Synchrony Financial

Good morning and welcome to the Synchrony Financial first quarter 2025 earnings conference call. Please refer to the company's investor relations website for access to their earnings materials. Please be advised that today's conference call is being recorded in listen-only mode. The call will be opened up for your questions following the conclusion of management's prepared remarks. If at any time you should need operator assistance, please press star zero. If you wish to ask a question following the prepared remarks, please press star 1. I will now turn the call over to Catherine Miller, Senior Vice President of Investor Relations. Thank you. You may begin.

Catherine Miller Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results 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 Devils, 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 Devils.

Thanks, Kathryn, and good morning, everyone. Synchrony delivered a strong financial performance in the first quarter of 2025 that included net earnings of $757 million, or $1.89 per diluted share, a return on average assets of 2.5%, and a return on tangible common equity of 22.4%. These results were driven by Synchrony's ability to leverage our core strengths in order to empower our customers with prudent financial flexibility and enduring value when they need it most, while also delivering loyalty and sales to the many partners, providers, and small businesses that form the foundation of our economy. During the first quarter, Synchrony engaged with approximately 70 million customers and generated $41 billion in purchase volume. Year-over-year trends in both active accounts and purchase volume continued to be impacted by the credit actions that Synchrony previously implemented, as well as continued moderation in customer spend as they navigated the challenges of affordability in day-to-day lives. Dual and co-branded cards accounted for 45% of total purchase volume for the quarter and increased 2%, generally reflecting the growth from our CareCredit dual card launch, which began last year and has been contributing to out-of-partner spend ever since. Purchase volume at the platform level ranged from between down 1% and down 9% year-over-year, as customers generally remained selected in their discretionary spend and bigger ticket purchases. particularly in categories like furniture, jewelry, outdoor, dental, and cosmetics. Slide three of our earnings presentation provides a closer look at our weekly purchase volume during the first quarter, as well as the first two weeks of April. Our week-to-week sales were generally consistent throughout the quarter, as was the weekly variance the prior year, including in March when news of government layoffs and tariffs began to intensify. And as you can see by the generational mix of weekly sales, we saw consistent engagement across the customer base throughout the quarter with no discernible shift between generational cohorts. These portfolio spend trends in combination with our credit actions contributed to the 2% year-over-year decline in ending receivables. From the payment behavior perspective, payment rate remained flat compared to last year, but increased sequentially by 10 basis points, generally in line with pre-pandemic seasonality. This sequential increase in payment behavior occurred across all credit grades as the proportion of above-minimum payments increased and less-than-minimum payments decreased. In aggregate, the proportion of less-than-minimum payments in our portfolio remained below the 2017 to 2019 average across all credit segments. Synchrony monitors our customers' behavior very closely across our portfolio through a comprehensive set of real-time indicators and data points, which range from cash usage and utility payment data to credit bureau and auto payment changes. And when viewed in combination with the spend and payment behaviors we've observed, we believe that customers are continuing to manage their spending needs and payment obligations amidst the challenges of a persistent inflationary environment and uncertain economic backdrop. Of course, our customers, partners, and small and mid-sized businesses rely on Synchrony for access to financial product and flexibility with attractive value propositions and utility for wherever life may take them. Our track record of leveraging our proprietary data, sophisticated underwriting and analytics, diverse product suite, and channel distribution to drive sales and enhance loyalty has reinforced Synchrony's position as the partner of choice, and we are proud of the consistently strong partner pipeline that has resulted from this execution. During the first quarter, Synchrony added or renewed more than 10 partners, including Sun Country, Texas A&M Veterinary Hospital, Ashley, Discount Tire, and American Eagle. Synchrony is always seeking opportunities to expand access to flexible financing across the wide range of spend categories we serve, particularly those where customers seek to maximize value. Our new co-brand program with Sun Country Airlines, a Minnesota-based hybrid low-cost air carrier, is a great opportunity to deliver compelling utility and rewards for flights throughout the United States and to destinations in Mexico, Central America, Canada, and the Caribbean. We have also continued to expand our Care Credit acceptance across the veterinary space and are excited to announce that Care Credit has been named the preferred financing partner for the Texas A&M University Veterinary Medical Teaching Hospital. This new partnership reflects a significant milestone in solidifying care credit acceptance at all 29 public veterinary university hospitals in the country, as well as Synchrony's commitment to supporting the veterinary community in ensuring pet parents have access to care for their beloved pets. In addition, our program Renewal with Ashley, the number one furniture selling brand in the USA and one of the world's largest furniture manufacturers, extends our nearly 15-year partnership. We are excited about the opportunity we see to help drive retail growth and enable customers to access flexible financing solutions to purchase quality furnishings that fit their lifestyle and budget. Meanwhile, our program renewal of Discount Tire will provide their millions of carholders with access to expanded utility at over 1 million U.S. locations through the Synchrony Car Care Network for automotive services and repairs, as well as for purchases like insurance, gas, oil changes, and more. And finally, we're proud to build our nearly 30-year partnership with American Eagle Outfitters through a multi-year extension that will continue to deliver exceptional value, enhance the customer experience, and deepen customer relationships. The Real Rewards by American Eagle and Aerie loyalty program was recognized as one of America's best loyalty programs by Newsweek for the fifth consecutive year. And the Real Rewards credit card was named my best retail credit card in-store rewards for 2025. These awards reflect our collective commitment to delivering value to loyal customers and driving growth, and we look forward to expanding access to these industry-leading financial solutions. So as we look to the remainder of 2025 and beyond, Synchrony remains in a position of strength. We are focused on executing across our strategic priorities and maintaining our differentiated approach to serving our customers and partners. Synchrony's ability to optimize the outcomes for our many stakeholders has been made possible by the incredible people here at Synchrony, who deeply understand their evolving needs and expectations. Our team approaches each opportunity to deliver best-in-class experiences with a passion and a commitment to excellence that is inspiring. That's why I'm so proud to share that Synchrony was named as the number two best company to work for in the U.S. by Fortune magazine and Great Places to Work. This recognition is testament to our unique culture, our company values that our employees embody every day, and our unwavering dedication to keeping our people at the heart of all that we do. And as our team continues to drive innovation, expand access to flexible financing, and deliver compelling results for all those we serve, we also remain focused on building our leadership position and driving significant long-term value for our stakeholders. With that, I'll turn the call over to Brian to discuss our financial performance in greater detail. Thanks, Brian, and good morning, everyone. Sigrid's first quarter performance continued to demonstrate the strength of our differentiated business model, which has been built to deliver resilient risk-adjusted returns through evolving market conditions. We generated $41 billion of purchase volume during the first quarter, which was down 4% year-over-year when compared to a record first quarter last year. include the effects of the credit actions we took between mid-2023 and early 2024, continued selectivity in customer spend behavior, and one less day in the quarter, which had an approximate 1% point impact. Ending loan receivables decreased 2% to $100 billion in the first quarter due to lower purchase volume. Our portfolio payment rate remained flat versus last year at 15.8% and was approximately 60 basis points above the pre-pandemic first quarter average. Net revenue decreased 23% to $3.7 billion, primarily reflecting the impact of the PetsBets gain on sale in the prior year. Excluding this impact, net revenue was essentially flat as lower interest expense and higher other income were offset by higher RSA. Net interest income increased 1% to $4.5 billion as a 7% decrease in interest expense was partially offset by a modest decline in interest income. Our first quarter net interest margin was 14.74% and increased 19 basis points compared to last year. The increase was driven in part by lower interest-bearing liabilities costs, which decreased 26 basis points versus last year and contributed approximately 25 basis points to our net interest margin. Our loan receivable yield grew 24 basis points, primarily driven by the impact of our product, pricing, and policy changes, or PPP fees, and partially offset by lower benchmark rates and lower assessed late fees. This contributed approximately 20 basis points to our net interest margin. Our liquidity portfolio yield declined 88 basis points, generally reflecting the impact of lower benchmark rates, and reduced our net interest margin by 15 basis points. And the mix of our interest-earning assets decreased by 62 basis points and reduced our net interest margin by approximately 11 basis points. RSAs of $895 million were 3.59% of average loan receivables in the first quarter and increased $131 million versus the prior year, primarily reflecting the program performance, which included the impact of our PPPCs. Another income decreased 87% year-over-year to $149 million due to the impact of the PetsBest game on sale in the prior year. Excluding that impact, Other income increased 69 percent, primarily driven by the impact of our PPPC-related fees. Provision for credit losses decreased to $1.5 billion, driven by a $97 million reserve release in the first quarter, compared to the prior year's reserve bill of $299 million, which included a $190 million reserve bill related to our Ally lending acquisition. Other expense increased 3 percent to $1.2 billion, generally due to the cost associated with the technology investments, and included a $15 million charitable contribution and a $12 million restructuring charge related to the Allied Lending business and the expected completion of its integration in the second quarter. Excluding the charitable contribution and the restructuring charge impacts, our expense would have been up 1% versus last year. The first quarter efficiency ratio was 33.4%, approximately 110 basis points higher than last year, when excluding the impact of the pet's best gain on sale. Taken together, Synchrony generated net earnings of $757 million, or $1.89 per diluted share, and delivered an average return on assets of 2.5%, a return on tangible common equity of 22.4%, and a 15% increase in tangible book value per share. Next, I'll cover our key credit trends on slide 8, which highlight the efficacy of our credit actions that Symphony took from mid-2023 through early 2024, and gives us confidence in our portfolio's trajectory towards our long-term net charge-off target of 5.5% to 6%. At quarter end, our 30-plus delinquency rate was 4.52%, a decline of 22 basis points from 4.74% in the prior year. and four basis points below our historical average for the first quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.29%, a decrease of 13 basis points from 2.42% in the prior year, and one basis point above our historical average for the first quarters of 2017 to 2019. And our net charge-off rate was 6.38% in the first quarter, an increase of 7 basis points from the 6.31% in the prior year, and 54 basis points above our historical average from the first quarters of 2017 to 2019. Net charge-off dollars were down 4% sequentially. This compares favorably to the 2017 to 2019 average sequential increase of 9%. Our allowance for credit losses as a percent of loan receivables was 10.87%, which increased approximately 43 basis points from the 10.44% in the fourth quarter. Turning to slide nine, Synchrony's funding, capital, and liquidity continues to provide a strong foundation for our business. During the first quarter, Synchrony grew our direct deposits by approximately $1.7 billion and reduced our broker deposits by $338 million. We executed both secured and unsecured deals at attractive credit spreads when compared to historical deals. In the secured market, we issued $750 million of three-year bonds with a coupon of 4.78%. In the unsecured market, we issued $800 million of six-year non-call five-year note at a coupon of 5.45%. We also achieved a credit rating upgrade from Fitch moving our long-term issuer default rating up to BBB with a stable outlook. We are proud of this rating action, as it reflects Synchrony's strong balance sheet, the resiliency of our business model, and strong execution as a public company over a decade since our IPO. At quarter end, deposits represented 83% of our total funding, with secured and unsecured debt representing 9% and 8%, respectively. Total liquid assets increased 9 percent to $23.89 and represented 19.5 percent of total assets, 142 basis points higher than last year. Moving to our capital ratios. As a reminder, SINCRE elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. We made our final transitional adjustment of approximately 50 basis points to our regulatory capital metrics in January 2025. Our capital metrics now fully reflect the phase-in effects of CECL. The impact of CECL has already been recognized in our income statement and balance sheet. We ended the first quarter with a CEP1 ratio of 13.2%, 60 basis points higher than last year's 12.6%. Our Tier 1 capital ratio was 14.4%, 60 basis points above last year. our total capital ratio increased 70 basis points to 16.5%. And our Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 25.1% compared to 23.8% last year. During the first quarter, Synchrony completed our existing share or purchase authorization for the period ending June 30, 2025, and returned $697 million to shareholders, consisting of $600 million in share or purchases and $97 million in common stock dividends. Given our strong capital position, we announced today that as part of our capital plan, our Board approved a new share or purchase authorization of $2.5 billion for the period ending June 30, 2026, and increase our regular quarterly dividend by 20% to $0.30 per common share beginning in the second quarter of 2025. Taking your means well positioned to return capital to shareholders is guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan. Turning to our baseline outlook for 2025 on slide 10. Given the court order entered last week in the litigation and ultimately vacated the late fee rule, Synchrony will begin the process of assessing next steps and engaging with the partners regarding the performance of our implemented PPPCs to determine if any adjustments are warranted. Our baseline assumptions exclude any potential impacts from changes to the PPPCs as well as any potential impacts from a deteriorating macroeconomic environment or from the implementation of tariffs and retaliatory tariffs as they are unknown at this point. Turn to our outlook in more detail. We continue to expect purchase line growth to be impacted by our previous credit actions and selective customer spend behavior, and that payment rate will remain generally in line with 2024 levels. As a result, we are maintaining our full-year expectation of low single-digit growth and ending loan receivables. We continue to expect net revenue between $15.2 and $15.7 billion for the full year. The industry's income is expected to follow seasonal trends associated with growth, credit performance and liquidity, and will ultimately be determined by a number of factors, including year-over-year growth in both interest income and other income as the impact of our PPP fees builds, partially offset by the flow-through effect of lower average benchmark rates on our variable rate receivables, lower assessed late fees as the liquidity performance improves, a lower yielding investment portfolio due to lower benchmark rates, and finance charges and lengthy reversals associated with the seasonality of our credit performance. Lower average benchmark rates should also continue to contribute to lower funding costs as our CDE maturity is repriced, although this will be influenced by competitive deposit beta trends in response to any additional rate cuts that may occur. In addition, we continue to expect higher levels of liquidity in the second quarter given our desire to prioritize our deposit-customer relationships and pre-fund future growth. We anticipate reducing our excess liquidity portfolio gradually as growth begins to build in the back half of the year. As a result, our liquid assets as a percent of total assets will average approximately 17% for the full year, which is higher than our historical average over the prior three years. We now expect RSA as a percent of average loan receivables to be between 3.70% and 3.85%, driven by improving program performance, and their net charge-off outlook has improved to be between 5.8% and 6.0%. Our revised net charge-off range expectation for the full year is now inside our long-term financial framework of 5.5% to 6%, driven by our prior credit actions and differentiated approach to underwriting and credit management. we are maintaining our expectation of an efficiency ratio between 31.5% and 32.5%. Before I turn the call over to Q&A, I'd like to leave you three key takeaways from today's discussion. First, our customers have remained stable. They've been consistently making choices that align their day-to-day needs and seeking value and flexibility to prudently manage their financial situations amid an inflationary and highly fluid environment. Second, securities credit trends continue to outperform relative to the industry, which is underscored by our current year outlook. Our sophisticated underwriting and credit management strategy have enabled a lower relative net charge-off peak than most of our peers, and Swister expected a return to our long-term target range. And while our credit actions create near-term impact on growth, our portfolio's credit position should provide greater long-term resilience as market conditions continue to evolve. Synchrony's robust capital remains a clear strength. Our new capital plan reflects the confidence of our board and our company that Synchrony is well positioned to continue to drive progress towards our long-term financial targets and deliver significant long-term value for our stakeholders. With that, I'll turn the call back over to Catherine to open the Q&A.