01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Synchrony Financial (SYF) reported net earnings of $2.3 billiona for 2016 ($2,251 million), up from $2,214 million in 2015, with return on assets of 2.7%.
The company is one of the premier consumer financial services companies in the United States and the largest provider of private label credit cards based on purchase volume and receivables. During 2016 it financed $125.5 billionb of purchase volume, and at December 31, 2016 it had $76.3 billion of loan receivables, 71.9 million active accounts and $52.1 billion of deposits, which represented 72% of total funding sources. Operations run through three sales platforms: Retail Card, Payment Solutions and CareCredit, with Retail Card generating $10.9 billion, or 74%, of total interest and fees on loans.
Credit quality weakened modestly during 2016. Over-30 day delinquencies rose 26 basis points to 4.32% and the net charge-off rate rose 21 basis points to 4.57%, and the provision for loan losses increased $1,034 millionc, or 35.0%, to $3,986 million. Management expects delinquency and charge-off rates to continue increasing modestly, and the allowance coverage ratio rose to 5.69%.
Concentration is a key investor consideration: the five largest programs (Gap, JCPenney, Lowe's, Sam's Club and Walmart) accounted for 54% of total interest and fees on loans, and JCPenney, Lowe's and Walmart each exceeded 10%. Capital and shareholder returns were active in 2016. The company declared and paid dividends of $0.26d per share ($214 million) and repurchased $476 million of common stock under a program of up to $952 million through June 30, 2017.
Its Basel III common equity Tier 1 ratio under transitional rules was 17.2%, and senior unsecured debt is rated BBB- by Fitch and S&P. The filing also discloses ongoing CFPB consent orders and a CFPB Notice of Opportunity to Respond and Advise regarding credit bureau reporting.
02—Key points
Key Highlights
- Net earnings rose to $2,251 million in 2016 from $2,214 million in 2015, with return on assets of 2.7% versus 2.9%.
- Loan receivables grew 11.8% to $76,337 million at December 31, 2016, driven by higher purchase volume and active account growth; purchase volume reached $125.5 billion.
- Net interest income increased 11.9% to $13,530 million, primarily on higher average loan receivables.
- Provision for loan losses increased 35.0% to $3,986 million; over-30 day delinquencies rose to 4.32% and net charge-off rate rose to 4.57%.
- Deposits grew 20.0% to $52.1 billion, with direct deposits up 27.6% to $37.9 billion, representing 72% of total funding sources.
- Capital return: $0.26 per share in dividends ($214 million) and $476 million of share repurchases; common equity Tier 1 ratio of 17.2% under transitional Basel III rules.
- Partner concentration: five largest programs represented 54% of total interest and fees on loans in 2016, and the Retail Card platform generated 74% of that total.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Interest Expense | $1.25B$1.14B | +10.0% |
| Net Income | $2.25B$2.21B | +1.7% |
| EPS (Basic) | $2.71$2.66 | +1.9% |
| EPS (Diluted) | $2.71$2.65 | +2.3% |
| Shares Outstanding (Basic) | 829.20M833.80M | −0.6% |
| Shares Outstanding (Diluted) | 831.50M835.50M | −0.5% |
05—Questions
Frequently Asked Questions
How concentrated is Synchrony's revenue among its partners?
Substantially all revenue comes from partner programs. The five largest programs (Gap, JCPenney, Lowe's, Sam's Club and Walmart) accounted for 54% of total interest and fees on loans for 2016 and 50% of loan receivables at December 31, 2016. JCPenney, Lowe's and Walmart each exceeded 10% of interest and fees on loans. Most Retail Card program agreements expire in 2019 or later, and 99% of Retail Card interest and fees come from agreements with expirations in 2019 or beyond.
Is credit quality deteriorating?
The filing describes stable but modestly weaker asset quality. The over-30 day delinquency rate rose 26 basis points to 4.32% at December 31, 2016, and the net charge-off rate rose 21 basis points to 4.57% for 2016. Management expects delinquency and net charge-off rates to continue increasing modestly in 2017 and says they are likely to increase materially if economic conditions deteriorate. The allowance coverage ratio increased to 5.69% from 5.12%.
How is Synchrony funded, and how has that changed?
Deposits are the largest funding source, at $52.1 billion or 72% of total funding sources at December 31, 2016. Direct deposits rose to $37.9 billion, while brokered deposits were $14.2 billion. The Bank Term Loan of $4.1 billion was fully prepaid during 2016. Securitized financings were $12.4 billion average balance for 2016, and the company had $6.7 billion of undrawn credit facilities and more than $25.0 billion of unencumbered assets in the Bank.
What is the company's capital and shareholder return position?
At December 31, 2016, the Basel III common equity Tier 1 ratio under transitional guidelines was 17.2%, and the fully phased-in estimate was 17.0%. The company declared dividends of $0.26 per share and repurchased $476 million of common stock during 2016 under a program authorizing up to $952 million through June 30, 2017. Dividends and repurchases remain subject to Federal Reserve Board oversight and regulatory approval.
What regulatory matters could affect the company?
The Bank has two CFPB consent orders, from 2013 and 2014, which required remediation and business practice changes, including for CareCredit and a debt cancellation product. The Bank received a CFPB Notice of Opportunity to Respond and Advise in May 2016 regarding credit bureau reporting on sold accounts. The company also faces numerous Telephone Consumer Protection Act class actions. Management states that it is not party to any pending matter expected to have a material adverse effect.
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