Synchrony Financial

Welcome to the Synchrony Financial Second Quarter 2021 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Catherine Miller, Senior Vice President of Investor Relations.

You may begin. Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, 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 can differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. 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 Wentzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles.

Thanks, Kathryn, and good morning, everyone. Synchrony delivered strong results during the second quarter, reflecting the power of our technology-enabled model the durability of our partner-centric value proposition, and the early indications of a consumer resurgence. With now more than a year of the COVID-19 pandemic moving into the rearview mirror, I am proud of how our team has continued to execute on our strategic priorities. Our multi-product, multi-capability strategy has enabled us to nimbly adapt and deliver best-in-class products and services to address our partners' evolving needs while also generating appropriate risk-adjusted returns for all our stakeholders. Let's get things started by reviewing some of the key financial highlights from the quarter. Net earnings reached a record $1.2 billion, or $2.12 per diluted share. This reflected an increase of $2.06 over last year, as we marked the anniversary of the pandemic's initial impact on our business, and really the world. We are deeply grateful for all of the frontline workers scientists, and leaders have done to support our community and make progress toward an eventual return to normalcy. Purchase volume grew 35% over last year, reflecting a 33% increase in purchase volume per account. This increased spend was broad-based across our five business platforms. This strength in purchase volume was largely offset by the persistently elevated payment rate trends resulting from the government stimulus and industry-wide forbearance actions. leading to a slight increase in loan receivables, which were $78.4 billion for the second quarter. Average balances per account were down about 4% for the period, while new accounts were up about 58%. Net interest margin of 13.78% was 25 basis points higher than last year. Elevated payment rates and excess liquidity levels continue to have an impact on receivables and yield. The efficiency ratio was 39.6% for the quarter, primarily reflecting lower net interest income. Expenses were down about 4% compared to last year and down 5% year-to-date as our cost efficiency initiatives continue as planned. We remain on track to remove about $210 million from our expense base by year-end, even as we continue to invest in our business. Credit continued to perform very well. Net charge-offs were 3.57% for the second quarter, down almost 178 basis points from last year. Turning to our balance sheet, deposits were down $4 billion or 7% versus last year, reflecting retail deposit rate actions we took to manage our excess liquidity position. Deposits represented 81% of our funding mix at quarter end, a slight increase versus last year due to the retirement of some of our debt during the second quarter of 2021. During the quarter, we returned $521 million in capital through share repurchases of $393 million and $128 million in common stock dividends. We also continue to reinvest in our business. One of our greatest competitive differentiators remains our digital capabilities. We continue to invest in innovative products and services that enable our partners to meet their customers wherever and however they want to be met. That where and how, of course, can change fairly quickly, as can the objectives that our partners seek to achieve, so we need to stay nimble and ahead of the curve. We have continued to win and renew key partnerships, including our recent renewal with TJX Companies. This has been a very valuable partnership for over 10 years now, and we are excited to continue to provide innovative financing products to TJX customers. We also renewed 10 other programs during the quarter, including Shop HQ, Daniels and Sutherland, and added four new programs, including JCB and Ochsner Health. Our go-to-market strategy utilizes innovative and scalable ways to reach and serve customers effectively across a broad spectrum of industries and financing needs and over the course of their lifecycle. We have built a technology platform that harnesses our proprietary data analytics, cutting-edge digital capabilities, to offer a customized suite of products specifically designed with our partners and their customers in mind, all while delivering appropriately aligned economic outcomes. Our recent business reorganization, which included the creation of a growth organization and the redistribution of our partners from three sales platforms into five, will allow us to better leverage these company resources and deliver swifter, more optimized products and capabilities for our partners and sustainable, profitable growth for our business. In fact, the growth we expect to achieve within each platform will be driven by utilizing our suite of products to expand lifetime value, deploying more of our digital capabilities to expand customer reach, or adapting our value propositions to harness organic trends as the landscape evolves. In the case of our home and auto platform, a combination of all three. In particular, our home partnerships have been a focus of Synchronize going back to our business inception when we started providing financing for appliance purchases. Over the years, we've significantly broadened the scope of this platform and expanded our customer reach. Today, Synchrony is penetrated across all distribution points in each sector of the home market. From big retailers to independent merchants and contractors and OEMs and dealers, our home platform provides financing solutions to about 60,000 merchants and locations across a broad spectrum of industries, including furniture and accessories, mattresses and bedding, appliances, windows, roofing, HVAC, and flooring. Our partnerships are deeply rooted in industry expertise, data-driven strategic objectives, and mutually beneficial economic outcomes. The average length of our top 20 partners is over 30 years because we are able to deliver a breadth of financing products, innovative digital capabilities, and seamless customer experiences that are customized to each partner's needs as they evolve over time. Our data insights and analytics expertise, when combined with the partner's own data, empowers each merchant as they seek to optimize their marketing, customer acquisition, and sales strategies. And the value that our suite of products provides to their customers is clear. About 58% of our sales are repeat purchases. Whether customers are looking to upgrade their living room couch or suddenly find themselves in need of a new washing machine, we enable our partners to consistently support those needs through a variety of financing options that are best suited to the customer and the particular purchase they're considering. So whether we've been entrusted to enhance customer loyalty, drive transaction volume, or usher a retailer's adoption of digital assets, our strategy has enabled steady growth across the home market. For the four years prior to the pandemic, Synchrony's home receivables grew at a 7% CAGR as consumer spend within home improvement furniture and decor, and electronic and appliances sectors each grew by between 4% and 8% annually. Certainly, the pandemic has brought with it both challenges and opportunities. As consumers quarantined in their homes, the desire to renovate their homes or upgrade their furniture and decor intensified. As people sought to leave crowded metropolitan communities for suburban neighborhoods, home improvement spend increased. In 2020 alone, the home industry represented an approximate $600 billion market opportunity. Synchrony serves a fraction of that today. Even as we normalize toward a pre-pandemic cadence, the consumer's desire to invest in their living spaces is as strong as ever, perhaps reflecting a secular shift in favor of more remote work. We have positioned our home platform very well to capitalize on these trends. We have opportunities to deepen the scope and reach of existing partnerships, while also implementing a number of strategic initiatives to better leverage our core competencies and deepen our market penetration. For example, we have begun using more data and advanced analytics to enhance our acquisition marketing and drive higher repeat sales. We've also launched our directive device capability, which puts the simplicity of our financing application and the power of our underwriting in the hands of the contractors and customers as they seek to install a new HVAC system replace their windows, or repair an oven. This direct-to-device technology is also being deployed in retailer locations, which helps shorten checkout lines and delivers a completely digital solution to apply and buy when in store. In short, we are excited about the opportunities for growth that we see in our home platform. There are certainly some natural tailwinds in the industry that should fuel home spend, even as life normalizes in a post-pandemic world. but we are actually more excited about the ways in which we're leveraging our technological innovations to extend our customer reach, enhance the value of the products and services we offer, and deepen our competitive differentiation. As we continue to execute on our long-term strategy, we are driving even greater customer lifetime value for our partners, better experiences for their customers, and strong returns for our stakeholders.

With that, I'll turn the call over to Brian. Thanks, Brian, and good morning, everyone. As Brian mentioned earlier, the strong results we achieved during the second quarter reflected a number of factors. First, a healthy consumer with significant savings and pent-up demand to spend it leading to broad-based purchase volume growth. Second, continued strength in credit quality across our portfolio. We continue to closely monitor our portfolio as industry-wide forbearance begins to expire across the broader consumer finance landscape and for some customers as rental forbearance also expires. Finally, the strong positioning of our business, combined with consistent execution by our team, while we maintain focus on efficient delivery of customized financing solutions and digitally enabled customer experiences across our diverse portfolio of partners, merchants, and providers. Focusing on the healthy consumer who has robust savings and desire to spend in an environment with improving economic trends. During the second quarter, consumer savings rates remained strong, unemployment continued to improve, and consumer confidence reached a 16-month high. As a result, discretionary spend seems to be making a gradual return to pre-pandemic levels. In fact, a conference board survey from June indicated that there's also a healthy interest among consumers to spend on long-lasting manufactured goods over the next six months, including homes, cars, and major household appliances, which we expect to be a positive tailwind for our home and auto platform in particular. Across our diverse set of platforms, strong consumer spend trends contributed to 35% higher purchase volume compared to last year, primarily reflecting 33% stronger purchase volume per account. When comparing these trends to the more normalized operating environment of the second quarter 2019 and excluding the impact of Walmart, purchase volume was 18% higher in the second quarter 21 and purchase volume per account was 22% higher. This demonstrates strong consumer demand, translating to higher spend relative to pre-pandemic levels. Dual and co-branded cards accounted for 39% of the purchase volume in the second quarter and increased 56% from last year. On a loan receivables basis, they accounted for 23% of the portfolio and were flat to the prior year. Average active accounts were up about 2% compared to last year, and new accounts were 58% higher, totaling more than 6 million new accounts in the second quarter and over 11 million new accounts year-to-date. Loan receivables reached $78.4 billion in the second quarter, a slight increase year-over-year as the period's strong purchase volume growth was largely offset by persistently elevated payment rate. This marks the first quarter of year-over-year growth since the start of the pandemic. Payment rate was almost 300 basis points higher when compared to last year, which primarily led to a 6% reduction in interest and fees on loans. RSAs increased $233 million, or 30% from last year, and were 5.25% of average receivables. The increase relative to last year's second quarter was primarily reflected in significant improvement in net charge-offs. As a reminder, our retailer share arrangements are designed to share in the program's performance, and when the portfolios are performing better on a risk-adjusted basis, our partners share in this performance. So the RSA is performing as it is designed and the elevated levels we have seen over the last few quarters are a reflection of Synchrony's particular financial strength through the pandemic. We continue to expect RSAs to decline as net charge-offs begin to rise. With an improved credit performance and a more optimistic macroeconomic environment, we reduced our loan loss reserves by $878 million this quarter. Other income decreased $6 million generally reflecting higher loyalty program costs from higher purchase volume during the quarter. Other expenses decreased $38 million due to lower operational losses partially offset by an increase in employee, marketing and business development, and information processing costs. Moving to slide eight and our platform results. We saw a broad-based purchase volume growth across all five platforms as consumers have become increasingly confident and remaining local restrictions are being lifted. Both our health and wellness and diversified value platforms experienced more than 50% growth in purchase volume. In health and wellness, this primarily reflected lifting of local restrictions on in-person interactions and consumers being more comfortable with the environment and undergoing elective procedures. The lifting of state restrictions was also a primary driver of the significant purchase volume growth in our diversified value platform as consumers increased their discretionary spend in categories like clothing and assorted household goods. Meanwhile, purchase volume grew by 30% in our digital platform, 25% in home and auto, and 9% in lifestyle. Loan receivable growth trends by platform generally reflected stabilization or modest growth versus the prior year as the higher purchase volume was partially offset by the elevated payment rates, the one exception being our diversified value platform which was also impacted by store closures in 2020. Average active account trends were mixed on a platform basis, up by as much as 5% in digital and down by as much as 6% in health and wellness. The active account growth in digital generally reflected the combination of a shift in the timing of an annual promotional event and the ramp up of some of our recent partner launches. The active account decline in health and wellness was primarily associated with the continued strength in consumer balance sheets. interest and fees were generally down across the platforms, with the exception of lifestyle, due to lower yield as a result of elevated payment trends we've been discussing. I'll move to slide nine to discuss net interest income and margin trends. During the quarter, the continued combined impacts of the March stimulus and high savings balance built during the pandemic led to higher than average payment rate across our portfolio. As slide nine shows, payment rate ran approximately 280 basis points higher than our five-year historical average and about 300 basis points higher relative to last year's second quarter. It's worth noting the gradual moderation in payment rate from April to June, at which point the payment rate was 18.5%, a 90 basis point decrease for the March monthly peak of 19.4%. We expect continued gradual moderation in payment rate as consumers continued to spend the excess savings they accumulated resulting from the combined impact of stimulus and slower discretionary spend during the lockdown. Interest and fees were down about 6% in the second quarter, reflecting lower finance charge yields from elevated payment rate trends and continued lower delinquent accounts resulting from our strong credit performance. Net interest income decreased 2% from last year. The net interest margin was 13.78%, compared to last year's margin of 13.53%, a 25 basis points year-over-year improvement driven by favorable interest-bearing liabilities costs and mix of interest-earning assets, partially offset by the pandemic's impact on loan receivable yield. More specifically, interest-bearing liabilities costs were 1.42%, a year-over-year improvement of 73 basis points, primarily due to lower benchmark rates. This provided a 62 basis point increase in our net interest margin. The mix of loan receivables as a percent of total earning assets increased by 170 basis points from 78% to 79.7%, driven by lower liquidity held during the quarter. This accounted for a 32 basis point increase in the margin. The loan receivables yield was 18.62% during the second quarter. The 84 basis points year-over-year reduction reflected the impact of higher payment rate and lower interest and fees, which we discussed earlier, and impacted our net interest margin by 65 basis points. We continue to believe that in the second half of the year, liquidity will continue to be deployed into asset growth, and slowing payment rates should result in higher interest and fee yields, leading to increasing net interest margin. Next, I'll cover our key credit trends on slide 10. In terms of specific dynamics for the quarter, I'll start with the delinquency trends. Our 30 plus delinquency rate was 2.11% compared to 3.13% last year. Our 90 plus delinquency rate was 1% compared to 1.77% last year. Higher payment trends continue to drive delinquency improvements. Focusing on the net charge off trends, our net charge off rate was 3.57% compared to 5.35% last year. Our reduction in net charge-off rate was primarily driven by improving delinquency trends as customer behavior pattern improved over the last several quarters. Our allowance for credit losses as a percent of loan receivables was 11.51%. As far as our credit outlook is concerned, we are monitoring trends in our portfolio closely as the accounts enrolled in multiple forbearance programs roll off, but have not seen any indication in our portfolio to date. Our best expectation at this time is that delinquencies should begin to rise sometime in the back half of 2021, leading to peak delinquencies in mid-2022. This would translate a net charge-off peak in late 2022. Moving to slide 11, I will cover expenses for the quarter. Overall expenses were down $38 million, or 4% from last year, to $948 million. As we continue to execute on our strategic plan to reduce costs, and remain disciplined in managing our expense base. Specifically, the decrease was driven by lower operational losses, partially offset by an increase in employee, marketing and business development, and information processing costs. The efficiency ratio for the second quarter was 39.6% compared to 36.3% last year. The main driver of the increase of the efficiency ratio was a negative impact from lower revenue that resulted from a combination of lower receivables and lower interest and fee yields. This is partially offset by a reduction in expenses. Moving to slide 12. Given the reduction in our loan receivables in 2020 and early 2021 and the strength in our deposit platform, we continue to carry a higher level of liquidity. While we believe it's prudent to maintain a higher liquidity level during uncertain and volatile periods, we continue to actively manage our funding profile to mitigate excess liquidity where appropriate. As a result of this strategy, there was a shift in our mix of funding during the quarter. Our deposits declined $4.3 billion from last year. Our securitized and unsecured funding sources declined by $2.6 billion. This resulted in deposits being 81% of our funding compared to 80% last year, with securitized funding comprising 10% and unsecured funding comprising 9% of our funding sources at quarter end. Total liquidity, including undrawn credit facilities, was $21.2 billion, which equated to 23% of our total assets, down from 29% last year. Before I provide details on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the joint federal banking agencies, which had two primary benefits. First, it delays the effect of the CECL transition adjustment for an incremental two years, And second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 17.8% CET1 under the CECL transition rules, 250 basis points above last year's level of 15.3%. The Tier 1 capital ratio was 18.7% under the CECL transition rules compared to 16.3% last year. The total capital ratio increased 250 basis points to 20.1%. And the Tier 1 capital plus reserves ratio on a fully phased-in basis was 28% compared to 26.5% last year, reflecting the impact of the retained net income. During the quarter, we returned $521 million to shareholders, which included $393 million in share purchases and paid a common stock dividend of 22 cents per share. During the quarter, we also announced the approval of a $2.9 billion share repurchase program through June 2022, as well as our plans to maintain a regulated quarterly dividend. Our business generates a considerable amount of capital thanks to the scalability of our digital capabilities, the utility of our diversified product suite, and the prioritization of growth and attractive risk-adjusted returns. We will continue to take an opportunistic approach to returning capital to shareholders as our business performance and market conditions allow, subject to our capital plan and any regulatory restrictions. As we exit the pandemic and the environment normalizes, we are confident in our capabilities and positioning of our business. We are emerging from this period as a stronger and more dynamic company, and we're excited about the opportunities we see to drive strong financial results and shareholder value. I will now turn the call back over to Brian for his final thoughts.

Thanks, Brian. While the pandemic has presented our company and the world with never-before-seen challenges, Synchrony has continued to rise to the occasion, facilitating the evolution of many of our partners as a new operating environment has been ushered in. We have a truly unique understanding of the partners we serve and the customer needs they seek to address. We have an almost 90-year history in consumer financing. We have continued to invest in our comprehensive product suite, amass our proprietary data, and leverage our advanced analytics to achieve targeted outcomes for each of the merchants we work with. We have been consistently investing in digital innovation for years and have demonstrated how effectively we can adapt to deliver the value our partners have come to expect, while also driving strong financial results and attractive returns for our shareholders. With that, I'll now turn the call back to Catherine to open the Q&A.

That concludes our prepared remarks. We will now begin the Q&A session. so that we can accommodate as many of you as possible, I'd like to ask the participants to please limit yourself to 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.

Thank you. We will now begin our question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speaker phone, please pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. And our first question is from Sanjay Sakrani with KBW. Please go ahead.

Thanks. Good morning. So Brian Doubles, you mentioned an early indication of consumer resurgence. I'm just curious which macro data points and micro ones give you the most encouragement. And then I guess the question I'm getting quite a bit is what the setup is for loan growth with us moving away from stimulus and there being other benefits coming from the government like the tax credits and obviously infrastructure. Maybe you could just help us think through all of that. Thanks.

Yeah. Hey, Sanjay. So look, I think no matter where you look, we feel pretty bullish around what we're seeing in the economy. Consumer confidence continues to build. You know, the trends on retail sales and spending, you know, all of that is translating into really good spend on our card. So as we look across our five platforms, it really is broad-based. You know, 35% purchase volume growth year over year, really strong across all five platforms. The fact that we're up 18% versus 2019 I think is a really good indication. So it's not just that we're comping against a weak 2020. It really is broad-based growth across the company. And then as you look at kind of per account purchase volume, per account was up 33%, so that's another positive indicator. And then this is a little more anecdotal, but as we talk to our partners, no matter what segment we're in, they're seeing a lot of pent-up demand to spend. The providers in CareCredit, they're booking appointments now three, four months out. They're opening the practices on Saturdays and Sundays to keep up with the volume. I know that's a little more anecdotal, but as our teams are out every day talking to the partners that are in the stores, they're just seeing and feeling a lot of pent-up demand to spend.

And I don't know, Brian, if you want to add to that a little bit on... Yeah, the only thing I'd add, Sanjay, to that is we look at savings rates. You clearly see the consumer who increased their savings in the beginning part of the pandemic when stimulus happened... That came back down in line with historical averages towards the end of 2020. You again saw that lift here in the end of the first quarter into the second quarter with the stimulus actions. We see now across the 29 largest banks that beginning to trail down a little bit. So some of those will come back in line clearly with the spending behavior patterns as well as the increase in the financial obligations as mortgage forbearance, auto forbearances, and the enhanced unemployment benefits begin to fade here in the back half of the year.

Yeah, I think, Sandra, you touched on receivables growth. That will absolutely come. We had four out of our five platforms had receivables growth. The payment rate is a little bit tough to predict, but we don't see anything that is permanent inside of the portfolio. So I do think we will see a reversion to the mean around payment rates. And based on the spend that we're seeing on our cards, receivables growth will absolutely come. And we're starting to see some positive signs there. And like I said, four out of our five platforms this quarter.

Okay, great. That's perfect. And just to follow up, there's a couple of portfolios that have been out there mentioned to be for RFP. I'm just curious how you're seeing your pipeline develop in terms of portfolio acquisition, etc. Maybe you could just touch on that. And just one clarification, Brian Wenzel. You know, the framework for key drivers from last quarter, I mean, it sounds like most of them stand, but I just wanted to clarify that they still stand. Thanks.

Yeah, so let me start on the pipeline question, Sanjay. So I would say, you know, across all five platforms, we've got a good pipeline of new opportunities. You know, one of the benefits of the reorganization is, you know, our teams are getting even deeper and aligned by industry and And we've got some fresh set of eyes on certain things, and we're looking at opportunities for new programs and startups that are a little bit unconventional, a little bit creative. And I think that's a great sign and kind of part of what we were trying to achieve with the reorg. I would tell you most of the opportunities that we're seeing in the pipeline are startups or new programs, with a couple exceptions of things that are out there that we're looking at that that have existing portfolios. But again, strong pipeline across all five platforms.

Yes. Sanjay, to your framework question. So the lack of the page, I wouldn't confuse with the fact that we're changing that framework. Again, I think when you look at what we put out in the first quarter, we highlighted the continued high payment rates that would impact loan growth in the first half of the year. That's going to continue. We do think it begins to abate in the back half of the year. So I think From the purchase volume and receivable growth standpoint, it's the same. Clearly, the elevated payment rate and persistency of that will provide a little bit of headwind in net interest margin as we move into the back half of the year. From a credit perspective, the higher payment rate really has given us what I'd say almost pristine-type credit. So I think you'll see in the back half of the year, and really for the full year for the company, we're going to be sub-4%. on a loss rate perspective, which is, you know, remarkable for this business given the high margins. And then the RSA, you know, following those trends will be a little bit more elevated in the back half of the year, you know, which, again, is working as it's designed to share in the upside performance of the company. So that's how I think about it. It's largely consistent with what we've said back in the first quarter. So... Thank you. Thanks, Sanjay. Thanks.

And thank you. Our next question is from John Hecht with Jefferies.

Hey, good morning and thanks for taking my questions. Good new customer activity. Maybe can you tell us how much of that was, say, from the newer channels like Venmo and Verizon? Maybe just give us kind of an update on, call it the maturation of those two new programs.

Yeah, John. So we obviously can't break out any specific performance on the programs, but I can just talk generally about both. Venmo is going really well. We're in full launch mode. I would say performance is better than our expectations so far. We're getting really great feedback from the customers around just the ValProp and the fact that we maximize rewards in those spend categories. They love the card design. They love the QR code, the ability to split payments and share. And so that program is off to a great start. It's still early, but all of the key indicators that we look at are performing really well. And similarly on Verizon, this is another program for us that will be a top 10 program in the future, performing ahead of our expectations. I think great feedback on the ValProp You know, it's definitely behaving like a top of wallet card, which is what we intended. You know, that was the goal. And so we're seeing really good spend on Verizon products and even outside as well. So off to a great start on both. And like I said, I think these can both be top ten programs for us in the future.

Okay. Very good. Thanks. Brian, I'm wondering just maybe if you give us a high-level kind of quick discussion and your opinion on the state of the market. And really what I'm kind of interested in is, you know, you've got some new kind of emerging market participants in the Buy Now, Pay Later product and so forth. And, yeah, I'm kind of wondering what your sense is for kind of underwriting quality across the spectrum and kind of competitive factors across the spectrum and given the changing elements of the market?

Yeah, John, it's a great question. I think, you know, obviously there are always new entrants in the buy now, pay later space. I think it's pretty clear at this point that every financial service provider out there will offer a buy now, pay later product. You know, equal pay financing is a big part of our business already. You know, we highlighted we do over $15 billion of balances currently on equal pay products. We offer those products over 70,000 locations. So our goal at the end of the day is to have a multi-product, multi-capability solution. I think ultimately that's what's going to win, and that's what we're offering to our providers. In terms of the competitive dynamics, it's hard to tell how others are underwriting. What I can tell you is we've been in this business a long time. It is really important to stay disciplined, which means you don't go a lot deeper in really good times, and you try not to contract too much in bad times because we know that our partners really value that stability, the consistency of our underwriting, and they get used to a certain approval rate. And we try to protect that in both good times and bad times. And as we all know, if you've been in this business a long time, if you do take on substantially more risk and you're winning business by lowering your underwriting standards, then that's a losing strategy over the long term. And so That's not how we operate. We've got a very experienced, disciplined credit team. And look, we want to win business based on our products and capabilities, based on our technology, our partnership model. We never want to win business based on just going deeper and taking on more risk.

Really appreciate the update. Thanks very much. Thanks, John. Thanks, John.

And we have our next question from Don Fandetti with Wells Fargo.

Yes. Brian, can you talk a little bit about the child tax credit, dig in a little bit more? For example, do you think that will lead to higher payment rates in July versus June? And how do you think about the overall materiality of it versus prior stimulus?

Yeah. Thanks, Don. You know, obviously, you know, an influx of $15 billion of cash, you know, on top of what's already out there is clearly not going to be beneficial. That being said, being it's targeted to folks that earn less than $150,000, that's a pull forward really from 2022. I'm not necessarily sure it will have any material impact necessarily on our payment rates. As we look in the beginning part of July, we have not seen a real elevation of the payment rates. They're more consistent with what we saw as we exited out of June. So I don't really see any data yet that says that that's going to be a potential problem. We'll certainly watch and see whether or not that becomes a permanent credit and a permanent pull forward as legislation gets enacted later on this year. So we'll continue to watch it, Don.

Okay. Thank you. I'm all set.

Thanks, Don. Have a good day.

And we have our next question from Betsy Grosick with Morgan Stanley. Hi, good morning.

Good morning, Betsy.

A couple questions. Just the first one, you talked through, you know, the NIM and the loan growth and how it's being impacted, you know, by the payment rates, et cetera. But could you speak to how much the loan growth and potentially NIM is impacted by some of these new entrants that we've been seeing and discussing here, be it either BNPL or other kinds of payment schemes that enable people to really shift some of their spending away from what might have been their primary payment device. I'm just wondering if that's had any impact.

Yeah, Betsy, I'll let Brian chime in here, but what we're seeing is really attributed to the higher payment rate just because consumers' balance sheets are stronger than they've ever been, and I think that is the primary driver. I don't think this is competitive pressure in any way, but I'll let Brian add some color to that.

Yeah, I'll just point you back to a couple of things, Betsy. First, when you look at our new account origination, the 6.3 million new accounts, of 1% versus 2019. So we're not seeing any, and even when we look down at the providers that may have alternative type of products, these buy now, pay later products, we are not seeing a real impact relative to new accounts. We also don't really see it in the payment rate and where we're kind of coming through. It really is, as Brian points out, the accumulated savings rates that you're seeing and stimulus that has flowed through the through the consumer, that's really driving the pressure against purchase volume and the headwind onto net interest margin, which is producing tremendous credit, which we sometimes put in the back mirror. But the credit is really terrific right now. So we'll continue to monitor it, but we don't see an impact from the alternative players.

Right. Okay. Now I get it. And clearly credit is a part of the math here. So it's a little bit surprising when people only look at like a PPOP instead of including the credit in there. I agree. I guess the other question I have on this is with regard to deposit products that you might be planning or thinking of offering. Because when you think about the BNPL, the pay-in for, you know, the pure pay-in for, I know there's different BNPLs, but the pure pay-in for should be financed or, you know, funded with a checking account, right? I mean, you shouldn't be paying for your paying for with a card balance. But I just wanted to understand how you're thinking about that when you're developing your own products and whether or not we should be anticipating more in the way of deposit products coming out from you. Thanks.

Yeah, I mean, Betsy, it's a great question. And we agree you shouldn't pay off one credit product with another credit product. So we agree with that. You know, I think we're looking at some alternative kind of savings products as part of our broader product strategy. You know, by now, PayLater is obviously top of mind right now across, I think, all issuers. Like I said, I think everybody will have a version of it. You know, we have $15 billion of balances today, as I said, and we're rolling out some new capabilities and features in the second half of the year. So nothing I can get too specific on at this point, but... but more to come and definitely part of our multi-product strategy that I touched on earlier.

Okay. Thank you.

Thanks. Thanks, Betsy. Have a good day.

Thank you. Our next question is from Rick Shane with JP Morgan.

Hey, everybody. Thanks for taking my questions this morning. Brian, you did a great job highlighting the impact of home and auto on the portfolio. I'm curious with the changes in the composition over the last several years, How important do you think back-to-school is, particularly in light of the challenges for back-to-school spending last year?

Yeah, you know, back-to-school hasn't been a big driver for us for a number of years, Rick, which is kind of surprising. You know, we just don't see a ton of volume there, and I think it's not as much of an event as it was, you know, probably when you and I were growing up, it was more of an event. I know even for my girls, they don't. There isn't a back-to-school event where they go, I'll go get new clothes and stuff for school. So we tend to see that spend space out over a longer period of time, and it's less of a spike for us. So, you know, I think that trend will continue even in the new paradigm.

Got it. I appreciate that. I'm chuckling because you know me well enough to know that my clothing budget is not that great either, even when I was a kid. Thanks, guys. Thanks, Rick.

And we have our next question from Moshe Orenbach with Credit Suisse.

Great, thanks. Brian, I'm hoping that you could kind of talk a little bit about the kinds of conversations that you have with your large retail partners about BNPL. In other words... I have to believe that they are quite vested in the success of your programs given they earn a significant amount of money, whereas at BNPL they're kind of paying a significant amount of money. And so, you know, maybe could you just, you know, obviously not asking about any specific partner, but what are those conversations like?

Yeah, it's a great question, Moshe. I think a lot of our partners are still in kind of the evaluation phase where they look at the Buy Now, Pay Later product and they obviously see a customer desire for that product and a customer demand for it. But one of the big questions is, as you pointed out, it's around economics. And it's still early there. And I think some retailers are willing to pay what is a pretty steep merchant discount rate if they believe that they're attracting new customers and they're getting sales that they wouldn't otherwise get. But when they look at that comparison, they look at it compared to some of our products where not only do we not charge interchange, we're also paying them quite a bit through the RSA. And they look at that and they say, okay, clearly economically they would prefer that the purchase goes on the private label card or a co-brand card because it's much better for them financially. And so to the extent that they stop believing that they're actually getting incremental purchases or new customers, then the economic tradeoff is very clear. And so I do think down the road there's an economic reckoning that will happen as this plays out. And it's still early in terms of these products and how they're offered. The other thing I would mention is that the other advantage and the things that we hear from our partners is they like the lifetime relationship that a card provides. They can do lifecycle marketing. They can do promotions and offers over a number of years. And one of the things that we talk a lot about with our partners and one of the things that we measure across all of our partners is repeat purchases. And we talk to you guys a lot about that as well because that has been – That has been a big focus for us over the last five years. And one of the things that, frankly, our partners look to us for is that ongoing customer loyalty. We measure that. We look at it by customer. When was the last time they made a purchase? Okay, let's send them a customized offer or promotion. So they really like that ability to do that lifecycle marketing. So I think it's a combination of economics, and that's still kind of a TBD on how all this is going to shake out. But the other thing that we hear across the board is they want to have a long-term relationship with the customer. They really value the loyalty that a lot of our products provide.

Thank you. And my follow-up question for Brian Wenzel, you kind of highlighted the impact of late fees along with the payment rate. Could you just talk a little bit about how that how that comes back? What is the time frame? Is it kind of early stage delinquencies? How should we think about that normalization of that factor?

Yeah, great question, Moshe. I think the way we kind of think about the credit outlook now, delinquencies build towards the latter part of this year heading into 2022. So late fees will begin to come back as you see the entry rate and delinquency begin to rise. So that will come first before you get into the charge-off. So, you know, if you believe that the latter part of this year, you'll begin to see the yield impact benefit coming from higher late fees in the portfolio. Thank you. Thanks, Moshe. Have a good day.

And thank you. Our next question comes from Mark DeVries with Barclays.

Yeah, thanks. I had a question about the NIM. Can you help us think about the lift that you may get from both a normalization of the payment rate to kind of a long-term historic average and also maybe the normalization of liquidity as a percentage of assets?

Yeah. So the way I would think about it, let's take liquidity first in the portfolio. So clearly we've been able to burn off Some of that liquidity here in the second quarter, both through the $2 billion in asset growth that we had, as well as the acceleration of some of the maturities in the funding profile. So we're running over $2 billion continued excess liquidity as we enter into the back half of the year. If you take out all the excess liquidity from here, there's probably another 40 basis points on to the net interest margin that you'd see a lift from. Again, we've highlighted before, you probably have 20 to 30 basis points from benchmark rates, so put that off to the side. The residual comes in probably two fashions. One is late fees, which you're probably 80 to 90 basis points of lift going back to a normalized late fee load, so not even at a loss rate higher than 5.5, but your normal load. And then you have the residual, which will be the above when pay rates come back in line. The one thing I'd say is we do not see anything in the portfolio today that gives us any indication that the net interest margin in that 16% realm is not going to be the mean that we go back to. We'll continue to watch it, but there's nothing fundamentally or structurally that we think is different. It's just really the timing to get there given the excess liquidity that the consumer has and that they're going to deploy here in the short term.

Okay, great. That's helpful. And then just a follow-up question on, Brian, on your comments about, you know, your partners really wanting to kind of stimulate the longer life cycle with customers. Do they find that using the revolving product where they've got incentives on spend is the best way to do that as opposed to offering, you know, some type of maybe a lower rate kind of fixed loan product on balances?

Yeah, Mark. I mean, it really does vary by partner, but I would say the majority, particularly the larger partners, they see the value of the value prop, right? The rewards, the loyalty that that drives. You know, when they go into one of our large partners, and a lot of times they're saving 5%, that is really meaningful. You know, we do that at Amazon. We do it at Lowe's. We do it at a number of places now. And that's a great way to incent that repeat purchases. You know, I think the other thing that, you know, we've been doing for a number of years now is in most of our partners, we store the card as the default payment type, right? And so you don't even have to think about it. It just goes right on the card. You get your 5%. And, you know, that's something that our partners have been very focused on as well to drive that, you know, again, the lifetime relationship with the cardholder and the loyalty that comes with it.

Okay. And I assume they also get the fastest checkout using the the revolving products, correct?

Yeah, I mean, it's just instant, right? It's stored as, you know, I know for Amazon, for me, it's stored as my default. I get my 5%. I don't even think about it. It just automatically goes on the card. So it's certainly the easiest, fastest way to check out for most of our partners. Great. Thank you. Thanks, Mark.

And thank you. Our next question is from Mihir Bhatia with Bank of America.

Hi, this is Nate Richard from Mahir Bhatia. Thanks for taking my question. I'm curious about how program costs are trending. I know you don't typically comment on specific portfolios, but are the rewards for consumers increasing for new portfolios? Like, for instance, I've noticed more prominent rewards with promotions for Venmo. I'm just curious if that's additive or representative of the product portfolio in trying to get new customers.

Yeah, your quality wasn't that clear. Are you asking about the loyalty cost trends?

Right. Is that increasing for the newer portfolios? Like I've seen Venmo have, like, more promotions and rewards. I'm wondering if that's additive or representative of the broad portfolio for new customer acquisitions.

Yeah, the way I would think about the loyalty costs, you know, first of all, our volume is up significantly year over year and up versus 19. So you're going to see a general trend in loyalty costs higher. Most certainly the new programs, Verizon and Venmo, will have those costs. that are in there, probably a slightly higher percent of the asset because the asset is just beginning to build. But it's not significantly different than our overall portfolio, not necessarily the driver. It's really the increased purchase volume across the entire portfolio that's driving our value prop and loyalty costs.

Okay, thank you. That's it for me. Great, thank you.

And we have our next question from Dominic Gabriel with Oppenheimer.

Hey, thanks so much for taking my questions. We obviously have the new segments that you've broken out, the new platforms. Can you talk about the differences in each of the platforms that have made you decide to break them up this way as far as the marketing teams, the go-to-market strategy, and if they're actually running a software that's different among them. Thanks so much, guys.

Yeah, sure. So the reason to reorganize and align more by industry was a couple fold. First, in terms of, to your point, the products and capabilities that we offer tend to align better by industry. And even more important than that, how we integrate and the products and capabilities and how we integrate them into the digital environment or the store footprint tends to align as well by industry. So one example, for our purely digital players, PayPal, Venmo, Amazon, we're integrating through our API technology or through SciPy right inside of their app. And that's different than what we would do in home and auto where for some of our larger partners, we're integrating both in their digital environment, mobile, online, but we also have tools and technologies to apply and buy in-store. And so because the product suite tends to be catered more towards industry because of the types of products that they're selling, as well as whether or not they're purely digital or have a store footprint, it just made more sense to align by industry. I'd say the second piece of this, and we saw this in CareCredit over the last, you know, 30 years, it really is an advantage to get really deep domain expertise in an industry. And one of the things that I think has been a secret to our success in CareCredit is that domain expertise. You know, our teams get, they build lifetime relationships. They get really deep in the different domains that we support dental that et cetera, and we're trying to replicate that in these other platforms. So those were the two primary reasons. I can tell you it's been great just a couple months in having these teams in place, looking at these segments differently, seeing kind of natural synergies and ideas for new products and capabilities as they're out talking to partners and thinking about it more with an industry bent to it. So far, the progress has been really great.

Great, great. Thank you for that detail. And then, you know, this might be a long shot, but can you talk about the tender share by each of those, and if not specific numbers, because I know that's unlikely, maybe just perhaps which one of the segments is, you know, at the average tender share below and above average of the whole company? And then when we think about the RSA in the second quarter, is that the high watermark if you think about, you know, NCO rates stay roughly, you know, fairly in line with where they are for the rest of this year? Is that the high watermark on a percentage basis for the RSA? Thank you very much. I really appreciate it, guys.

Yeah, let me start on the kind of the penetration question. You know, I would say Across each of those platforms, we've got significant room to grow penetration. Inside of each of those platforms, we have startup programs where we're a relatively small percentage of the payments inside of those programs, and we have very mature programs where we can be 30%, 40% PEN. What I can tell you is we measure our teams on increasing that penetration rate regardless of where they're at. So even for the more mature programs, Our teams that are embedded inside of our partners, they get measured based on growth and driving that incremental tender share. So even in mature programs, we are very focused on the penetration rate. Now, Brian, if you want to take a second piece of that.

Yeah, so RSA, as you think about RSA in the back half, the two factors really to focus on is, one, the purchase volume, right? Because RSAs are not only sharing, there is volume-oriented purchases. So the strength in purchases you see in the back half of the year and then how the net charge-off and provision line continues to develop. I mentioned earlier in the call, we expect the NCO rate for the full year to be below 4%. But if there are incremental ACL releases, that could impact it. So it will remain elevated in the back half of the year. you know, from where we are, you know, historically, but it shouldn't be dramatically larger than what we saw in the second quarter.

Great. Thanks so much.

Thank you. Operator, we have time for one more question. And thank you. Our last question is from Bill Karkachi with Wolf Research.

Good morning. As you look a bit further out, do you see the normalization of payment rates providing a tailwind to the normalization of your revolve rates such that we could see your loan growth start to outpace your spending growth? If you could just speak to that dynamic.

Yeah, you know, clearly, you know, we've said that we believe payment rate will move back to the mean. That will accelerate loan growth. And most certainly, if you had a slowing purchase volume market, that could push the the loan growth ahead of the purchase volume growth. Again, the way we've thought about the back half of the year, and it hasn't really changed in the back half heading into 2022, is that you are going to continue to see elevated purchase volume, one from pent-up demand that we see, and as we talk to our partners, merchants, and providers, that you're going to see the consumer who has the wherewithal with the savings to continue to spend. So So I think over the next 18 months, you're going to continue to see elevated purchase volume, Bill, and then you're going to combine that with a moderation of the payment rate to the mean over time. So the two will work in concert.

Got it. And then separately on capital, there's been some skepticism around your ability to get down to pure levels of capital. Can you speak to what gives you confidence that you can get there and I might have missed this, but any commentary on the potential for, you know, increasing the authorization above your current plan?

Yeah, you know, Bill, I'm going to first point you back to a little bit of the history, right? As we separated from GE, we had an 18% capital level. We had worked that down to 14% over, you know, a couple of years, you know, three or four years. So we've demonstrated the ability. We've demonstrated the ability, you know, just before the pandemic to, to take down capital, I think $3.3 billion in a nine-month period before the pandemic happened. So I think we have the ability and demonstrated capability to do that. So I think we're confident in our ability to get down there. Now, with regard to the current authorization, right, we talked about this a little bit in the first quarter. That is a backwards-looking authorization, right? So the data in which we used to run our stress scenarios under our processes and our governance mechanisms were based off of December and early January assumptions, right? So that's where we had the capital plan put together and approved by our board. As things continue to change, we'll evaluate whether or not there is a desire for the board and leadership team to increase that authorization level, and we'll revisit that. But right now we have $2.5 billion remaining We've executed $593 million so far this year, which were slightly regulated by the restrictions put on by the Fed. And we will be aggressive with regard to our execution against the $2.5 billion. And again, if the environment warrants, we'll revisit that.

Thank you.

Thanks, Bill.

Thank you all for joining us this morning. The investor relations team will be available to answer any further questions you have.

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