Synchrony Financial third quarter results: the party continues, for how long
Synchrony Financial (NYSE: SYF) managed to beat analysts’ estimates for third-quarter earnings with a smaller-than-expected drop in its bottom line. Consumer lender’s GAAP earnings per share were $1.47, while revenue was $2.91 billion. That compares to GAAP earnings of $2.00 per share and revenue of $2.37 billion in Q3 2021. Meanwhile, the consensus earnings forecast was $1.38 per share. , with a turnover of 2.80 billion dollars.
Difficult comparables for Synchrony Financial’s third quarter results
The latest round of financial results came against tough comparables as the company benefited from a large provision release associated with the termination of its partnership with fashion retailer Gap in the third quarter of last year. PCL for the quarter was $929 million, compared to $724 million in the prior quarter and $25 million a year ago.
So far, the pace of normalization of benefits is slower than expected. Credit performance continues to be healthy, with the proportion of loans overdue more than 30 days at 3.28%, compared to 2.74% in the second quarter of 2022. This represents a fairly significant increase of 54 basis points compared to compared to the previous quarter, and was 86%. basis points more than in the third quarter of last year. That being said, it still compares favorably to pre-pandemic levels of between 4-5%.
Net charges, which tend to be more of a lagging indicator, rose more modestly, up 27 basis points from the prior quarter to 3.00%. While this still represents an increase of 82 basis points from a year ago, it remains significantly lower than the ratio of around 5-6% seen in the two years leading up to 2020.
At the same time, resilient purchasing volume, supported by robust consumer spending, helped drive strong growth in loans receivable – which rose 13% from a year ago to 86, 0 billion dollars. Meanwhile, net interest income increased 7% to $3.93 billion, while net interest margin widened 7 basis points to 15.52%.
The annualized return on tangible equity for the quarter was 26.6% – lower than the 40.1% reported for the third quarter of last year and 30.3% in Q2 2022 – but still at a respectable level. Additionally, the strong underlying performance was beneficial to SYF’s already unmatched cost/income ratio. Its efficiency ratio was 36.5% in the quarter, compared to 37.7% in the prior quarter and 38.7% a year ago.
Difficult economic context
So far, Synchrony Financial has held up better than expected, amid rising concerns about the US consumer as they grapple with rising concerns about inflation and the risk of recession. Despite signs of increasing pressure on households, credit card companies appear to be in an ideal position in the financial sector.
While mortgage lenders are seeing reduced levels of origination and refinancing activity, credit card issuers continue to benefit from the continued resilience in the health of household budgets. Inflation, together with wage growth, has kept consumer spending growing overall, at least in nominal terms. That pushed up interchange fees, as well as loan receivables, as consumers depleted savings built up during the pandemic and payment rates slowed.
At the same time, delinquencies, although starting to rise again, remain very low by historical standards. This is likely due to the strength of the labor market, with the unemployment rate at a pre-pandemic low of 3.5%.
“We continue to see signs of gradual normalization across the credit spectrum of our portfolio. The vast majority of our borrowers continue to show consistent or better performance than 2019…Meanwhile, markets labor markets continue to be robust and portfolio repayment rates remain elevated relative to our 5-year historical average.This suggests to us that borrowers generally remain well positioned to support robust demand for goods and services while meeting their financial obligations in a responsible manner.”
Chief Financial Officer Brian Wenzel, Synchrony Financial Q3 2022 Earnings Call
How long can the party go on? The operating environment will become more challenging as although the labor market remains robust, the pace of job growth has slowed as employers have begun to cut hiring in recent months. Moreover, with inflation stubbornly high, the Fed is under pressure to raise rates more than expected. This could increase the risk of a recession and increase household interest burdens, which in turn will negatively impact debt affordability and the ability to spend in the future.
The company’s excess capital position and its superior underlying profitability compared to its peers put it in a strong position to face an accelerated pace of credit normalization. Its common equity Tier 1 (CET1) ratio, at 14.3%, is well above its long-term target of 11%. This is despite share buybacks worth $950 million and dividends worth $109 million being paid in the third quarter.
SYF’s agile cost structure and above-average profitability are supported by its partnership-driven business model, as necessary marketing and customer acquisition expenses are significantly reduced. Its diverse relationships with business partners should help it cope with changing consumer habits, especially as it continues to expand into the healthcare sector.
Higher inflation will likely lead to continued weakness in discretionary spending, highlighting the importance of diversification into non-discretionary categories. Moreover, health is an area of secular growth.
“As health care costs continue to rise and the burden of out-of-pocket spending intensifies with the growth of high-deductible health plans, there is a clear and growing need for consumers to have access to financial solutions that give them choice, the choice of how and when they manage the cost of planned and unplanned medical procedures as well as elective care procedures.”
Chairman and CEO Brian Doubles, Synchrony Financial Q3 2022 Earnings Call
Although Synchrony Financial has an attractive business model, the clouded macro outlook will continue to weigh on medium-term earnings expectations and valuations. So while valuation multiples are low – the stock trades at just 6.1 times its expected earnings – the current favorable credit environment may not last very long.