Synchrony Financial

Good morning, and welcome to the Synchrony Financial second 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. Currently, all callers have been placed 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 one. I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. You may begin. Kathryn Miller Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results 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, Katherine. Good morning, everyone. Synchrony delivered a strong financial performance in the second quarter of 2025 that included net earnings of $967 million, or $2.50 per diluted share, a return on average assets of 3.2%, and a return on tangible common equity of 28.3%. Despite an uncertain macroeconomic backdrop, we executed at a high level across our strategic priorities to drive value for our many stakeholders. Synchrony's diversified portfolio of products and spend categories industry-leading value propositions and expansive network of distribution channels enabled us to connect approximately 70 million Americans with a broad range of small and mid-sized businesses and national brands. And our continued credit discipline and previous credit actions drove better-than-expected delinquency and net charge-out performance, reinforcing our ability to drive sustainable growth and strong risk-adjusted returns as we look forward. And while our credit actions, in combination with selective consumer spend behavior, have had a short-term impact on our year-over-year growth in purchase volume and receivables, we have begun to see some encouraging signs within the portfolio. Symphony generated $46 billion of purchase volume in the second quarter. Dual and co-branded cards accounted for 45% of that purchase volume and increased 5% versus last year, primarily reflecting growth from our care credit dual card, as well as broad-based growth across our other dual card programs. Out-of-partner spend on our dual and co-branded cards generally continue to reflect a discerning customer with the mix of discretionary spend down slightly compared to last year. That said, we saw gradual growth in the mix of discretionary spend as the quarter progressed, with points of strength coming from restaurants, cosmetics, and electronics. We also saw continued improvement in average transaction values during the second quarter, which were down only about 50 basis points compared to last year. a clear improvement from the 1.7% decline in the first quarter and the 2.4% decline in the fourth quarter. Customers across credit grades contributed to this trend, but particular strengths came from our non-prime credit segment. Customers across credit grades continued to transact with relatively consistent frequency over the last several quarters, up about 3% in the second quarter versus last year, which partially offset the impact of lower transaction values. Overall, we feel good about the resilience we've seen in our customers thus far and will continue to leverage our core strengths as we navigate this operating environment. Of course, Synchrony has built a long track record of driving powerful outcomes for our customers and partners through constantly changing market conditions. This has earned us both the opportunity and privilege to be a partner of choice for hundreds of thousands of businesses across the country. And during the second quarter, we added or renewed more than 15 partners, including the addition of our program with Walmart and OnePay and our renewed relationship with Amazon. We are proud to announce our partnership with OnePay, a leading consumer fintech to exclusively power a new industry-leading credit card program with Walmart, one of the most iconic and largest retailers in the world. Together, we will leverage our respective expertise to launch a general purpose card and a private label card, both featuring a seamless digital experience embedded inside the OnePay app and compelling value propositions. We expect the program to launch this fall and are excited to deliver even greater innovation and choice to better serve the millions of consumers that seek to maximize their purchasing power. Synchrony's renewed relationship with Amazon builds on more than 15 years of collaboration and financing innovation. which is why we are also proud to announce our recently completed launch of Synchrony Pay Later at Amazon. Our Buy Now Pay Later offering is available for all transactions of $50 or more for approved Amazon customers. Synchrony continuously seeks to evolve and enhance the customer experience and the ways in which we drive utility and choice for our customers and loyalty and sales for our partners. And in today's world, that often means providing access to flexible financing anywhere that a customer is seeking to make a purchase, whether that's online or in person. One of our offerings with PayPal called PayPal Credit has been a popular choice among consumers for many years and historically has been a digital-only product. Over the last several years, however, we've seen increasing demand for a physical PayPal credit card so that customers could utilize their favorite form of financing more broadly in their day-to-day lives. Together, PayPal and Synchrony sought to deliver a more innovative payment solution that would enable our customers to take PayPal credit anywhere and still have access to six-month promotional financing on qualifying PayPal purchases. We are currently rolling out the fiscal PayPal credit card to U.S. customers, which can be added to mobile wallets for fast and easy tap-to-pay and includes a limited-time promotional offer to pay for qualifying travel purchases like flights, hotels, cruises, and rideshares. As we look ahead, Syncline is in a position of strength. We have been consistently executing across our business to reinforce our resilience amidst an ever-changing economic backdrop. We've been investing in our continued evolution to deliver the right products at the right time and for the right purchases as customer preferences and needs change. We are also driving customer loyalty, sales, and lifetime value for the many small and mid-sized businesses, local merchants and providers, and major national brands that we serve. In the last quarter alone, Synchrony launched new products with two of our top five partners and announced a new partnership with a previous top five partner. We also renewed one of our top five partners. With this renewal, the current expiration dates of our program agreements with our five largest partners range from 2030 through 2035. In addition, 22 of Synchrony's 25 largest program agreements have an expiration date in 2027 or beyond, and those 22 programs represent 98% of our interest and fees attributable to the top 25 as of year end 24. Synchrony is clearly building upon a long track record of delivering truly differentiated outcomes for our many stakeholders and solidifying our position as the partner of choice within the heart of American commerce. With that, I'll turn the call over to Brian to discuss our financial performance in greater detail. Thanks, Brian, and good morning, everyone. Synchrony's second quarter performance showcased the strength of our differentiated business model, which has been built to deliver resilient, risk-adjusted returns through evolving market conditions. We generated $46 billion of purchase volume during the second quarter, which was down 2% year-over-year, and include the effects of the credit actions we took between mid-2023 and early 2024, and continued selectivity in consumer spend behavior. Purchase volume at the platform level ranged between down 7% year-over-year in home and auto, reflecting discerning customer spend and this uncertain macroeconomic backdrop and up 2% in digital as growth in both new accounts and spend per active was partially offset by lower average active accounts. Ending loan receivables decreased 2% to $100 billion in the second quarter due to the combination of lower purchase line and higher payment rate. The payment rate increased by approximately 30 basis points versus last year to 16.3% and was approximately 100 basis points above the pre-pandemic second quarter average. The higher payment rate primarily reflects the impact of our previous credit actions, which contributed to approximately 1.5 percentage point sequential increase in our super prime credit card mix and an almost equivalent decrease in the proportion of non-prime. Payment rate was also impacted by a reduction in percentage of promotional financing loan receivables, which generally carry a lower payment rate. We expect the mixed shift to gradually revert to the historical mean over time. Net revenue decreased 2% to $3.6 billion, primarily reflecting the impact of higher RSAs driven by program performance. Net interest income increased 3% to $4.5 billion as a 10% decrease in interest expense and a 1% increase in interest and fees on loans was partially offset by lower interest income on investment securities. Our second quarter net interest margin increased 32 basis points versus last year to 14.78%. The increase was driven in part by a 53 basis point increase in our loan receivable yield, which was primarily driven by the impact of our product, pricing, and policy changes, or PPPCs, and partially offset by lower benchmark rates and lower assessed late fees. This contributed to approximately 43 basis points of our net interest margin. Total interest-bearing liabilities cost decreased 45 basis points versus last year and contributed approximately 38 basis points to our net interest margin. Our liquidity portfolio yield declined 95 basis points, generally reflecting the impact of lower benchmark rates, and reduced our net interest margin by 16 basis points. In our loan receivables mix, as the percentage of interest-earning assets decreased by 194 basis points, which reduced our net interest margin by approximately 33 basis points. RSAs of $992 million were 4.01% of average loan receivables in the second quarter and increased $182 million versus the prior year, primarily reflecting program performance, which included lower net charge-offs and the impact of our PPP fees. And other income increased 1% year-over-year to $118 million, driven by the impact of our PPPC-related fees and partially offset by the $51 million gain from the Visa V-1 share exchange in the prior year. Excluding the impact of this gain, other income would have increased 79% versus last year. Provision for credit losses decreased $545 million to $1.1 billion, covered by a $265 million reserve release in the second quarter, compared to the prior year reserve build of $70 million, and a $210 million decrease in net charge-offs. Including the reserve relief, it's $12 million relating to the movement of approximately $200 million in loan receivables to help for sale. Other expenses increased 6% to $1.2 billion, generally reflecting higher employee costs, partially offset by lower operational losses, and preparatory expenses related to the late fee rule in the prior year. The second quarter efficiency ratio was 34.1%, approximately 240 basis points higher than last year, driven by the higher expenses and the impact of higher RSAs on net revenue as credit performance improved. secretly generate net earnings of $967 million, or $2.50 per diluted share, and deliver a return on average assets of 3.2%, return on tangible common equity of 28.3%, and an 18% increase in tangible book value per share. Next, I'll cover our key credit trends on slide eight. At quarter end, our 30-plus delinquency rate was 4.18%, a decrease of 29 basis points from the 4.47% in the prior year, and 10 basis points below our historical average from the second quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.06%, a decrease of 13 basis points from 2.19% in the prior year, and five basis points above our historical average from the second quarters of 2017 to 2019. Our net charge-off rate was 5.70% in the second quarter, a decrease of 72 basis points from 6.42% in the prior year, and 10 basis points below our historical average from the second quarter of 2017 to 2019. Net charge-off dollars are down 11% sequentially. This compares variably to the 2017 to 2019 average sequential trend of essentially flat. And as highlighted on slide three of our presentation, sequencing sequential net charge-off trends have generally outperformed our quarterly average sequential movement between 2017 and 2018. When evaluating credit performance, our portfolio delinquency and net charge-off trends reflect both the efficacy of our credit actions and the power of our disciplined underwriting and credit management, and reinforce our confidence in the portfolio's credit positioning as we move forward. Finally, our allowance for credit losses as a percent of loan receivables was 10.59%, which decreased approximately 28 basis points from the 10.87% in the first quarter. Turning to slide nine, Synchrony's funding, capital, and liquidity continue to provide a strong foundation for our business. During the second quarter, Synchrony's direct deposits decreased by approximately $310 million, and broker deposits declined by $863 million. At quarter end, deposits represented 84% of our total funding, with both secured and unsecured debt each representing 8%. Total liquid assets increased 9% to $21.8 billion and represented 18.1% of total assets, 145 basis points higher than last year. Moving to our capital ratios. Synchrony ended the second quarter with CET1 ratio of 13.6%, 100 basis points higher than last year's 12.6%. Our Tier 1 capital ratio was 14.8%, 100 basis points above last year. Our total capital ratio increased 110 basis points to 16.9%. And our Tier 1 capital plus reserves ratio increased to 25.2% compared to 23.9% last year. During the second quarter, Synchrony returned $614 million to shareholders, consisting of $500 million in share purchases and $114 million in common stock dividends. Synchrony remains well positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and our capital plan. Turning to our outlook for 2025 on slide 10. Our baseline assumption for the four-year outlook now include the minor modifications we expect to make to our PPPCs this year, as well as the impact of the launch of a Walmart OnePay program in the fall, and exclude any potential impact from the deteriorating macroeconomic environment or from the implementation of tariffs or potential retaliatory tariffs, as their effects remain unknown. Turning to our outlook in more detail. Our current expectation is that ending loan receivables will be flat versus last year. This expectation includes the continued impact of selective consumer spend and the ongoing effects of our past credit actions on purchase line and payment rate. Previously, we expect payment rate to generally remain flat relative to 2024. However, we now expect it to remain elevated in 2025, reflecting the credit and promotional finance mix shift discussed earlier. While our past credit actions may have impacted our growth trajectory over the short term, they have needfully strengthened the trajectory of our portfolio's delinquency and net charge-off performance. We now expect our loss rate to be between 5.6% and 5.8%, which is comfortably within our long-term underwriting target of 5.5% to 6%. This improved credit outlook will contribute to higher RSAs as partner program performance further improves. As a result, We now expect RSA as a percent of average receivables to be between 3.95% and 4.1%, which will also shift our net revenue outlook for the full year to be between $15 and $15.3 billion. Managers' income for the year will be impacted by lower receivables, but it's still expected to follow seasonal trends associated with growth, credit performance, and liquidity. we expect our net interest margin to increase to an average 15.6 percent in the second half of 2025, reflecting improving loan receivables yield related to credit seasonality and the building impact of our PPPCs, lower funding costs due to lower benchmark rates, partially offset by lower yielding investment portfolio, and an increasing mix of loan receivables as a percent of burning assets, driven by the impact of seasonal growth and a gradual reduction of our excess liquidity. And lastly, we're updating our efficiency ratio expectation to be between 32% and 33%, primarily reflecting the updated net revenue outlook, as well as higher expenses associated with the launch of the Walmart OnePay program. We expect other expenses to increase approximately 3% on a dollar basis for the full year. In summary, Synchrony's differentiated business model is expected to deliver net interest margin expansion, lower net charge-offs, and continued performance alignment to RSA this year. This will drive higher risk-adjusted return and return on average assets that exceeds our long-term target of 2.5%. With that, I'll turn the call back over to Brian. Thanks, Brian. Before I turn the call over to Q&A, I'd like to leave you with three key takeaways from today's discussion. First, synchronous credit trends have outperformed relative to the industry, which is underscored by our current year outlook. Our portfolio's credit position will provide a strong foundation on which we can grow and deliver strong risk-adjusted returns. While we have begun to selectively unwind some of our credit actions on the margin, we are closely monitoring the environment and our portfolio and are evaluating further actions as we gain more clarity. Second, Synchrony's unique business model delivers industry-leading value propositions, a diverse product suite, and advanced digital solutions, empowering customers with financial flexibility and driving loyalty and sales for businesses. And our interests are closely aligned. When our customers thrive, so do our partners. And third, Synchrony is the nationwide leader in the private label and co-brand industry. It is positioned to deliver market-leading returns for our shareholders. We consistently earn and win new and existing partners, including more than 25 partners in the first half of 2025 alone. And we have built a long track record of execution through our intense focus on delivering outstanding outcomes for our customers and partners. This is what drives deep, long-lasting relationships and meaningful long-term value for all. With that, I'll turn the call back to Katherine 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. At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. Please limit yourself to one question and one follow-up question. We'll take our first question from Ryan Nash with Goldman Sachs. Your line is open. Please go ahead.