Company Reports

Net charge-offs for the credit card issuers have risen significantly so far in 2024, continuing an ongoing trend from 2023. Questions about credit conditions have become a repeated feature of conversations with management teams, and many have focused on the topic as a lens into the financial health of the United States consumer.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer.

No-moat-rated Synchrony Financial reported solid second-quarter results as higher credit costs were more than offset by strong revenue growth and excellent cost management. Net revenue increased 12.7% from last year to $3.7 billion. Meanwhile, diluted earnings per share increased to $1.55 from $1.32 last year, which translates to a return on equity of 16.7%. As we incorporate these results, we do not expect to materially alter our $46 per share fair value estimate. While Synchrony has had a strong start to 2024, with credit performance and loan growth coming in better than we had initially expected, the share’s strong performance so far this year has left them slightly overvalued.

After two years of rapid interest rate hikes, the rising rate cycle is likely over. While there is still considerable uncertainty surrounding the path that interest rates will take from here, the market is now anticipating falling interest rates in 2024, with interest rate futures projecting one to three rate cuts in 2024 and even more the following year. Like their traditional banking peers, many of the consumer finance-focused banks in our coverage did benefit from rising interest rates. However, this benefit was not uniform; there were clear winners and losers. We expect a similar phenomenon in a period of falling interest rates, with different firms holding significantly different exposure to interest rate movements.

No-moat-rated Synchrony Financial reported decent first-quarter earnings that benefited from a one-time gain from the sale of its Pets Best business. Excluding the impact of the Pets Best transaction, revenue increased 16.6% from last year to $3.7 billion. Adjusted earnings per share decreased from $1.81 last year to $1.18. These results translate to an adjusted tangible return on equity of 16.8%, which is modestly below the bank’s historical average. As we incorporate these results, we do not plan to materially alter our $46 fair value estimate for Synchrony.

We are reducing our fair value estimate for Synchrony Financial from $47 per share to $46, as we incorporate a higher chance that the Consumer Financial Protection Bureau's new rules on credit card late fee limits are implemented as proposed. These new rules would limit late fees to $8 dollars per violation from the current $30 for first-time offenses and $41 for additional missed payments. While these rules will impact all the card issuers in our coverage, private label card issuers like Synchrony are more exposed to these changes due to the weaker credit quality of their card business and higher reliance on late fee income.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer.

Returning to no-moat-rated Synchrony following earnings, we are raising our fair value estimate to $47 per share from $42, more than we had initially anticipated. Our new fair value estimate translates to a 2024 price/earnings ratio of 9 times.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer. These headwinds can be particularly intense if the retailers that Synchrony partners with fail during a recessionary period, which adds to the already meaningful macroeconomic exposure of credit card issuers in general.

No-moat-rated Synchrony Financial reported fourth-quarter results that were in line with our expectations, as rising credit costs more than offset strong loan growth. Net interest income increased 8.8% from last year and 2.4% from last quarter to $4.47 billion. Earnings per share decreased 18.3% from last year to $1.03, which translates to a return on tangible equity of 14.7%. As we incorporate these results, we do not plan to materially alter our $42 fair value estimate.

No-moat-rated Synchrony Financial reported decent third-quarter earnings as it benefited from good loan growth and resilient credit quality. The bank reported an 11% year-over-year increase in net interest income to $4.36 billion, while Synchrony's net income fell 10.7% to $628 million, primarily due to higher provisioning expenses. This translates to a return on tangible equity of 22.9%. As we incorporate these results, we do not expect to materially alter our $42 per share fair value estimate. We see the shares as undervalued.

Returning to no-moat-rated Synchrony Financial following second-quarter results, we are raising our fair value estimate to $42 per share from $39. Around $1.50 of the increase comes from earnings since our last update. About $1 comes from higher loan growth assumptions. The remaining $0.50 comes from lower near-term net charge-off expectations; while Synchrony’s credit costs have risen in 2023, they have done so slower than we initially expected. In our view, the shares are modestly undervalued at their current price.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer. These headwinds can be particularly intense if the retailers that Synchrony partners with fail during a recessionary period, which adds to the already meaningful macroeconomic exposure of credit card issuers in general.

No-moat-rated Synchrony Financial reported decent second-quarter earnings as the negative impact of higher credit costs was partially offset by a lower retailer arrangement expense and strong loan growth. Net interest income of $4.1 billion was 8.4% higher than the year-ago period and 1.7% higher than last quarter. Diluted earnings per share during the quarter fell 17.5% from last year to $1.32, which translates to a return on tangible equity of 21.7%. The decrease in profitability was primarily due to higher credit costs as the bank's 2022 results benefited from unusually low credit costs. As we incorporate these results, we expect to maintain our $39 per share fair value estimate for Synchrony.

No-moat-rated Synchrony reported decent first-quarter earnings as strong loan growth and good cost management were offset by higher credit costs and lower net interest margins. Synchrony’s net interest income rose 7% from last year to $4.05 billion, while earnings per share fell 24% year over year but rose 6% sequentially to $1.35. The drop in earnings was primarily due to higher credit loss provisioning, with Synchrony setting aside $1.29 billion versus $521 million last year. It is worth noting that Synchrony benefited from historic lows in credit costs last year, which led the bank to generate substantial windfall profits, leading to difficult comparisons for its results this year. As we incorporate these results, we are maintaining our $39 fair value estimate.

Many of the credit card-focused firms under our coverage have developed deep discounts to our fair value estimates as concerns about rising credit costs have been aggravated by recent turmoil in the banking sector following the failure of Silicon Valley Bank. While the market has gone too far in discounting many of these names, the concern is not entirely unwarranted. Rising interest rates, debt levels, and shelter costs have increased financial pressure on consumers as a larger portion of their income becomes tied up in servicing financial obligations, and we expect this pressure to continue to build in the near term.

Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and cobranded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer. These headwinds can be particularly intense if the retailers that Synchrony partners with fail during a recessionary period, which adds to the already meaningful macroeconomic exposure of credit card issuers in general.

No-moat-rated Synchrony Financial reported decent fourth-quarter earnings that were largely in line with our expectations, as impressive loan growth was offset by rising credit losses and funding costs. The bank’s net interest income increased 7.2% from last year and 4.5% sequentially to $4.1 billion. Earnings per share fell 14.8% from last year to $1.26, which translates to a return on equity of 17.5%. The drop in earnings was primarily due to higher credit loss provisioning, with Synchrony building $425 million in reserves versus $72 million last year. As we incorporate these results, we are maintaining our $41 fair value estimate.

Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. While the company’s promotional financing and installment loans have consistently performed well, its private-label and cobranded credit cards, co-marketed through partnerships with retailers, faced more headwinds both during and after the pandemic, with credit card receivables outstanding falling sharply in 2020 and 2021. This decline can be tied to elevated repayment rates on the company's cards as consumers used fiscal stimulus money to pay down debt.

No-moat-rated Synchrony Financial reported solid third-quarter results, though strong loan growth was offset by higher credit costs. The bank’s net revenue grew 5.9% from last year to $3.97 billion, while earnings per share fell 26.5% to $1.47. This translates to a return on tangible equity of 26.6%, still above the firm’s long-term average despite the drop in profitability. As we incorporate these results, we do not plan to materially change our $43 fair value estimate and see the shares as undervalued as consumer credit firms remain out of favor by the market.