Synchrony Financial (SYF) (Business (Competitive advantage: (1)Private…
Synchrony Financial (SYF)
Buying back $2.2B from July 2018 to July 2019 (>10% of market cap)... have done this for past 3 years as capital exceeds requirement
PZENA buying Capital One instead
Walmart did not renew contract... 10% of interest income
Walmart had low penetration with its customers - Only mid-single digits. A typical SYF account has 20% penetration. Walmart has the highest loss rate across all of SYF's portfolios (11%)
Walmart claimed that SYF breached contract by not approving enough applicants.
NCOs increase/Credit Deterioration
Direct Peers = Discover Financial, Capital One and AXP
RSAs help offset downside. From 2013 to 2017, RSAs were 4.3% of loan receivables. In 2009 they were 1.6%.
How does SYF grow? (1) Expand relationships with existing partners by adding new customers or using data to market and increase purchase volume at partners, (2) Win new business from competitors, (3) buy loan portfolios (PayPal), or (4) Growth with e-commerce (investing in digital tech with ApplePay and SamsungPay
Exposure to sub prime dropped from 19% in 2008 to 8% in Q3 2018.
Holds excess capital... CET1 ratio of 14.2% versus peers at 11.7%... excess capital earnings 1%... 2016 was inflection point for capital return due to spin off requirements/Fed approval.
Loans expected to grow 13-15% Y/Y in 2018, including Walmart loss.
50% of loan book is floating rate, 50% fixed... floating rate is better here if rates go up... a 100bps increase in fed funds rate would
net interest income by $103M
Focusing on e-commerce and digital payments...
... this is a tailwind for the company because one of the barriers to adoption today is carrying multiple credit cards... e-cards help... Patent Pending technology for consumers to make payments on their phone at retailers.
Competitive advantage: (1)Private label or merchant branded cards – eg Walmart credit cards – appeal to merchants because the closed loop system allows them to save the large interchange fees paid to Visa/Mastercard/Amex with general purpose credit cards. (2)- Additionally, the merchant likes the ability to create customer loyalty and grow revenues with merchant-specific royalty schemes. and (3) - SYF provides the consumer with credit and manages the credit card process in return for interest income generated from revolving credit balances. SYF targets a minimum 2% ROA and generally splits any excess return with the merchant partner. Equally, the merchant absorbs part of the net charge offs in more challenging times.
Other businesses....Additionally Synchrony operates 2 smaller businesses: Payment Solutions and CareCredit. These generate less than 5% of earnings combined and are not crucial to the investment case:- Payment solutions provide private label financing options for major consumer purchases (70% home furnishing and electric appliances). In other words you can get ‘Sleepy’ financing when you buy a bed at their store. - CareCredit provides financing for elective healthcare procedures and services. Around 60% is dental and 15% veterinary related.
Synchrony is the private label partner of Ebay, Paypal, QVC, etc. But the most exciting opportunity is no doubt their relationship with Amazon.
SYF has been working with Amazon for 7 years and Amazon is now looking to increase the penetration of its private credit card amongst customers. To that extent they are soft trialling a 5% (!) cash back card for Amazon Prime members.
CEO in place since IPO. She has been in the retail finance business in GE since 2000.
Historically, SYF’s mid-cycle net charge-offs (NCO’s) were in the low 6%’s (quoted as % of loan receivables), ranging from the low 4%’s in the mid 2000’s to 10%+ in 2009. Over the past 5 years, average NCO’s have been ~4.5% which is below average due to the favorable credit environment after the financial crisis
The top 5 credit card lenders are JP Morgan, Citi, Capital One, Bank of America and Synchrony Financial and account for 70% market share (in that order). The top 8 lenders account for 95% of the market.
Increased use of Cards versus Cash = Tailwind