Synchrony Financial: Don’t Ignore The Upside Potential (NYSE:SYF)

Credit Quality Improving But Will It Last?

I covered Synchrony Financial (SYF) last quarter in the article “Synchrony Financial: Bad News Seems Already Priced In.” Since then, the stock is up 21%, even after the 5% beat down it took after reporting earnings on 10/20. At that time, I pointed out the unexpected decline in load delinquencies and charge-offs each quarter in 2020. This is unusual behavior for a recession. For example, Synchrony’s charge-off rate was around 11% in 2009. The improving trend continued this quarter, however, with the charge-off rate down to 4.4%. Delinquencies continued to decline as well.

Source: Synchrony Financial 3Q 2020 Earnings Presentation

Synchrony, like many banks, has instituted a forbearance program for those needing some extra time to pay their bills. While $3.8 billion worth of loans signed up for the program since it was instituted, only $227 million remained in forbearance at the end of 3Q. This is less than 0.3% of total loan receivables. Synchrony plans to end the forbearance program at the end of October, according to the earnings call.

Despite these positive trends so far, Synchrony has been increasing loan loss reserves each quarter. You can see in the slide above loan loss reserves calculated by the old method have increased $873 million this year. This is before the $3.671 billion increase from the new CECL standard for estimating loan losses. Synchrony attributes the trend in credit quality so far to generous government stimulus payments but believes losses could increase again if no further stimulus is coming and recovery from the pandemic is slow. CFO Brian Wenzel stated the very conservative assumptions on future unemployment and GDP in the earnings call:

So the baseline measure that we used, which is really coming off of the Moody’s August baseline metric, which has unemployment at that point being 9.9% at the end of this year, 7.9% in 2021 and 4.5% in 2022. And as we’ve gone through and done our modeling off of that, the way which we interpret it, we actually have redistributed that unemployment curve. So effectively, the unemployment we have at the end of the year is 9.7%, down from the second quarter, 9.1% in 2021, up slightly from our previous estimate and 6.3% in 2022. So we have a little bit slower recovery back into 2021, as we think things have pushed out, which partially, as we talked about, some of the stimulus and other metrics. And then, the GDP assumptions we have in line with the Moody’s, the baseline model, to be honest with you, which had a linked quarter 5.4% decline in the third and 0.7% in the fourth.

The Federal Reserve’s latest projections, released in mid-September, are not nearly as grim. The Fed consensus for unemployment is 7.6% at the end of 2020, 5.5% in 2021, and 4.6% in 2022. For GDP, the Fed has a full-year 2020 estimate of -3.7%. There is of course much uncertainty on how much a COVID spike could impact the economy in 4Q and how long vaccine rollout and recovery will take in 2021. Nevertheless, Synchrony’s assumptions look highly conservative, and the $344 million reserve build this quarter may have spooked those who did not dig into the assumptions behind it. If Synchrony upgrades their economic assumptions in the next few quarters, you could easily see some reserve releases which would provide an unexpected boost to earnings.

Loan Growth Slow To Take Off

Since losing the Walmart (WMT) partnership last year, Synchrony has been slow to replace loan receivables. They are down 6% from last year, and down 5% excluding the impact of the Walmart loss.

Synchrony loan receivablesSource: Synchrony Financial 3Q 2020 Earnings Presentation

On the bright side, purchase volume is now increasing, and in September was higher year-on-year for the first time since the onset of the pandemic.

Synchrony Purchase VolumeSource: Synchrony Financial 3Q 2020 Earnings Presentation

Synchrony has been emphasizing the new partnerships with Verizon (VZ) and Venmo (PYPL) that rolled out this year, but they are not expected to be a significant contributor to earnings until 2021. The Verizon card rolled out at the end of June, while the Venmo card just launched. Besides the loan balance growth, the Venmo partnership gives Synchrony the opportunity to gain experience moving from physical to digital products, including integrating with mobile apps.

Venmo Credit Card Source: Synchrony Financial 3Q 2020 Earnings Presentation

Heading into 4Q, Synchrony typically sees purchase volume and loan receivable growth due to holiday spending. With physical stores reopening, this is also an opportunity to sign up new accounts. CEO Margaret Keane mentioned this on the earnings call.

I would say, in September, we did start seeing store traffic start really coming back at a bigger pace. We still originate a lot of accounts in-. store. So having that in-store traffic come back, I think, is going to be very helpful. I think as we continue to market our new programs, where we’ll see positive trend there.

I think the real question mark is really how does holiday play out? Right now our view is consumers are saying they want to shop, and they want to do something fun and be out there. So I think holiday is going to play into this as well.

I believe 4Q can show sequential loan growth, even conservatively assuming a 5% decline year on year. With this growth and lower loan loss reserve builds, Synchrony can have a strong fourth quarter creating a strong base to build from in 2021.

Putting The Numbers Together

I updated the model I last used at the start of 2020 with 3Q 2020 actuals and projections for 2021. Starting with the balance sheet, I am assuming Synchrony can grow loan receivables by 5% in 2021. This is at the low end of the growth they were expecting for 2020 before the onset of the pandemic. I assume cash balance goes down to fund the loan growth. The bank is currently very well-capitalized with a Common Equity Tier I Capital ratio of 15.8%, 130 basis points above 3Q 2019. Therefore, the cash draw to fund the loans should be feasible. I assume liabilities do not change. Equity increases by retained earnings, which is net income minus dividends, and I also allow $1.8 billion of buybacks which lets the equity/asset ratio increase slightly during the year. The resulting book value per share increases from $19.47 at the end of 3Q 2020 to $23.27/share at the end of 2021. Return on assets and Return on common equity improve to 2.7% and 21.3% by the end of 2021, still down from 2019 due to the still lower loan receivables and net interest margin.

Synchrony Balance SheetOn the income statement, 4Q 2020 has only two significant differences from the 3Q actuals. First, loan receivables increase about 3.3% sequentially from 3Q 2020; however, they are still about 5% below average 2019 receivables and 7% below 4Q 2019. Second, there is minimum reserve build as improved expectations for the economy are reflected in the CECL calculations. The result is a 4Q EPS estimate of $0.96, much better than the analyst consensus of $0.59 that prevailed prior to the 3Q earnings release. Added to the actuals for the first nine months of 2020, my 2020 EPS estimate is $2.01 per share.

In 2021, you see the 5% loan growth and reduction in cash. I assume little change in yields on loans and cash which were around 19.5% and 0.3%, respectively, in 3Q 2020. The improvement in the net interest margin to 14.95% comes from the higher share of loans and lower share of cash as a percentage of total interest-earning assets. I assume charge-offs hold steady around 5% and reserve build increases only slightly in line with loan growth. Costs decrease by $200 million in 2021 in line with the commentary on the earnings call.

With loan receivables and net interest margin still below 2019 levels, net income is about 30% lower than 2019 but more than double that of 2020. Thanks to the resumed buybacks in 2021, my 2021 EPS estimate of $4.68 is just 16% lower than 2019.

Synchrony Income StatementRisks

The biggest risk remains the uncertain path out of the COVID-19 pandemic. A resumption of severe lockdowns brought on by a worsening of the pandemic this winter could cause delinquencies and charge-offs to finally turn up, and maybe even require additional reserve builds.

A second risk is bankruptcy or significant sales reduction at any of Synchrony’s partners which are listed here. You will see that this list includes several mall-based stores that are not doing well lately such as J. C. Penney (OTCPK:JCPNQ) and Stein Mart (OTCPK:SMRTQ).

Finally, with Synchrony operating basically entirely within the US, they would be subject to higher taxes in the event a new administration decides to raise the corporate income tax from 21% to 28%. I would not expect this to take effect until 2022 at the earliest, however.


Although SYF share price has been on a steady climb since the pandemic, the earnings release frequently seems to be a good excuse for traders to take profits. This quarter, it seems like they focused on the reserve build and slow loan growth. Synchrony’s assumptions behind the reserve build appear very conservative relative to those of the Fed and other economic forecasters. Loan growth has been slow, but purchase volume finally started to show year-on-year growth in September and loan balances may not be far behind as the Verizon and Venmo cards continue to roll out. At a P/E of 13.7 times my estimate of 2020 earnings and 6.2 times 2021 earnings, little upside potential is priced into the stock. I remain long and bullish on Synchrony.

Disclosure: I am/we are long SYF, SYF.PA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.