01—Abstract
Summary
Summary of the 10-K filed February 15, 2019. Cited figures are marked; the original filing is the authoritative source.
Synchrony Financial's 2018 Form 10-K reports net earnings of $2,790 milliona, up from $1,935 million in 2017, with diluted EPS of $3.74 versus $2.42.
The increase was driven primarily by higher net interest income, which rose 7.3% to $16,118 millionb, and a lower provision for income taxes, which fell 38.5% to $854 million, reflecting the reduced U.S. corporate tax rate under the Tax Act and the $160 million 2017 tax remeasurement charge. Partially offsetting this were a 4.7% increase in the provision for loan losses to $5,545 million, largely from the reserve build for the PayPal Credit portfolio, and a 9.3% rise in other expense to $4,095 million. Loan receivables grew 13.7% to $93.1 billion, primarily due to the July 2018 acquisition of the U.S. PayPal Credit program ($7.6 billion of loan receivables).
Total deposits increased 13.3% to $64.0 billionc, with direct deposits at $49.4 billion, and deposits funded 73% of total funding sources. Over-30 day delinquencies rose to 4.76% and the net charge-off rate increased to 5.63%. The company repurchased $1.9 billion of common stock and paid $0.72 per share in dividends, and it has a $2.2 billion repurchase program authorized through June 30, 2019.
Investors should note the pending sale of the Walmart Retail Card receivables, announced January 23, 2019 and expected to close late in the third quarter or early in the fourth quarter of 2019, along with the expectation of a slight increase in the 2019 net charge-off rate, primarily due to the PayPal Credit portfolio. The filing also discloses a pending securities class action filed November 2, 2018, and a related derivative action filed January 28, 2019. Current ratings are BBB- (Fitch and S&P) for senior unsecured debt at the holding company.
02—Key points
Key Highlights
- Net earnings rose 44.2% to $2,790 million, with diluted EPS of $3.74 versus $2.42 in 2017
- Net interest income increased 7.3% to $16,118 million, primarily due to the PayPal Credit acquisition and higher average loan receivables
- Loan receivables increased 13.7% to $93,139 million, driven by the $7.6 billion PayPal Credit acquisition, higher purchase volume and active account growth
- Provision for loan losses increased 4.7% to $5,545 million, mainly from the PayPal Credit reserve build and higher net charge-offs; net charge-off rate rose 26 basis points to 5.63%
- Total deposits grew 13.3% to $64.0 billion, with direct deposits up 15.7% to $49.4 billion; deposits represent 73% of total funding sources
- Walmart Retail Card program receivables are being sold, with closing expected late Q3 or early Q4 2019; the company expects a slight increase in 2019 net charge-offs
- Returned $1.9 billion to shareholders through share repurchases and $534 million in dividends ($0.72 per share); a $2.2 billion repurchase program runs through June 30, 2019
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 15, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Interest Expense | $1.87B$1.39B | +34.4% |
| Net Income | $2.79B$1.94B | +44.2% |
| EPS (Basic) | $3.76$2.43 | +54.7% |
| EPS (Diluted) | $3.74$2.42 | +54.5% |
| Shares Outstanding (Basic) | 742.30M795.60M | −6.7% |
| Shares Outstanding (Diluted) | 746.90M799.70M | −6.6% |
05—Questions
Frequently Asked Questions
Why did net earnings increase so significantly in 2018?
Net earnings rose to $2,790 million from $1,935 million, primarily because of higher net interest income and a lower provision for income taxes. The provision fell $535 million, or 38.5%, due to the reduced 2018 U.S. corporate tax rate and the $160 million of additional tax expense recognized in 2017 from remeasuring the net deferred tax asset. The effective tax rate was 23.4% in 2018 versus 41.8% in 2017.
What was the impact of the PayPal Credit acquisition?
On July 2, 2018, Synchrony completed the acquisition of the U.S. PayPal Credit financing program, comprising $7.6 billion of outstanding loan receivables. The filing cites it as a primary driver of the increases in loan receivables, net interest income, the provision for loan losses (through a reserve build), other expense, and professional fees due to interim servicing costs. Synchrony Bank is also now PayPal's exclusive issuing bank for this program in the United States through 2028.
What is happening with the Walmart program?
Synchrony announced in July 2018 that it would not renew its Retail Card agreement with Walmart. On January 23, 2019, it agreed to sell the outstanding Walmart loan receivables, with completion expected late in the third quarter or early in the fourth quarter of 2019. Beginning in Q1 2019, these receivables will be classified as held for sale, which is expected to reduce loan receivable growth and reduce the allowance and provision for loan losses.
How is the company's credit quality trending?
Credit metrics worsened modestly. Over-30 day delinquencies were 4.76% of period-end loan receivables at December 31, 2018, up from 4.67%, and the net charge-off rate rose to 5.63% from 5.37%. The allowance coverage ratio increased to 6.90% from 6.80%. Management expects the 2019 net charge-off rate to increase slightly, primarily due to the PayPal Credit portfolio, partly offset by the Walmart portfolio sale, and expects near-term trends for the remaining portfolio to be relatively stable.
What are the main legal and regulatory risks disclosed?
A putative securities class action, Retail Wholesale Department Store Union Local 338 Retirement Fund v. Synchrony Financial, was filed November 2, 2018, alleging misleading statements about underwriting practices and the private-label card business. A related shareholder derivative action, Gilbert v. Keane, was filed January 28, 2019. The Bank also received a Civil Investigative Demand from the CFPB in May 2017 regarding deferred interest promotions and is subject to two prior CFPB consent orders. The company states that it does not believe any pending matter would have a material adverse effect on its consolidated financial condition or liquidity.
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