01—Abstract
Summary
Summary of the 10-K filed February 13, 2020. Cited figures are marked; the original filing is the authoritative source.
Synchrony Financial reported net earnings of $3.7 billiona for 2019, up from $2.8 billion in 2018, driven primarily by higher net interest income and a reduction in provision for loan losses tied to the sale of the Walmart consumer portfolio.
Net earnings increased 34.3%, and diluted earnings per share were $5.56b compared with $3.74 in 2018. Loan receivables decreased 6.4% to $87.2 billion at December 31, 2019, primarily due to the Walmart sale, which included $8.2 billion of receivables sold in October 2019, while remaining loan receivables grew 5.2%. The Walmart sale also produced reserve reductions of $857 million, which the filing cites as contributing to the earnings increase.
The company operates through three sales platforms (Retail Card, Payment Solutions and CareCredit) and funds itself largely through deposits, which totaled $65.1 billionc, or 77% of total funding sources. Retailer share arrangements rose 24.5% to $3.9 billion, and the over-30 day delinquency rate improved 32 basis points to 4.44%, while the net charge-off rate rose slightly to 5.65%. The company repurchased $3.6 billion of common stock in 2019 and paid $0.86 per share in dividends, and it issued $750 million of non-cumulative perpetual preferred stock in November 2019.
The filing highlights a significant upcoming accounting change: adoption of CECL on January 1, 2020 is expected to increase the allowance for loan losses by approximately $3.0 billiond, or 54%, and reduce retained earnings by approximately $2.3 billion. Management expects provision for loan losses to increase in 2020 as a result. The Basel III common equity Tier 1 ratio was 14.1% at December 31, 2019, and the company expects that CECL will reduce this ratio by approximately 60 basis points per year during the phase-in period through 2023.
02—Key points
Key Highlights
- Net earnings rose 34.3% to $3.7 billion in 2019, with diluted EPS of $5.56 versus $3.74 in 2018.
- Loan receivables fell 6.4% to $87.2 billion after the October 2019 sale of $8.2 billion of Walmart receivables; excluding the sale, remaining receivables grew 5.2%.
- Provision for loan losses decreased $1.4 billion (24.6%) to $4.2 billion, including $1.1 billion of reserve reductions tied to the Walmart sale.
- Deposits of $65.1 billion represented 77% of total funding sources, with direct deposits up 9.7% to $54.2 billion.
- Expected CECL adoption on January 1, 2020 is estimated to increase the allowance for loan losses by about $3.0 billion (54%) and reduce retained earnings by about $2.3 billion.
- Returned capital through $3.6 billion of share repurchases and $581 million of common dividends in 2019; $750 million of preferred stock was issued in November 2019.
- Basel III common equity Tier 1 ratio was 14.1% at December 31, 2019; the 2019 Share Repurchase Program allows up to $4.0 billion through June 30, 2020.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 13, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Interest Expense | $2.29B$1.87B | +22.5% |
| Net Income | $3.75B$2.79B | +34.3% |
| EPS (Basic) | $5.59$3.76 | +48.7% |
| EPS (Diluted) | $5.56$3.74 | +48.7% |
| Shares Outstanding (Basic) | 670.20M742.30M | −9.7% |
| Shares Outstanding (Diluted) | 673.50M746.90M | −9.8% |
05—Questions
Frequently Asked Questions
What drove the increase in Synchrony's 2019 net earnings?
The filing attributes the 34.3% increase in net earnings to $3.7 billion mainly to higher net interest income and lower provision for loan losses, which benefited from reserve reductions of $1.1 billion related to the Walmart consumer portfolio sale completed in October 2019. These gains were partially offset by higher retailer share arrangements and other expense.
How will the CECL accounting standard affect Synchrony's financial results?
Synchrony adopts ASU 2016-13 (CECL) on January 1, 2020. The company estimates the allowance for loan losses will increase by about $3.0 billion, or 54%, and retained earnings will decrease by about $2.3 billion. The filing expects provision for loan losses to rise in 2020, and the Common Equity Tier 1 ratio to decline by about 60 basis points per year during the phase-in period running through 2023.
What is the outlook for loan growth and credit quality in 2020?
Management expects total interest income to continue growing, driven by growth in average loan receivables, though the Walmart sale will reduce interest income and yields. The company expects its net charge-off rate for 2020 to decrease slightly from 2019's 5.65%, and expects credit trends for the ongoing portfolio to be relatively stable.
How is Synchrony funding its operations and returning capital to shareholders?
Deposits are the largest funding source at $65.1 billion, or 77% of total funding. In 2019 the company repurchased $3.6 billion of common stock and paid $581 million in common dividends ($0.86 per share), and issued $750 million of non-cumulative perpetual preferred stock. The Board approved a share repurchase program of up to $4.0 billion through June 30, 2020, and management expects to complete it by the end of the second quarter of 2020.
How concentrated is Synchrony's revenue among its partners?
The five largest ongoing programs (Gap, JCPenney, Lowe's, PayPal and Sam's Club, excluding Walmart) accounted for 47% of total interest and fees on loans in 2019. Lowe's and PayPal each accounted for more than 10%. Retail Card programs represented 73% of total interest and fees on loans, and 20 of 25 ongoing Retail Card agreements expire in 2022 or later.
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