Synchrony Financial

Good morning and welcome to the Synchrony Financial First Quarter 2022 Earnings Conference Call. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please dial 01 on your touchtone phone. Please note it is no longer star 1, it is 01. Please note this conference is being recorded. And I will now turn the call over to Catherine Miller, Senior Vice President of Investor Relations. and 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 websites. 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 nor 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'll now turn the call over to Brian Doubles.

Thanks, Catherine. Good morning, everyone. Synchrony delivered strong financial results for the first quarter of 2022, including net earnings of $932 million, or $1.77 per diluted share, a return on average assets of 4%, and a return on tangible common equity of 34.9%. This financial performance was driven by the core strengths of our business and the continued execution of our key strategic priorities to drive greater value for our partners, providers, and customers. We continue to expand and diversify our portfolio during the first quarter with the addition or renewal of more than 15 partners. We also continue to extend our reach and engage more customers, thanks to the powerful combination of our seamless experiences, attractive value propositions, and broad suite of flexible financing options. New accounts grew 10% during the first quarter, reaching 5.5 million, and average active accounts increased 6%. Turning to customer spend, we continue to experience broad-based demand across the many industries we serve. Purchase volume increased 17% versus last year, driven by double-digit growth in our diversified value, digital, health and wellness, and home and auto platforms. We also continue to see higher engagement across our portfolio as purchase volume per account grew 10% compared to last year. Customer spend reflected strong cross-generational growth. Millennial and Gen Z spend increased 23% year-over-year, and Gen X and Baby Boomer spend increased 15%. The combination of strong purchase volume and a slight moderation in payment rate drove loan receivables growth of 8% on a core basis. Dual and co-branded cards accounted for 42% of the purchase volume in the first quarter and increased 29% from the prior year. On a loan receivables basis, including the loan receivables held for sale, Dual and co-branded cards accounted for 25% of the portfolio and increased 16% from the prior year. In short, Synchrony has continued to see strong engagement across our customer base and momentum across our product suite, thanks to our ability to deliver flexible financing options that specifically address whatever our customers' transactions may look like on any given day. Whether they're looking to cover a healthcare need, purchase supplies for a home repair, or they're simply convenience or value shopping, our customers can access financing solutions that specifically address their needs while optimizing the value they seek. Of course, in an ever-changing consumer landscape, the financing needs and expectations of customers evolve, as do the strategic priorities of our partners. To an increasingly greater degree, it's no longer simply about reward points or cash back. It's also about delivering an end-to-end experience where the kinds of perks that attract a customer to the product are designed to anticipate and optimize value. The more dynamic and data-driven those experiences and value propositions are, the deeper the customer relationship and the stronger their lifetime value over time. In order to deliver consistent and compelling outcomes for both our customers and partners, we consistently invest in our digital capabilities, our product suite, and our value propositions so that we can continue to meet our customers where, when, and however they want to be met. These investments take shape in a number of different ways, whether it's through loyalty, technology, or marketing spend. Our partners' interests are aligned with ours, so we structure the majority of our economic arrangements such that the investment and upside opportunity are shared. Synchrony's innovative digital capabilities allow us to deeply integrate with our partners and providers to deliver seamless and engaging omnichannel experiences, while also leveraging our data and insights to optimize customer outcomes. In particular, we are often able to develop highly tailored value propositions to attract customers for whom we can predict transaction behavior and financing needs, which ultimately leads to more engaged and satisfied customers, higher spend, and better outcomes for all. We are always looking for ways to enhance our program performance. Value proposition refreshes are a particularly attractive and effective way to drive deeper engagement with existing customers and attract new customers, resulting in higher lifetime value of each account. We have far more data and insights to leverage based on our experience with an existing portfolio. And since our partners' interests are aligned with ours, the investment costs are generally shared. Simple program enhancements like deeper integrations, more relevant and universal value propositions and greater product flexibility enable us to deliver greater and more utility and value to our customers and stronger results for our partners. Our customers receive greater financial flexibility to address their broad range of needs and make smarter purchases, while also maximizing the rewards they care about. And our partners attract new customers and derive greater customer loyalty, larger ticket sizes, and more frequent transactions. Our partnership with PayPal is a great example of how together we continue to evolve and enhance our offerings to drive still greater outcomes for all. Earlier this month, we announced the launch of our new and refreshed co-branded PayPal Cash Back credit card. The consumer value proposition is a best-in-class cash back offering where the consumer will earn unlimited 3% cash back when paying with PayPal at checkout and 2% everywhere else MasterCard is accepted. The card has no annual fee, no category restrictions, and can be added to the digital wallet for easy, fast, and secure checkout. We're excited about this opportunity as it delivers exceptional consumer value while leveraging the innovative digital experiences from previously launched partner programs to deliver a truly seamless and elegant customer experience. In particular, the PayPal card experience will be fully integrated with the PayPal app and powered by native APIs. Customers will be able to apply for the card and service their accounts all within the app, as well as receive personalized notifications and alerts to manage their credit account. Thanks to our integration within the PayPal app, customers will be able to redeem their rewards into their PayPal balance to use for future purchases or transfer into their PayPal savings account powered by Synchrony Bank. The rollout of the new product, enhanced experience, and value proposition began earlier this month. and we expect it to be fully deployed this quarter. Given the level of integration and functionality we are launching with this card, as well as the best-in-class value proposition we're delivering, we expect to see meaningful growth in new accounts and spend on the card. We're truly excited to continue to raise the bar by consistently investing in and delivering innovative financing experiences for our partners and customers. With that, I'll turn the call over to Brian to discuss the first quarter financial performance in greater detail. Thanks, Brian, and good morning, everyone.

Synchrony's first quarter performance reflected continued strength across our diversified sales platforms, and in particular, the powerful combination of our digitally powered product suite, seamless customer experiences, and compelling value propositions, which resonate deeply with the needs of our customers and partners. We generated over $40 billion of purchase volume in the first quarter of 2022, reflecting a 17% increase compared to last year. From a platform perspective, Our home and auto, diversified in value, digital, and health and wellness platforms each continue to experience double-digit year-over-year growth in purchase volume, reflecting strong demand for both our products and attractive partner and provider networks. At the platform level, home and auto purchase volume was 10% higher due to the continued strength in home and improvement in auto as more consumers returned to the road. In diversified in value, purchase volume increased 25% driven by strong retailer performance and higher customer engagement. The 20% year-over-year increase in digital purchase volume generally reflected the growth across the platform. We experienced greater customer engagement, including higher active accounts and higher spend per active among our more established programs and continued momentum in our new program launches. The 17% increase in health and wellness purchase volume was driven by broad-based strength led by dental, given the benefit of increases in patient volume compared to the prior year. Our lifestyle platform generated purchase volume growth of 4%, reflecting strong retailer sales and growth in music and specialty, partially offset by the ongoing impact of inventory shortages and power, and particularly strong growth in the prior year period. Loans grew 8% year-over-year to $83 billion, including loan receivables of $78.9 billion and health-for-sale receivables of $4 billion. At the platform level, year-over-year loan growth rates accelerated from the fourth quarter as strong purchase volume and some easing in payment rates contributed to balanced growth. Net interest income increased 10% to $3.8 billion, primarily reflecting a 7% increase in interest and fees due to higher average loan receivables. On a sequential basis, first quarter payment rate was down approximately 25 basis points to 18.1%. but was still approximately 45 basis points higher than the last year and approximately 225 basis points higher than our five-year historical average. As we progressed through the first quarter, payment rate declined to 17.2% in February, but increased in March, reflecting normal seasonality associated with the tax refund season. That said, March was the first month where payment rate was lower versus the prior year since the pandemic began in 2020. Net interest margin was 15.8% in the first quarter, a year-over-year increase of 182 basis points. The primary driver of this NIM expansion was a 6.5% increase in the mix of loan receivables relative to total interest-earning assets due to the growth in average receivables and lower liquidity. This accounted for 126 basis points of the year-over-year increase in our net interest margin. In addition, the first quarter's 32 basis points of proven loan yield and 33 basis point reduction in interest-bearing liabilities costs each contributed 26 basis points of NIM improvement. RSAs were $1.1 billion in the first quarter and 5.41% of average receivables. The $150 million year-over-year increase was primarily driven by the continued strong performance of our partner programs. Provision for credit losses was $521 million, an increase of 56% versus last year due to lower reserve release that was partially offset by lower net charge-offs in the first quarter of 2022. Included in this quarter's provision was a reserve release of $37 million, inclusive of the reserve reductions from our health for sale portfolios of $29 million. Excluding the impact of our health for sales portfolios, the $8 million reserve release reflected an improvement in our loss forecast and credit normalization trends based on continued strong performance. partially offset by an uncertain macroeconomic environment. Other income decreased $23 million, primarily reflecting higher loyalty costs due to purchase volume growth. The year-over-year comparison was also adversely impacted by lower investment gains from our ventures portfolio. Other expenses increased 11% to $1 million due to the impact of higher employee, marketing, and business development and technology costs. Other expense also included the impact of $10 million related to certain employee and legal matters. Our efficiency ratio for the first quarter was 37.2% compared to 36.1% last year. In total, Synchrony generated net earnings of $932 million, or $1.77 per diluted share, during the first quarter. We also generated a return on average assets of 4% and a return on tangible common equity of 34.9%. 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 our strong customer demand with a diverse range of products, but we were able to do so while maintaining cost discipline and strong risk-adjusted returns. Next, I'll cover our key credit trends on slide 9. elevated payment rates continue to drive year-over-year improvement in our delinquency metrics. Our 30-plus delinquency rate was 2.78% compared to 2.83% last year, and our 90-plus delinquency rate was 1.30% compared to 1.52% last year. When removing the impact of the held-for-sale portfolios on our delinquency measures for the quarters of this year and last year, The 30-plus delinquency metric would have been down about 15 basis points versus 5, and the 90-plus metric would be down about 30 basis points instead of 22. Our portfolio's strong delinquency trends have continued to drive year-over-year improvements in our net charge-off rate, which was 2.73% compared to 3.62% last year, an 89 basis point improvement year-over-year, primarily reflecting a very healthy consumer and a 45 basis point higher payment rate. The 36 basis point sequential increase from our fourth quarter net charge-off rate of 2.37% primarily reflected the impact of approximately 25 basis point sequential decline in the payment rate, as some consumers continued to revert back towards pre-pandemic payment behaviors. Our allowance for credit losses as a percent of loan receivables was 10.96%, up 20 basis points from the 10.76% in the fourth quarter. Let's focus on some key trends that have supported our strong performance and the confidence we have in our business. First, as we just discussed, the underlying trends within our portfolio are performing better than our expectations heading into the year. Our portfolio payment trends continue to show gradual normalization across the credit spectrum, reflecting the strength of the consumer more broadly. In addition, the population of customers within our portfolio that are now in post-expiration forbearance programs from other lenders has performed better than our expectations. This suggests to us that with the benefit of excess savings due to stimulus, modified spending behaviors, and widespread forbearance, these borrowers manage their personal balance sheet well through the pandemic and therefore have a lower probability of default. According to data from Chernus, two-thirds of consumers have either only spent a portion of their stimulus or have the entire amount of stimulus they receive still saved. The remaining third of consumers have spent the entirety of the cash stimulus they received during the last two years. When tracking consumer balance trends by tiers, 0 to 2,500, 2,500 to 5,000, and balances greater than 5,000, the KERNOS data indicates that while all balance tiers of stimulus-receiving customers have seen balance declines between $200 to $300 from peak levels observed last fall, the two higher tiers continue to show growth in their savings balances since the third stimulus check. The lower tier with balances of $2,500 or less has generally remained flat, aside from the stimulus checks over the last two years. Meanwhile, labor markets continue to be robust as unemployment levels decline and wage growth continues. Through mid-April, consumer spending continues to be strong, reflecting broad-based spend across our platforms and products. Finally, our portfolio is well-positioned to navigate changing market conditions given to inherent diversification across spend categories, financing options and channels, and customer demographics. Synchronized sales platforms encompass a broader range of discretionary and non-discretionary industry through a wide network of distribution channels. More than a quarter of our purchase volume in 2022 came from each of our diversified value, home and auto, and digital platforms. Another 8% of purchase volume came from health and wellness. And almost half of our world spend in 2022 was comprised of bill pay, discount store, drugstore, healthcare, grocery and non-grocery food, and auto and gas spend. In addition, our disciplined approach to driving consistent growth and attractive risk-adjusted returns means that our portfolio credit mix remains balanced and favorably positioned compared to the mix in the first quarter of 2020. At the end of the first quarter of 2022, approximately 40% of our balances represented super prime customers, Another 35% came from prime, and the remaining 25% came from non-prime. And in terms of average credit line by credit segment, our portfolio super prime, prime, and non-prime lines are still lower by an average of 8% compared to two years ago. Moving on to another synchrony strength, our funding, capital, and liquidity. Deposits at the end of the first quarter were $63.6 billion, an increase of $814 million compared to last year. Our securitized and unsecured funding sources declined by $1.8 billion. This resulted in deposits being 83% of our funding compared to 81% last year, with securitized funding comprising 8% of our funding sources and unsecured funding comprising 9% at quarter end. Total liquidity, including undrawn credit facilities, was $17.8 billion, which equated to 18.7% of our total assets, down from 29.2% last year. As a reminder, before I provide the details of our capital position, it should be noted 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. This transitional adjustment pertains strictly to our regulatory capital metrics. To that end, The first-year phase-in of the impact of CECL on our regulatory capital resulted in a reduction of our CET1 ratio of approximately 60 basis points in the first quarter. We ended the quarter at 15.0% CET1 under the CECL transition rules, 240 basis points below last year's level of 17.4%. Their Tier 1 capital ratio was 15.9% under the CECL transition rules, compared to 18.3% last year. The total capital ratio decreased 250 basis points to 17.2%. And a Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 24.5% compared to 28.7% last year. We continue our track record of robust capital returns to shareholders. In the first quarter, we returned $1.1 billion to shareholders through $967 million of share purchases and $114 million of common stock dividends. Even when factoring in the roughly 180 basis points of remaining CECL transition impacts on our capital ratios over the next three years, Sync Training still has considerable excess capital on our balance sheet to deploy in order to get to our 11% CT1 target ratio. This, coupled with the meaningful earnings and capital generation of our business, thanks to our disciplined approach to growth at appropriate risk-adjusted returns, means that 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 regulatory restrictions. As part of our capital plan, the Board has approved a 5% increase in our common dividend, bringing it to $0.23 per share beginning the third quarter 2022. In addition, our Board has approved an incremental share repurchase authorization of $2.8 billion for the period ending June 2023. Inclusive of the remaining $251 million authorization we had in March 31st, this brings our total share purchase authorization to $3.1 million. Finally, let's turn to our updated outlook for the full year, which is summarized on slide 12 of our presentation. We've assumed that the pandemic remains well controlled, that any rising cases will not have a material impact on the economy or our customers. Our macroeconomic scenarios include a minimum of five interest rate increases during 2022, qualitative tightening measures starting in the second quarter, a slowing economy resulting from these actions, and continued higher inflationary conditions. While the macroeconomic environment is uncertain, given the dynamics of the portfolio as we see them today, we do not anticipate a material impact on our full-year 2022 outlook for loan receivables and credit performance. We expect consumer demand to remain robust, supporting broad-based purchase volume growth across the various industries and markets we serve. As consumer savings begin to decline and payment rate moderates, while on a lag, we would expect purchase volume growth to moderate as the year progresses. Given the strong purchase volume and loan receivables growth we've achieved, we expect ending loan receivables growth of approximately 10% versus the prior year. The extent that payment rate moderates further we would anticipate purchase volume to moderate and loan growth to accelerate. We expect our net interest margin to be between 15.25% and 15.50% for the full year. As we move through the year, NIM will be impacted by the fluctuation in the percentage average loan receivables to average earning assets due to the impacts of seasonal growth, portfolio conveyances, and the timing of funding. As mentioned earlier, our NIM Outlook also reflects the anticipated impact of rising benchmark rates, as well as rising interest and fees, which will be partially offset by higher reversal as credit normalizes. In terms of credit performance, we expect a rise in delinquency and loss from current levels. For the full year 2022, we expect net charge-offs to be less than 3.50%. Based on the performance we've seen across the portfolio, we do not expect the portfolio to reach our mean annual loss rate of 5.5% until 2024, unless significant changes in the macroeconomic environment develop. Of course, as credit normalization continues to take shape, we expect interest and fee yields to increase. As charge-offs peak, this growth in interest and fees will be partially offset by peak reversals. We expect reserve builds in 2022 to be generally asset-driven. RSA expense will continue to reflect the strength of our program performance and purchase buying growth, but should begin to moderate as net charge-offs rise. For the full year, we expect the RSA as a percentage of average loan receivables to be between 5.25% and 5.50%. As a reminder, we anticipate the gap of BP portfolio conveyances to occur in the second quarter, producing a non-recurring gain on the sale of approximately $130 million. We expect to completely offset this gain through increased investments or incurring certain discrete items and thus be EPS neutral for the full year. Included in this quarter was $10 million of certain employee and legal matters, leaving approximately $120 million of the incremental costs remaining for the full year. In terms of other expense, we continue to expect the quarterly levels to be approximately $1.05 billion. This outlook excludes the impact of the $130 million gain on sale we are reinvesting or incurring in our business. We remain committed to delivering positive operating leverage. To the extent that receivables or revenue growth is not tracking ahead of expense growth for the full year, we will moderate our spending where appropriate while still prioritizing the best long-term prospects for our business. An example of such an opportunity might be through fewer workforce additions or reducing other discretionary spend. So to conclude, Synchrony is operating from a position of strength as we progress through 2022. We're confident in our business' ability to deliver sustainable, attractive, risk-adjusted growth, even if the market conditions change. Our innovative customer experiences, compelling value propositions, and flexible product offerings are resonating across the diverse industries, partners, and customer demographics we serve. Our sophisticated, cycle-tested underwriting, as well as our deep domain experience of lending and servicing at scale, mean that the predictive power of our credit decisioning and account management capabilities will continue to support the stability of Synchrony's target loss range. Finally, our RSA functions as an economic buffer. As interest and fees rise with credit normalization and receivables growth, the RSA absorbs the impact of both rising net charge-offs and a large proportion of any increases in growth-oriented costs. These factors enable SynchronAid to deliver consistent results with peer-leading range of risk-adjusted returns over time. I'll now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. We deeply understand the needs and expectations of our customers and partners, which enables us to deliver financing solutions and experiences that strongly resonate, building long-lasting relationships and greater value over time. Synchrony's differentiated business model consistently positions us as the partner of choice. Whether we're powering financing experiences for local merchants, healthcare providers, or national brands, we're able to meet our customers where, when, and however they want to be met. The scalability of our technology platform, the breadth of our product suite, and the depth of our lending insights across many industries enables us to consistently deliver sustainable and attractive outcomes for all of our stakeholders. And with that, I'll turn the call back to Catherine to open the Q&A.

That concludes our prepared remarks. We'll now begin the Q&A session. In order to accommodate as many of you as possible, I'd like to ask the participants to please limit yourselves to one question. If you have additional questions, please re-queue, and we will do our best to address as many questions as time allows. Otherwise, the investor relations team will be available after the call for any follow-up. Operator, please start the Q&A session.

We will now begin the question and answer session. If you have a question, please dial 01 on your touchtone phone. If you'd like to be removed from the queue, please dial 02. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please dial 01 on your touchtone phone. And from Credit Suisse, we have Moshe Orenbuck. Please go ahead.

Great, thanks. Brian, I wanted to kind of just follow up on the net interest margin guidance. You know, obviously on a year-over-year basis, there's a big change in the mix of earning assets. And you kind of alluded to the fact that that might be normalizing. So is there a way to relate the 10-ish percent growth in loans to growth in net interest income in dollars? you know, in other words, how much of that expected decline from current levels in the margin is more about asset mix than it is about other factors. Thanks.

Thanks, and good morning, Moshe. Yeah, so I would expect, and I think the way Brian and I and the leadership team are managing the business is that we would like to see asset growth come through in NII, right? So the biggest wild card then afterwards would be the interest expense piece. So we would expect that from a dollar basis, it would track at least on the top line revenue. And then again, I highlighted a little bit of the timing relative to some of the funding cost changes that we'll have in place. And you're right, you know, one of the bigger wild cards will be ALR as a percent of average earning assets, which was at a little bit higher mark than we usually run at 85% during the first quarter, usually runs at, you know, a point or two lower than that. So, But again, it should track on a dollar basis, at least on the revenue side, back to asset growth.

Thank you. Next, we have Ryan Nash. Please go ahead.

Hey, good morning, Brian. Good morning, Brian.

Hey, Ryan.

So, you know, Brian, the credit outlook, both near and intermediate term, seems more upbeat. And I was wondering if you could maybe just talk about what you're seeing in the underlying portfolio that led to the better credit outlook. And You know, with the outlook from unemployment to remain pretty strong here, just, you know, maybe outside of a recession, can you just talk about, you know, what you see as the drivers of normalization, and are you seeing any impact from inflation on your customer spending habits? Thanks.

Yeah, thank you. Thanks, Ryan. So first, when you think about credit, you know, the biggest thing for us as we entered the year was the large portion in our book of customers who had received forbearance at other institutions. and how those customers would play out off forbearance. Again, we look back to the performance we had for folks that were on forbearance with us. We obviously understood who did not have forbearance with us. And now you look at this population of people. As we looked over the last four months, the performance of that was, you know, significantly better than our expectation. So we watched that develop. We also watched how our vintage post the refinements we made beginning of last year developed And we became more confident that we would not see what I would call a faster credit normalization, which reflected in a slower glide back to our mean loss rate out in 2024. So that's really how credits developed. Again, as we sit here the first couple of weeks in April, we haven't seen anything that would most certainly change that view. I'll go to your last point about inflation and the customer. You know, the customer is really starting at a point of strength. They obviously have excess liquidity, and we demonstrated that, or at least indicated that with higher savings rates. Our credit delinquency and how it sits today, average balances, all are in great shape when they have it, and you have low unemployment. So we look at the customer today. When you look at purchase behavior pattern, we see small evidences of inflation inside of our book, but not really significant. So If you looked at a category like gasoline, our average transaction value on gasoline is up 22% year over year. So you clearly see the effect of inflation there. But in some respects, we don't see other parts of inflation. So look at grocery. Grocery for us, average transaction value is flat year over year, flat sequentially every month during the quarter, but frequency is up a little bit. So that tells you the consumer is being able to manage their spend inside that category. We see a little bit in apparel, but the rest we have not seen any dramatic impacts from inflation as we move forward. And to address your middle point on unemployment, again, you know, we look at unemployment. It's obviously stronger than we had anticipated entering the year. It continues to reign strong. There's more jobs that are outstanding. I think most certainly with continued strength in the unemployment market, you know, we obviously believe that the credit forecast we put out both for this year and for next year will remain intact. Thanks, Ryan.

We have Betsy Grasick. Please go ahead.

Hi, good morning. Hi, Betsy. Could you unpack a little bit the loan growth acceleration that you got in digital and help us understand how much of that is coming from the new cards you have out there, PayPal, Verizon, et cetera, the new offerings, the refreshed offerings on PayPal, and you know, other drivers of that, and contrast it with the home and auto, which may be decelerated a bit. Thanks.

Yeah, sure, Betsy. I'll start on that. I'd say, look, generally, you know, digital is a platform that we clearly expect to outpace the rest of the business in terms of growth rate. We're definitely seeing that. A big chunk of that is obviously attributed to Venmo and Verizon. Both of those programs continue to perform really well. Still believe those will be top ten programs for us in the future. We're getting great both qualitative as well as quantitative feedback on both in terms of the experience, the ValProp, et cetera. There's really nothing inside the digital numbers this quarter for the PayPal launch. That just happened. But we're really excited about that as well. I think that's going to be a terrific offering. It's really, really two parts. First, the ValProp we think is best in class. It's going to be a top of wallet card for folks. And then I would say the other thing that we did is we really launched probably, you know, our most sophisticated technology stack in terms of how we're integrating inside of the PayPal app. So the experience is really fantastic. So, again, I think digital will continue to outpace the rest of the business.

Yeah, I think just to add on, Betsy, for the home and auto piece, you know, when you look at that platform, auto is clearly improving. It came off of a low last year. So that's obviously a positive trend. With regard to inside home, there's a little bit of continued softness in the furniture portion of home, which, again, is a little bit more of the inventory backlogs clearing out. Again, we bill when furniture is delivered, so we expect that to continue to be a headwind here for the next quarter or two, hopefully, as the inventory and supply chains clear up.

I think this is also the benefit of having a really diversified business. We're We're seeing really strong growth in digital, really strong growth in health and wellness, and that's a little bit immune in terms of impact from supply chain and other things, if you think about health and wellness and the backlog that those providers are working through. So, again, I think it speaks to the benefit of having a very diversified portfolio. Thanks, Betsy. Have a good day.

We have Sanjay Sakrani. Please go ahead.

Thanks. Good morning. Obviously, the drumbeat on macro weakness is increasing since we last spoke. And I know, Brian Wenzel, you talked about all the statistics that make you comfortable on the state of the consumer. I'm just thinking about the reserve posture. You guys are pretty well above sort of where you were, Cecil, day one. Maybe you could just talk about how you – accounted for the macro environment at the time CECL Day 1 was set, and then where we are today, because at some point we're going to migrate back down to CECL Day 1 if losses remain well below those levels, correct?

Yeah, and good morning, Sanjay. So the way I would think about our reserve position today versus CECL adoption, you know, again, our mean loss rate has not changed from that 5.5% target, so So at the end of the day, it's really the loss forecast that gets you in that reasonable supportable period and then potentially any overlays. So I think when you look at it today for us, if you were solely to look at the macroeconomic condition, Sanjay, it would tell you that your coverage ratio would be down versus day one, right? One of the things that we still have is qualitative overlays both for some off-us relief that we talked about, as well as we have some macroeconomic uncertainty as it relates to Ukraine and the higher inflationary environment that kind of, you know, is keeping the reserve slightly higher than the day one. Again, I think, you know, where we sit today is we will ultimately migrate back to that day one. We'll certainly, as I think the inflationary pressures and the global and geopolitical uncertainty clears, and that reserve builds here in the coming months will really be more growth-oriented. So, again, you know, absent mix, you know, we still view as we're going to migrate back to that day one CECL rate. But, again, you know, we're trying to account for some of the uncertainties that exist in the marketplace. Thank you, Sanjay. Have a good day. Brandon, we're ready for our next call, Brandon.

We have John Hecht. Please go ahead.

Yeah, thanks, guys, very much.

Hey, John.

How are you guys? Morning, John. I guess one question is, excuse me, any discussions with the partner pipeline or any major partnership renewals as we go through this year?

Yeah, look, I would say we've got a very strong pipeline across all five of the platforms. You know, if I look at it today, it tends to skew a little bit more towards startup programs and opportunities like that as well as, you know, I would say distribution partnerships and opportunities as well for our products. There isn't as much out there with the exception of maybe one or two that are large existing programs, but we'll obviously get a look at those as well as they come up in the next year or two. And then I think for us, you know, we're actively renewing our programs and we don't have anything significant of size coming up in the next few years. But, you know, we're always in discussions with our partners about, you know, what kind of changes can we make to drive even better performance? Can we do that in the context of a renewal? So our teams are actively working those opportunities where they exist. But, you know, generally, I feel like we've got a pretty good pipeline and we're well positioned. We're also getting a lot of good getting a lot of good traction on the product suite, and I think the benefits of having an integrated product suite. So as we're out there competing, I think that's a real differentiator for us, too. Thanks, John. Have a good day. Thanks, John.

We have Don Fandetti. Please go ahead.

On the PayPal cashback card refresh, I guess my question is, do you expect the same amount of Revolve to drop, or do you expect that to be a little more transactional? And I guess, you know, Brian Devils, do you feel like the integration here is pretty deep? Does that make the relationship stickier in terms of sort of renewal type risk longer term?

Yeah, so look, I'd start by saying we're really excited about the launch of the new value proposition and the new experience inside of the app. I think it's going to be a game changer. PayPal is excited about it. So are we. I would tell you that These opportunities that we have to relaunch a ValProp, it does drive a lot of traffic, a lot of new accounts, a lot of spend. And I think with a ValProp like this, it will definitely be a top-of-wallet card. We had a good ValProp before, but this is incremental, so we're really excited about it. And I would tell you on your integration question, Don, absolutely. I think that our goal is for our integration to be absolutely seamless to the customer. And we started doing this years ago with SciPy. Now we're leveraging our API stacks. And I can tell you when you're inside the PayPal app, the Venmo app, you don't know what was something that was developed by PayPal or something that was developed by Synchrony. It's just completely seamless. You never know. You never have to step outside of the app. You never get kicked to a website. It's 100% integrated and completely seamless. So that's our goal. We don't necessarily focus on... how does that impact a renewal down the road? We're really focused on just how do we deliver the absolute best experience we can for a PayPal customer, a Venmo customer, et cetera. So we're very excited to have this launched and look forward to seeing how it does. Thanks, Don. Have a good day.

We have Mihir Bhatia. Please go ahead.

Good morning, Brian, Brian and Catherine, and thank you for taking my question. I wanted to just go back to payment rates for a second. You saw a pretty big moderation in March. Maybe you could just talk a little bit about that. I guess what made the payment rates go from up 140 basis points year over year to down 50 basis points? The reason I guess I asked about March is, you know, that's when we started seeing a lot more conversation around inflation, higher gas prices starting to have an impact. So was that a consumer thing? Was it as you expected? Is there something else about the year over year comp we should be keeping in mind? Anything there?

Yeah, first of all, thank you, Mahir, for the question. So, you know, again, there is a little bit of timing related to tax refunds that plays out. So clearly there was, you know, some faster refunds that were paid out in February versus March. If you look at the overall, you know, tax refund season, right, your average refund is ahead of last year, I want to say 13%. And the dollars are probably $14 billion. So we think that had probably a little bit of a disproportional effect in February. We also think, you know, as we watch consumer behavior patterns, you know, we've indicated to you we have seen portions of the portfolios and cohorts that have decelerated payment rates beginning in the latter part of 2021, and that has continued into 2022. When we look at it, I know we get a lot of questions with regard to credit grades. inside of that? Are you seeing any one particular place inside the portfolio? If I look at March alone, so just March alone, the deceleration and the payment rate happened across all credit grades. So it was not at the lower end. It actually, the largest percentage of deceleration happened in the prime segment. So it's not a subprime issue relative to inflation. And I think when you also look at the, you know, again, we also talk quite a bit about the people in repayment statement balances, you know, their minimum payments were the middle We've obviously seen the folks in the middle decline, but go as equally up into the full pays as down into the minimum pays. So, again, it really says this across the board, and we don't necessarily think it's inflation-driven, but part of, I think, the migration that we anticipated back on payment rate, back to the mean that we anticipate, you know, the exact time of which we're not 100% sure of, but, again, we're starting to see that turn. So, thank you, Mihir. Thank you.

Morgan, we have rich pain. Please go ahead.

Thanks. Good morning. When we look at the operating expenses and talk about the incremental reinvestments in 2022. I'm curious, should we see that as a run rate? Or should we see the 120 million that you have remaining through the rest of the year sort of one time or incremental as we think about going for numbers going forward?

Great, great. Thanks for the question. It will be one-time expenses. You know, we had the $10 million in the first quarter there related to some employee-related reductions. I think as you step into the second quarter again, we'll detail this out. You'll see some further reductions in some of our physical footprint and structural costs inside the business. You will see some incremental dollars that are put into marketing to really accelerate growth, and that will be one time in nature. So I would not anticipate it to be an ongoing expense. Again, what we're trying to do is take the one-time gain, really reinvest it back into the business, either to reduce structural costs or accelerate growth. So it should be a net zero for this year and not cop into next year, but hopefully help the growth. Thank you.

We have Kevin Parker. Please go ahead.

Thank you for taking my questions, and good morning. I would like to go back to your comments about NIM and the expectations for deposit costs. Deposit costs are higher in the previous rate cycle versus today, but your balance sheet is much more deposit funded than it was previously. So it seems like, structurally, you should have a slightly better liability structure in this rate cycle. I was hoping maybe you can just dig in a little deeper on your expectations for deposit betas in this cycle versus the previous cycle and your expectations for overall funding costs, just given the uncertainty around rates and inflation.

Yeah, great question. So when we look back to the kind of previous cycle and previous rate increases, again, we were really growing our deposit book, which we started back in the, you know, call it the early 2010 to 2015 range. So we were accelerating growth in the bank. And given the fact that we were a newly separated company, there was some higher costs that were embedded in there. I think you are right. We have shifted from probably a mid-70s percent deposit composition of the funding stack to at least low 80s, now mid-80s, potentially with, I think we're 83% this quarter. So that is going to provide a benefit There's going to be some rotation. I think as you see interest rates rise here, a lot of folks have gone into savings versus CDs. In the short run, that could have some negative impact. Over the long run, getting people locked into CDs in this environment is a better alternative for us. So we look at that as being over the long term a good thing if I can get people into term-related savings products. I think when you think about betas, if you look where we are so far today with the first 25 basis point movements, less than half of that, if you'll call it that, has already manifested itself in our high-yield savings rates. Depending upon the tenor, essentially it's been 100%, but we've really been trying to raise deposits because our growth rate of being targeted at that approximately 10%, we want to get ahead of some of the funding-related matters. It's going to be a little bit around what competition does in the marketplace, but again, it could be slightly higher than previous cycles. But again, people have been slower to react so far into the environment. And again, I think the higher deposit mix will be very, very beneficial for us as we think about NIM moving forward. Thank you.

And Meng Zhao, please go ahead. Thanks for taking my question. So I guess on slide 12, you guys mentioned the annual loss rate won't hit the mean until 2024 unless significant macro changes. Can you sort of just quantify what comprises some of these changes? I just sort of wanted to get a sense on how you're thinking about downside scenarios. Thank you.

Yeah, you know, when you think about our loss rate, the biggest variable that drives loss in a recession or any other environment is unemployment. And what's going to be different, I think, as people think about the macroeconomic backdrop, is that you're coming from incredibly low unemployment, and you really have built-up savings in the prime and super prime segments. So when you traditionally think about a credit normalization or an increase in your loss expectations, it's driven off of unemployment, number one. And then, two, in that prime segment, it really goes into people that struggle, that have higher exposure at default. So I think as we look at it going forward, because you have such low unemployment, you have more jobs than you have today, up until now, albeit not necessarily offsetting inflation, a rising hourly wage, that buffers some of the unemployment pressure that you would see in the loss rate. And the excess savings that you have would buffer some of the loss content that you'd see in the prime segment. That's what gives us probably greater comfort that there's more of a glide, even in a slightly difficult scenario. the scenario where macroeconomics changes is you do have a rapid rise in unemployment and you have a very fast depletion in savings rates in the prime customers, you know, could dictate a higher loss rate over that horizon. Thank you, man.

Please go ahead.

Good morning. On the payment rate expectation, I know you flagged the decline that you saw in March, which is encouraging. Can you maybe talk about your confidence and, you know, sustainable decline there on the payment rate front? And then on the flip side, I appreciate the color you gave on the delinquencies and at least some of the progression on credit by customer segmentation. Are you seeing any stress at all in the lower income bans that's noteworthy here because we're hearing about some payment issues at the lower income at other payment providers out there. Thanks.

Let me deal with your latter question with regard to the lower credit. We are not seeing, as you would refer to it, pressure. We see normalization that's happened on payment rate as on entry rate and delinquency flows, but not pressure. So I know there are other subprime issuers out there that have pressure may have been more aggressive really going out during the, I call it the middle part of the pandemic, to open the origination or credit box for them. We obviously didn't do that. So we're not seeing incremental pressure. We're seeing more, what I would say, normalization back to a pre-pandemic level related to that lower credit quality. With regard to payment rate, and this is something we monitor closely, we monitor lots of different ways Credit rate is one. We look at different aspects inside of it. We look at who's paying, call it statement balances, min pays, between that. Again, we're following a trend. It appears to be moving in the right direction. The exact slope here, we have to get through the tax return season here, which will be April, and then we'll begin to see how the consumer continues to react. Again, they are spending very healthily across the credit spec across the industry relative to credit cards. So purchase volume strength will most certainly help bring the payment rate back in line with mean averages. So there's nothing that we see that's stressed. There's nothing that we see that there's indicative of a change in direction relative to the slope of the performance. Thank you. Next question, Brandon.

We have Eric Saigonovich. Please go ahead.

Thanks. The loan growth guide is a bit above your kind of long-term expectation. Can you just talk a little bit about is that more payment rate, is it more kind of acceleration in terms of the customer activity, or is it still a bit of a catch-up from some of the pandemic-related maybe on the healthcare side?

Yeah, look, I would say, maybe just to take a step back, I'd say, you know, generally we feel pretty good about the operating environment as we look at it here for the balance of the year. You know, we were talking about high single digits earlier this year. I think we feel better that that's going to be in that kind of 10% plus range. We're not relying on an enormous amount of payment rate moderation in that. It really is more top-line purchase volume driven payments. You know, we just had our highest first quarter ever in terms of sales on our product. So, you know, we're seeing really good growth across the portfolio. You know, we had growth rates on receivables in the five platforms anywhere from 6% to 12%. So it's broad-based. It's not one platform that's really driving that. It really is across the business. So we feel like, at least for the balance of the year, the consumer is strong. You know, as Brian said, two-thirds of them saved at least a portion of, if not all of the stimulus. So we're seeing that come through in purchase volume. You're seeing it in the credit metrics. So, you know, like I said, we feel pretty good about the environment right now, and it really is driving what we're seeing on the growth side, and it's not necessarily a reversion to the mean on payment rate. Thank you.

Time for one final question. Once again, we have time for one final question. From Autonomous Research, we have Brian Foran. Please go ahead.

Hi, thanks. You know, I guess as you think about the outlook for the consumer and how you feed that through managing the business, it's tricky, right? Because you've been very clear. Everything you're seeing recently is better than budgeted. Consumers in great shape. You know, one of the narratives in the market is the Fed's got to jack rates to 3% plus. It's got to get unemployment up to tame inflation. And it's kind of like all going to play out over the next six months or so. But we really won't know the impact until next year. And so I guess the spirit of the question is, like, as you think through your underwriting and your marketing this year, I know you're always making changes and always trying to be thoughtful and proactive. Is there any scenario where, like, you're tightening underwriting even though your book's doing great because of that forward-fed risk? Or how do you think about meeting that, you know, unusual interest rate risk through the book and through your marketing plans as we move through the year?

Yeah, look, generally I would say, Brian, we're going through a period of extraordinarily strong performance as it pertains to credit. I mean, we've never seen delinquencies and loss rates where they are. We don't underwrite to these levels. They're about half of what we would consider a target NCO rate. And so what I would tell you, we're not tightening an expectation of what's going to happen in 23 and 24 because we didn't we didn't take this opportunity to go a lot deeper, right? We're not underwriting to today's environment, whether it's how we're underwriting the consumer, how we're underwriting new programs. You know, we're looking at this at kind of an overtime mean loss rate, and that's what we're underwriting to. So one of the things that we've talked about in the past that's really important in our business is, you know, when times are extraordinarily good, we don't necessarily go a lot deeper. We try and maintain our discipline. And we look at the value of whether it's a customer or a program agreement, we look at that over a number of years and assume that over that time period you're going to have some reversion to the mean. And that's really the discipline that we have around our underwriting model. Again, whether you're looking at consumers or new programs and how we're pricing those, we try and factor in what we think is going to happen over the next few years and not take advantage of the extraordinarily good period that we're operating in right now. Thank you.