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.