% increase in interest and fees due to higher average loan receivables, partially offset by the impacts of the portfolio sold during the second quarter of 2022. On a core basis, interest and fees increased 18%. for the third quarter when normalizing for the prior year impact of portfolios recently sold was 17.6%, approximately 10 basis points lower than last year, while still approximately 200 basis points higher our historical average. The interest margin was 15.52% in the third quarter, a year-over-year increase of 7 basis points. The primary driver of this increase was a 51 basis point improvement in loan yields, which contributed 42 basis points to net interest margin. Stronger liquidity portfolio yield also contributed 29 basis points. These improvements in our loan and liquidity portfolio yields were partially offset by the anticipated increase in interest-bearing liability costs, which increased 74 basis points to 2.05% in the quarter and reduced net interest margin by 62 basis points. The mix of interest-earning assets also reduced net interest margin by roughly 2 basis points. RSAs were $1.1 billion in the third quarter and 5% of average receivables. The $209 million year-over-year decrease was primarily driven by the impact of the portfolio sold in the second quarter of 2022 and program performance. Provision for credit losses was $929 million for the quarter. The year-over-year increase reflected the impact of a growth-driven $294 million reserve build this year compared to a $407 million reserve release in the prior year. Other income decreased $50 million, primarily reflecting the impact of higher loyalty costs. Other expenses increased 11% to $1.1 billion, reflecting higher employee cost and other expenses. Total other expense included $27 million of additional marketing growth reinvestment of Q2's $120 million gain on sale proceeds. As detailed in the appendix of our presentation, we expect that the gain on sale and the reinvestment made in the second, third and fourth quarters of this year, will be EPS neutral for the full year 2022. Our efficiency ratio for the third quarter was 36.5% compared to 38.7% last year. Excluding the effects of the gain on sale reinvestment, the efficiency ratio would have been 35.6% and approximately 310 basis point improvement versus last year. Putting it all together, Synchrony generated net earnings of $703 million or $1.47 per diluted share for the third quarter. We also generated a return on average assets of 2.8% and a return on tangible common equity of 26.6%. These strong net earnings and returns demonstrate the power and efficiency of our digitally enabled model, combined with the compelling value of our financial products and services we offer through our financial ecosystem. Synchrony is consistently able to meet a broad range of our customers' needs while maintaining cost and credit discipline, which allows us to sustainably grow while delivering consistent risk-adjusted returns. Next, I'll cover our key credit trends on Slide 8. We continue to see signs of gradual normalization across the credit spectrum of our portfolio. The vast majority of our borrowers continue to perform consistently with or better than 2019 performance. We continue to monitor borrower behavior closely and note that consumers are still slowly working through excess savings levels from peak levels. The external data we track indicates due to the combination of summer spending and inflationary conditions, the proportion of customers who receive stimulus payments and have since spent the entire amount has increased approximately 2 percentage points since July now around 40% compared to 38% a few months earlier. The remaining 60% of customers still a portion or all of the stimulus still saved. When tracking consumer savings balance trends by tiers, 0 to 2,500, 2,500 to 5,000 and balances greater than 5,000. The external data suggests that during the course of the third quarter, the top 2 tiers of seamless customers experienced balance reductions of approximately $300 have begun to rebound, while the bottom here are seen at roughly $100 in runoff. Meanwhile, labor markets continue to be robust and portfolio payment rates remain elevated compared to our historical 5-year average. This suggests to us that borrowers generally remain well positioned to support robust demand for goods and services while responsibly meeting their financial obligations. Turning to Synchrony's portfolio, our 30-plus delinquency rate was 3.28% compared to 2.42% last year, and our 90-plus delinquency rate was 1.43% compared to 1.05% last year. Our third quarter net charge-off rate was 3% versus 2.18% last year. This 82 basis point year-over-year increase generally reflected the gradual progression of our credit losses towards our portfolio underwriting target of 5.5% to 6%. Our allowance for credit losses as a percent of loan receivables was 10.58%, down 7 basis points from the 10.65% in the second quarter. Moving on to another source of Synchrony strength, our capital, liquidity and funding. Deposits at the end of the third quarter reached $68.4 billion, an increase of $8.1 billion compared to last year. Our securitized and unsecured funding sources increased by $1.6 billion. Altogether, deposits represented 82% of our funding while securitized and unsecured debt represented 8% and 10%, respectively, at quarter end. Total liquidity, including undrawn credit facilities, was $20.3 billion, or 20.1% of our total assets, consistent with last year. We maintain a diversified approach to both our deposit base and secured and unsecured debt issuances and prioritize a strong and efficient funding foundation of at least 80% deposits. We expect to continue to grow our deposits to fund our growth, and we'll maintain an opportunistic approach to secured and unsecured issuances when market conditions are supportive of efficient funding. Generally speaking, we manage our balance sheet to be interest rate neutral. That said, as we continue to grow our deposit base, and actively encourage a rotation from savings to CDs, we're actively extending our deposit duration. As a result, we expect to be slightly liability-sensitive over the near term, while we continue to manage interest rate through term maturities. It's also important to note that through the mutual alignment of economic interest and delivery of a minimum return on assets at the partner program level, Synchrony's RSA will provide some offsetting support to the impact of rising interest rates on our business. Moving on to discuss Synchrony's strong capital position. Note, that we previously elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. As a result, starting this past January of 2022 and ending in January 2025, Synchrony makes an annual transitional adjustment of approximately 60 basis points to our regulatory capital metrics. The impact of CECL has already been recognized in our income statement and balance sheet. With that in mind, we ended the quarter at 14.3% CET1 under the CECL transition rules, 280 basis points lower than last year's level of 17.1%. The Tier 1 capital ratio was 15.2% under the CECL transition rules compared to 18% last year. The total capital ratio decreased 280 basis points to 16.5%. And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 24.1% compared to 26.6% last year. We continue our track record of robust capital returns in the third quarter. In total, we returned $1.1 billion to shareholders through $950 million of share and $109 million of common stock dividends. As of quarter end, our total remaining share repurchase authorization ending June 2023 was $1.4 billion. Synchrony remains well positioned to continue to return considerable capital to our shareholders as guided by our business performance, marking [Technical Difficulty] and incorporates our latest view on the interest rate environment and funding needs. Operating expenses should continue their quarterly run rate of approximately $1.05 billion, excluding the impact of the gain on sale reinvestment plans which are detailed in the appendix of our earnings presentation. To conclude, Synchrony remains very well positioned to achieve our long-term financial operating targets as the environment normalizes. I'll now turn the call back over to Brian for his closing thoughts.

Kathryn Miller:

That concludes our prepared remarks. We will now begin the Q&A session. [Operator Instructions]. Operator, please start the Q&A session. Thank you.

Ryan Nash:

So Brian, the fourth quarter net charge-off guide implies a little bit of a ramp. Can you maybe just talk about what is driving that? And then second, you had said in the past that you'd expect to approach more normal levels by the end of '23, call it, 5.5. And obviously, that implies a decent ramp from here. Can you maybe just talk about how you see credit progressing in the intermediate term? And what does this mean for the allowance.

Ryan Nash:

Got it. And then the margin is holding up better than expected, given the pace of rate hikes, but Brian, you did reiterate the balance sheet is somewhat liability sensitive. So can you maybe just talk about what is assumed in terms of loan and deposit betas? And then if you look out over the remainder of the rising rate cycle, where do you see the margin in betas going in a 5% Fed scenario just given your balance sheet positioning?

Operator:

We have our next question from Moshe Orenbuch with Credit Suisse.

Brian Wenzel:

Moshe, again, I think as we've said, and I know people have been frustrated with it, the RSA is acting as a design. So when charge-offs kind of troughed out the RSA peak, now we start to see charge-off dollars rising partially offset by higher interest and fees, but really seeing that flow through the RSA, which gave us a sub-5% RSA for this quarter. Most certainly, we've incorporated that into the guide into the fourth quarter. Again, I think we'll be back in January to kind of give you the trajectory. There's nothing that we look at, Moshe, that says, as you move back towards that normalized mean loss rate of 5.5% that we're going to be outside of the traditional RSA range of 4% to 4.5%. So from a charge-off perspective, it's acting as designed and should go back. Clearly, I think we're going to have to look at how net interest margin and program performance works. But again, we think generally, you're going to see the RSA rate trend down as charge-offs trend up.

Moshe Orenbuch:

Perfect. And just as a follow-up, I mean you did highlight both the percentage of the business and the growth rates kind of in your co-brand and dual card portfolios. Maybe could you talk a little bit about whether -- how the plan over the next several years? Is the plan to grow that? Does that grow faster? And how do you think about that contributor to Synchrony's overall growth rate?

Brian Wenzel:

Yes. The only thing I'd highlight, Brian, you talked quite a bit about the multiproduct approach here and having the right product for our customers. And when you look at our partner bases, whether it's PayPal, Venmo, Verizon, Walgreens, and some of the other core retailers, TJX, that product just fits nicely into the portfolio. And we do it in a line structure very different than our competitors. So it allows us to control the risk in the portfolio and really optimize the balance.

Operator:

We have our next question from Sanjay Sakhrani with KBW.

Operator:

Please proceed, Mihir.

Brian Wenzel:

Yes. So when we go to the latter part. The lower new account is really the portfolio sold during the second quarter. If you look at it on a core basis, which strips out those portfolios were up 2%, and generated, again, 5.8 million new accounts. From an underwriting standpoint, we have not seen in the portfolio attributes which would require us to take kind of measures across the entire portfolio. That said, Mihir, we always are making refinements and changes to our underwriting standards. We look at partners and performance. So again, we don't see attributes where we need to take a broad-based action. But we are most really taking some small refinements. I also want to go back to what's really unique about our underwriting and what we've done over the last several years is we have not relied upon credit to be the primary driver of growth. So we haven't changed our underwriting standards. We haven't gone out like a lot of other issuers to use that and credit lines in order to get new accounts. We have people coming to us because they're the most loyal customers of our partners and really want to engage with the value propositions and the brand. And because we get so much data from our partners because we're using unique attributes, which we highlighted in PRISM at our Investor Day. And then you you combine those attributes and rolling together, we think we're making actually hopefully smarter decisions on risk at the end of the day and not having to take more risk. And again, we see nothing that today says we need to tighten across the board. But again, we have the abilities and the tools to manage that risk appropriately if we see a change in the portfolio.

Brian Wenzel:

And just 1 final point on that, Mihir, just adding on to Brian's point. If you go back, we provided a chart before, if you look at the volatility in credit through cycles, we're just generally less volatile because of the way in which our line structures are in this underwriting standards and most certainly, you can go back, we've shown the chart a number of different times, and it's because the severity and the consistency kind of gives us a competitive advantage.

Brian Doubles:

Yes. Sure. So look, I would start by saying it's still a pretty competitive environment out there. I think given what has happened in some of the fintech space, you've seen a little bit of a pullback there maybe a little bit less aggressive in terms of offers and rates, et cetera. But what I'll tell you is that as we're out talking to our partners and prospects what's really resonating right now is the multiproduct strategy being able to offer Buy Now Pay Later, paying for migrating to other products in our portfolio. Because I think one of the things that our partners have seen is that depending on the consumer, depending on the product that's being purchased, and frankly, depending on the macroeconomic environment, pay gets a lot more expensive in an environment where rates are rising at the pace that they're rising. So I think partners have taken a step back and now they're trying to rationalize their point of sale and saying, "Hey, look, how do I optimize this for the economy that I'm operating in for my consumer for what they're buying." And what's great is we can go in and say, look, for this product, we think it's a 12-month, 6-month promotional financing product with an opportunity to upgrade them into a revolving product down the road. That's pretty powerful. That's pretty powerful because it gives optionality and it helps them manage the expense side of the equation, too, in terms of what those financing offers cost them on what it takes out of their margins. So we're seeing really good traction in terms of the discussions that we're having out there both with our existing partners as well as new prospects.

Sanjay Sakhrani:

I guess first question for Brian Wenzel. On your comments related to being liability-sensitive. Understandably, you might have some headwinds on the NIM. But I'm just trying to think about NII. So your yield is obviously benefiting from rates, but also higher revolve. Could you just help us parse through that and think about NII going forward?

Sanjay Sakhrani:

Got it. Then maybe a question for Brian Doubles, just following up on what Mihir was asking earlier. I mean I kind of asked this question last quarter, but you have another quarter of a dislocation among fintech valuations. You've had the CFPB obviously come in with some comments on regulatory actions potentially for Buy Now Pay Later. I'm just curious if that's presenting an opportunity for you guys? Do you feel like there might be some more sensitive moves you can -- I mean, just broadly speaking, maybe you could just address that a little bit more.

Operator:

Our next question is from John Hecht with Jefferies.

Brian Wenzel:

Yes. Let me start, and then Brian may add some commentary. John, when we look at the consumer spending behavior patterns. We're not seeing very much changed, right? They're being very consistent. They are making choices, right, where people are saying, okay, maybe I'm sending a little bit more for grocery or gas, spending a little bit less on T&E. But we're seeing very much consistency as we think about average transaction value and frequency consistently throughout the year. And we look at it by credit grade by platform. We look at the world composition components. So everything seems to be consistent. So the customer itself is not migrating or changing their spending behavior patterns. We continue to see just tremendous positive growth relative to our Millennial and Gen Z. They make about 25% of our sales. They're our fastest-growing cohort at, call it, 400 to 500 basis points higher than the company average. So they continue to to view that. Again, the value propositions have to resonate with the customers, and we continue to think that in the multiproduct and distribution model that we have, we just think is attractive. So we have not seen the consumer from a spending behavior pattern change significantly, again, making smarter decisions, but overall level of spend, not really changing.

John Hecht:

Okay. That's very helpful. And then second unrelated question. Just thinking about the RSA next year, as Brian, maybe you can remind us, is the correlation for the -- as credit normalizes, is the correlation for the RSA delinquencies, provisions, charge-offs? And is there any seasonality or timing differences for us to think about there?

Operator:

Our next question comes from Kevin Barker with Piper Sandler.

Brian Wenzel:

Yes. The way I think about it, Kevin, is you have this period of time where the consumer is working through, number one, excess liquidity that they have. So that saves rate. Now we'll carry you through, particularly on some of the higher spenders well into 2023. In some of the lower credit quality cohorts and you're seeing wage gains that are offsetting inflation. So you have some tailwinds with regard to spend, and you see that strong spending behavior pattern. What we probably anticipate is as some of that savings drives up and some of maybe the lack of -- or the utilization of lower discretionary spending because people aren't going in the office every day. As that tightened a little bit, what you're going to see is probably spending come down and payment rate come down. But I think what you're going to see first is payment rate begin to slow. Spending stay there, you're going to see balances go up. And then you're going to see purchase volumes slow. So I think there could be a elongation of asset growth here in the short term. Again, we'll have to see how the economy and the macroeconomics and plays out for a medium term. But clearly, there are probably more tailwinds than headwinds in the short term.

Brian Doubles:

Well, I'll start and ask Brian to comment. Look, we are running the business very nimbly right now. We're ingesting thousands of data points every day on what the consumer is doing, payment trends and behaviors. We look at it by program, by product, by geography. We're looking for any indicators that say we need to make some tweaks as we go. And I call them tweaks because this -- for us, this is not an event. It's not 1 day you're risk on and the day of risk off. It's you kind of take what you're seeing every day and you kind of make changes and slight modifications as you go. And we feel really good about our ability to do that. We've invested a lot in our technology platform, our data sources, our tools. And so there isn't 1 thing that we look at. But as we're looking at percent of customers that make the payment, how much above the payment are they making, who's gone late for the first time. Those are all little tells and little signs that say, okay, maybe we go in and we turn the dial a little bit. And so again, we feel really good about our ability to do that. We're not seeing anything right now that is concerning. It's been a very gradual, I'd call it, normalization. As we move through the year, in fact, I think every quarter, we updated our credit guidance and it was always modestly better than we thought 90 days prior. So I think we are still in a pretty good operating environment. We don't see anything that says we got to go in and really ratchet down creating and certainly nothing that says we got to do anything different than what we're doing on the share repurchase side.

Operator:

The next question is from Rick Shane with JPMorgan.

Brian Wenzel:

Yes. Thanks, Rick. So when you look at how we have built our reserve models, right? So you look at our baseline macroeconomic forecast, which, again, we take from Moody's as a starting point, and which shows, call it, an employment rate next year of 4%. When we think about credit normalization, right, and getting back to that 5.5% as we look at the underwriting cohorts we put on over the last couple of years, that migration back to 5.5%. The implied unemployment rate in the model is higher than that. So think about something that's probably closer to the mid-4s effectively. We don't necessarily put that in. But effectively, it shows a higher unemployment rate. We then, on an overlay basis, say, okay, if there is some concern, what does that scenario look like? So effectively, it gives us a higher coverage as we sit here today than than what you would normally expect given the delinquency profile if you just looked at it by its own. So unless there's a significant deterioration beyond that, and we don't see that, then you're really going to be in growth driven reserves. If we just looked at delinquencies today and ran our quantitative models, it would be below day 1 CECL, right? So we think we're adequately reserved today to encompass what we think is going to happen in in 2023 and moving out. So we feel good about it. I think when you look at the delinquencies that we have in here for 3Q, it gives you a pretty good line of sight into what to expect both fourth quarter and most likely first quarter. So you can plan that out. And again, absent something significantly change in the macro environment, we feel pretty good about where the coverage is and that we're adequately reserved for under various scenarios.

Brian Wenzel:

Yes. But I think you have to look at it. If I just ran the pure quantitative model, I'd just go back to this point again, you'll be below day 1 CECL. And it's really the qualitative models and those overlays that is pushing you higher than day 1 and in theory allowing. So if you looked inside our quarter, our quantitative models moved up and our qualitatives moved down as it kind of got embedded into the core delinquency formation. So again, I know we don't provide a lot of ability and people don't provide visibility into all those different models, but they are working in concert with each other. And that's where we get comfort that we're appropriately provisioned at the end of the quarter.

Betsy Graseck:

Okay. So two questions. One, I know we talked quite a bit about the net interest margin already. It's down a bit from the peaks that you had earlier this year. And the exit run rate looks like it's around 15.27%, somewhere in that range for fourth quarter. And I'm hearing you talk about the migration of the funding mix looking to go from savings to CDs. And I noticed your CD offer is pretty robust here, 15 months that you've got at 3.91. So are you suggesting that with the forward curve where the Fed gets to 4.6% or 4.7%, 4.8%, depending on which day you look at it, that you lock that in on the yield side and as that comes through and your funding cost migrates higher, but is relative to what the would do. Do you feel like the trajectory here should be continuing this path of decline as we move through the year next year? Or do you think that your shift to CDs can halt that slide?

Betsy Graseck:

And then just a follow-up question on your partner activity and how they're looking for you to help them with their sales growth as you go into next year, which is expected to be a little bit of a slower paced environment. Can you give us any sense as to any credit box changes that would come as a result of that or other ways that you can help drive your partners' revenue growth?

Operator:

We have no further questions.

Operator:

And thank you, ladies and gentlemen, this concludes our earnings call. We thank you for your participation. You may now disconnect.

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, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the Company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit 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 Wenzel:

Thanks, Brian, and good morning, everyone. Synchrony delivered another strong financial performance for the second quarter, highlighting the benefits of our highly diversified business across our sales platforms, our partners, merchants, providers and customers and underpinned by the continued health of the consumer. This quarter, we achieved the highest quarterly purchase volume as a company, exceeding $47 billion, which reflected a 12% increase compared to last year. On a core basis, which excludes the impact of our recently sold portfolios in the prior and current year quarters, purchase volume grew 60% year-over-year. From a platform perspective, our diversified and value, health and wellness, digital, and home and auto platforms each continue to generate double-digit year-over-year growth in purchase volume, reflecting strong demand for the variety of goods and services we finance, as well as the broad partner, merchant and provider networks that connect our customers and partners. At the platform level, home and auto purchase volume was 12% higher due to continued strength in home as well as higher auto-related spend, reflecting the waning effects from the pandemic period, the preference for consumers to invest in the maintenance of their existing vehicles given the supply chain issues on new and used vehicle sales and the impact of inflationary pressures on gasoline purchases and automotive parts. In diversified value, purchase volume increased 24%, driven by the strong retailer performance and higher customer engagement. The 14% year-over-year increase in digital purchase volume generally reflected the growth across the platform. We experienced greater customer engagement, including higher average active accounts and spend per active among our more established programs and continued momentum in our new program launches. The 15% increase in health and wellness purchase volume was driven by broad-based growth in active accounts and higher spend per active account driven by our dental, pet and cosmetic categories. Our lifestyle platform generated purchase volume growth of 2%, reflecting strong retailer sales and growth in our music, specialty and luxury verticals, partially offset by the ongoing impact of inventory shortages in our outdoor vertical and particularly strong growth in the prior year period. Loan receivables grew 5% year-over-year to $82.7 billion or 11% on a core basis. We also continue to see sequential growth driven by strong purchase volume and partially offset by higher payment levels. Net interest income increased 15% to $3.8 billion, primarily reflecting the 13% increase in interest and fees due to higher average loan receivables. Payment rate for the second quarter, when normalizing for the impact of the portfolio sold during Q2, was 18.1%, approximately 20 basis points higher than last year, approximately 250 basis points higher than our historical average. The net interest margin was 15.60% in the second quarter, a year-over-year increase of 182 basis points. The primary driver of our NIM expansion was a 570-basis-point increase in the mix of loan receivables relative to total interest-earning assets, primarily due to the growth in average receivables and lower liquidity. This accounted for 105 basis points of the year-over-year increase in our net interest margin. In addition, the second quarter's 80-basis-point improvement in loan yield contributed to a 63-basis-point improvement in net interest margin, while the slight increase in interest-bearing liability costs reduced net interest margin by 1 basis point. RSAs were $1.1 billion in the second quarter and 5.42% of average receivables. The $121 million year-over-year increase was primarily driven by the continued strong performance of our partner programs and also included an approximate $10 million impact associated with our reinvestment of the gain on sale from portfolios sold during the second quarter. The reinvestment was in support of the growth initiatives in association with the value proposition launch. As a reminder, the RSA is designed to create mutual alignment of interest. While each agreement is unique to the partner program, we generally structure the majority of our economic arrangements such that the investment and upside opportunities are shared. So as Slide 7 demonstrates, the RSA enables our partners to sharing the profitability of our programs, while also providing economic protection to our business. In a rising credit loss environment, the level of RSA payment to our partner declines because the higher credit costs become a larger offset to the program's profitability. In addition, the minimum profitability threshold within each RSA ensures that Synchrony achieves an appropriate risk-adjusted return before any economics are shared with the partner. These minimum return thresholds also provide a buffer to our business in the occasional event of a regulatory change such that the profitability of the program performance is impacted by, for example, a change in fees collected. This dynamic also was demonstrated on Slide 7 due to the strength of our risk-adjusted return when the CARD Act became effective in 2011. Given the questions regarding the potential changes to late fee regulation, I thought I'd highlight two things. First, over 60% of our late revenue flows through our RSA agreements and will be subject to sharing with our partners. Second, greater than 95% of the late fees are covered through either repricing rights or change in law provisions, effectively change in regulation provisions, which were included in our program agreements adopted after the CARD Act was implemented. This is another example of how the RSA function has alignment of interest with our partners as market conditions change. Next, let's focus on provision for credit losses, which was $724 million for the quarter, a year-over-year increase due to the impact of a reserve release last year and partially offset by lower net charge-offs. Other income increased $109 million, primarily reflecting the impact of the $120 million gain on sale from the portfolio sold during the quarter. Excluding the impacts of the gain and certain reinvestments of the portion of the proceeds, other income would have been 3% lower year-over-year, primarily due to the impact of higher loyalty costs that were partially offset by interchange revenue year-over-year. Other expenses increased 14% to $1.1 billion due to the impact of higher employee costs marketing spend, information processing and other expenses. Our efficiency ratio for the second quarter was 37.7% compared to 39.6% last year. Excluding the effects of the reinvestment expenses deployed from the gain and sale proceeds, the efficiency ratio would have been 36.8%, an approximate 280-basis-point improvement. The increase in employee costs versus last year reflected higher headcount driven by growth and in-sourcing as well as higher hourly wages and other compensation adjustments. Total other expenses included $62 million of costs related to additional marketing and site strategy actions as we reinvest the $120 million gain on sale through these and other growth and efficiency initiatives. As detailed in the appendix of our presentation, we expect that the gain on sale and reinvestment in Q2 and the remainder of this year will net out as EPS neutral on a full year basis. In summary, Synchrony generated net earnings of $804 million or $1.60 per diluted share for the second quarter. We also generated a return on average assets of 3.4% and a return on tangible common equity of 30.3%. These strong net earnings and returns demonstrate the power and efficiency of our digitally-enabled model, combined with the compelling value of the financial products and services we offer through our financial ecosystem. Not only were we able to support the strong customer demand with a diverse range of products, but we're able to do so while maintaining cost discipline and strong risk-adjusted returns. Next, I'll cover our key credit trends on Slide 11. At a macro level, we continue to see signs of gradual normalization across the credit spectrum of the portfolio. That said, even with this normalization, our 2021 and 2020 vintages continue to perform better than our 2019 vintages and payment rates remain elevated versus last year as well as compared to our historical average. With regard to delinquency, our 30-plus delinquency rate was 2.74% compared to 2.11% last year, and our 90-plus delinquency rate was 1.22% compared to 1% last year. The year-over-year delinquency comparisons were primarily impacted by the prior year period's historic lows, at which point, the impacts of COVID-19 stimulus and forbearance action had the greatest impact on the portfolio. Our portfolio of strong delinquency trends have continued to drive year-over-year improvement in our net charge-off rate, which was 2.73% compared to 3.57% last year, an 84-basis-point improvement year-over-year, primarily reflecting the very strong consumer. Our allowance for credit losses as a percent of loan receivables was 10.65%, down 31 basis points from the 10.96% in the first quarter. Let's focus on some key trends that continue to support our strong performance and confidence we have in our business. First, the consumer remains in a strong position. The combination of robust labor markets, wage growth and elevated savings continues to support the desire to spend and repay their financial obligations, while also managing through the impacts of the inflationary pressures. According to external data, stimulus spending segments have generally remained consistent from March through June. About 2/3 of consumers have either spent a portion of their stimulus or have the entire amount of stimulus they receive still saved. The remaining 1/3 of consumers has spent the entirety of the cash they received during the last two years. When taking a look across the balance tiers, the top two tiers of the stimulus recipients, those with balances above $2,500, have seen modest balance decreases, while the lower tier balances less than $2,500, have remained flat. During the second quarter, consumers rotated their spend within discretionary and non-discretionary categories as they manage higher costs from inflationary pressures while still fulfilling their everyday purchases. In general, we saw a slight variability across our out-of-partner spend volume and frequency trends. These fluctuations likely indicate that the consumer is not actively reducing total spend or frequency, but rather rotating their overall spend. So for example, in certain categories like grocery, it appears that our customer is managing to ticket size and substituting items that are a greater priority, whether that means choosing a generic brand or forgoing a less desired item or treat. In terms of gas station spend, however, average transaction values have accelerated with rising gas prices, but transaction frequency has generally held constant, if not increased slightly. All this is to say, we continue to see trends of a strong consumer who is moving through their day-to-day and spending money without meaningfully changing their choices or priorities. Second, the differentiated strength of our business as well as the underlying trends within our portfolio that we have discussed today continued to demonstrate Synchrony's ability to deliver market conditions. In addition to the inherent resilience that comes from the diversification of our portfolio across spend categories, financing options, distribution channels and customer demographics Synchrony derives financial strength through our sophisticated cycle-tested underwriting. The predictive power of our credit decisioning and account management capabilities supports more stable loss performance around our target peer loss range of 5.5% to 6% even as economic conditions change and consumer creditworthiness evolves. From 2009 peak loss rate of 10.7% during the great financial crisis, the last decade's average of approximately 4.5% loss level our portfolio has grown and evolved meaningfully. And even as the mix of partners and credit quality of our portfolio has shifted over that same decade, Synchrony has grown significantly and delivered resilient risk-adjusted returns within a band of 8.5% to 11%. It's also important to note that we've delivered these returns even as interest and fees have been coming at somewhat lower levels due to the elevated pay rates during the last two years. Moving on to another synchronous strength, our funding, capital and liquidity. Synchrony's balance sheet has been built to be resilient. Over time, we have diversified our business in support of our ability to generate consistent risk-adjusted returns and considerable capital. This, in turn, has allowed us to grow and evolve our balance sheet such that we can fund growth efficiently without having to make trade-offs with regard to what's in the best long-term interest of our business and our various stakeholders. Let's start with the strong and stable foundation of Synchrony's funding, our deposit base. Deposits at the end of the second quarter reached $64.7 billion, an increase of $4.9 billion compared to last year. Our securitized and unsecured funding sources declined by $1.3 billion. This resulted in deposits being 84% of our funding compared to 81% last year, with both securitized and unsecured funding each comprising 8% of our funding sources at quarter end. Total liquidity, including undrawn credit facilities, was $18.9 billion, which equated to 19.8% of our total assets, down from 23% last year. As a reminder, before I provide the details on our capital position, it should be noted that we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. The impact of CECL has already been recognized in our income statement and balance sheet. The annual transitional adjustment pertains strictly to our regulatory capital metrics. We ended the quarter at 15.2% CET1 under the CECL transition rules, 260 basis points lower than last year's level of 17.8%. The Tier 1 capital ratio was 16.1% of the CECL transition rules compared to 18.7% last year. The total capital ratio decreased 270 basis points to 17.4%. And the Tier 1 capital plus reserve ratio on a fully phased in basis decreased to 25% compared to 28% last year. We continue to deliver robust capital returns to our shareholders. In the second quarter, we returned $809 million to shareholders through $701 million of share repurchases and $108 million of common stock dividends. When considering our existing capital position today, combined with the meaningful earnings and capital generation of our business, Synchrony is particularly well positioned to execute our capital plan as guided by our business performance, market conditions and subject to our capital plan and any regulatory restrictions. As of quarter end, our total remaining share repurchase authorization for the period ending June 2023 was $2.4 billion. Finally, let's review our full year outlook, which is summarized on Slide 14 of our presentation and incorporates the following macroeconomic assumptions

Kathryn Miller:

That concludes our prepared remarks. We'll now begin the Q&A session. [Operator Instructions] Operator, please start the Q&A session.

Ryan Nash:

So Brian, maybe can impact the net interest margin guidance a bit. I think you said 10 hikes, which is a little below the market. And I guess, is the change in guidance reflective of the outperformance or any other drivers? And maybe can you just talk about the deposit pricing strategy from here given the pace of hike? And what's included in for betas in terms of the updated margin guidance?

Ryan Nash:

Got it. And if I can ask a follow-up maybe for both of you. So the reserve today is at 10.65%, still above day one CECL despite obviously very low losses. I know this partially is hard to answer, but, can you maybe just help us understand how you think about reserve building in a modest downturn maybe relative to past cycles? And can you maybe just talk about how you think about the relationship between rising unemployment and losses in a recession just given the strong liquidity position that Brian Doubles had outlined that consumers are in, in the prepared remarks?

Brian Doubles:

Yes. I think, Ryan, just expand on that a little bit. We've been pleasantly surprised all year by the strength of the consumer. We're running at below half of our target loss rate in the business. So to Brian's point, we've got a lot of room to move, and we'll have plenty of time to move if we need to, if we start to forecast a worsening macroeconomic scenario as we head into '23. But the consumer from all aspects, whether you look at spend, whether you look at credit, at this point in time, is still really strong. I think they've got the excess savings. I think 2/3 of customers either saved a portion or all of the stimulus. So that's going to take a few quarters to burn through, and we'll -- we're looking at this every day. And if we think -- as we move into '23, I think we feel really good about how we're positioned for the balance of this year. But as we move into '23, if we need to make some modifications to kind of keep us within our target loss rate, we'll absolutely do that.

Moshe Orenbuch:

And Brian Doubles, you talked a little bit about offering of additional products to existing customers. Maybe I was hoping you could kind of expand on that a little bit. Maybe talk about how you could do that? What areas of the portfolio you think are best kind of situated for that? And maybe what that could add to your growth rate over the intermediate term?

Moshe Orenbuch:

Perfect. And just as a follow-up. From a credit standpoint, as you started the year, there was some caution, I guess. You had some caution about how some of your customers, who had been, let's say, received deferments elsewhere, might perform. And obviously, that concern has kind of burned through. Could you just talk a little bit about -- and you mentioned a lot about the state of the liquidity of your customers. What are you looking at to kind of gauge their health at this stage? I mean what are the key things that you would look at and say, "Wow, that's -- now that's better or where we're seeing that normalization continue?"