01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
Synchrony Financial (SYF) reported net earnings of $1,935 milliona for 2017, down 14.0% from $2,251 million in 2016, driven mainly by higher provision for loan losses ($5,296 million, up $1,310 million or 32.9%), higher other expense, and $160 million of additional tax expense from the Tax Act.
Adjusted net earnings, excluding that Tax Act impact, were $2,095 millionb. Net interest income rose 11.0% to $15,016 million on higher average loan receivables, and loan receivables grew 7.3% to $81,947 million at year-end. The company financed $131.8 billion of purchase volume in 2017 across three sales platforms: Retail Card, Payment Solutions and CareCredit.
Retail Card generated $12.0 billionc, or 74%, of total interest and fees on loans, and the five largest Retail Card programs (Gap, JCPenney, Lowe's, Sam's Club and Walmart) accounted for 53% of total interest and fees on loans. Deposits grew 8.5% to $56.5 billion and represented 73% of total funding sources. Net charge-off rate rose 80 basis points to 5.37%, and the company expects the trend of rising charge-offs and delinquencies to continue in 2018 at a more modest pace.
The filing describes the pending PayPal transaction, a roughly $6.8 billiond acquisition of PayPal Credit U.S. receivables that is expected to close in the third quarter of 2018 subject to regulatory approval. Capital remained strong, with a Basel III common equity Tier 1 ratio of 16.0% under transitional rules, and the company repurchased $1.5 billion of common stock and paid $446 million in dividends in 2017. Management expects to increase both dividends and buybacks in 2018 due to the lower corporate tax rate, subject to regulatory and board approval.
02—Key points
Key Highlights
- Net earnings fell 14.0% to $1,935 million, with diluted EPS of $2.42, versus $2.71 in 2016, driven by a $1,310 million (32.9%) increase in provision for loan losses and $160 million of Tax Act-related tax expense.
- Net interest income increased 11.0% to $15,016 million, primarily from higher average loan receivables.
- Loan receivables reached $81,947 million at December 31, 2017, up 7.3%, with 74.5 million active accounts and $131.8 billion of 2017 purchase volume.
- Net charge-off rate rose 80 basis points to 5.37% and the allowance coverage ratio increased to 6.80% from 5.69%.
- Deposits grew 8.5% to $56.5 billion, representing 73% of total funding sources, with direct deposits up 12.7% to $42.7 billion.
- Concentration risk: the five largest Retail Card programs accounted for 53% of total interest and fees on loans, and JCPenney, Lowe's and Walmart each exceeded 10%.
- Capital returns increased: $1.5 billion of share repurchases and $446 million of dividends in 2017, with a Basel III CET1 ratio of 16.0% under transitional rules.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Interest Expense | $1.39B$1.25B | +11.5% |
| Net Income | $1.94B$2.25B | −14.0% |
| EPS (Basic) | $2.43$2.71 | −10.3% |
| EPS (Diluted) | $2.42$2.71 | −10.7% |
| Shares Outstanding (Basic) | 795.60M829.20M | −4.1% |
| Shares Outstanding (Diluted) | 799.70M831.50M | −3.8% |
05—Questions
Frequently Asked Questions
Why did Synchrony's net earnings decline in 2017 despite growth in loans and net interest income?
Net earnings fell to $1,935 million from $2,251 million. The main drivers were a $1,310 million (32.9%) increase in provision for loan losses, reflecting higher net charge-offs and a higher loan loss reserve, a $331 million (9.7%) increase in other expense, and $160 million of additional tax expense from the Tax Act. Excluding the Tax Act impact, adjusted net earnings were $2,095 million.
What is the PayPal transaction and when is it expected to close?
Synchrony agreed to acquire approximately $6.8 billion of loans from the PayPal Credit U.S. consumer credit receivables portfolio, including about $1.0 billion of interests held by other investors. Synchrony Bank will become PayPal's exclusive issuing bank for the PayPal Credit point-of-sale program in the U.S. for 10 years. The transaction is expected to close in the third quarter of 2018, subject to regulatory approval and other customary conditions.
How concentrated is Synchrony's revenue among its partners?
Revenue is concentrated. The five largest programs (Gap, JCPenney, Lowe's, Sam's Club and Walmart) accounted for 53% of total interest and fees on loans for 2017 and 49% of loan receivables at year-end. JCPenney, Lowe's and Walmart each accounted for more than 10% of total interest and fees on loans. Retail Card partner program agreements with 79% of Retail Card interest and fees on loans expire in 2020 or later.
What does the filing say about credit quality trends and the outlook for 2018?
Over-30 day delinquencies rose to 4.67% of period-end loan receivables from 4.32%, and the net charge-off rate rose to 5.37% from 4.57%. Management expects the trend of increasing net charge-off rates, delinquencies and allowance coverage to continue in 2018, but at a more modest rate than in 2017. It also expects allowance increases in the second half of 2018 to reserve for the PayPal portfolio.
How is Synchrony returning capital to shareholders, and what changes are expected in 2018?
In 2017 Synchrony repurchased $1,496 million of common stock and paid dividends of $0.56 per share, or $446 million. The quarterly dividend was raised to $0.15 per share in the third quarter of 2017, and a repurchase program of up to $1.64 billion runs through June 30, 2018. Management expects to increase both dividends and share repurchases in 2018 due to the lower corporate tax rate, subject to regulatory and Board approval, while capital levels are expected to decline upon closing of the PayPal transaction.
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