Synchrony Earnings: Strong Results Despite Rising Credit Card Net Charge-Offs

No-moat-rated Synchrony SYF 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.

Synchrony’s net interest income growth was due to receivable growth and not net interest margin expansion, with Synchrony’s average receivables 9.8% higher than last year at $90.8 billion and quarter-end credit card balances up a more impressive 15.5%. On the other hand, the bank’s net interest margin continues to face pressure from higher funding costs, falling from 15.58% last quarter and 15.80% last year to 15.22%. This is in line with our expectations, as while higher interest rates are a positive for many lenders, private label card issuers like Synchrony do not consistently benefit from higher rates.

Credit results from Synchrony also continue to rise, with net charge-offs in the quarter rising 1.76% year over year and 1.01% quarter over quarter to 4.49% of average loans. The bank’s 30-day delinquency rate was more resilient, only rising to 3.81% of total loans from 2.78% last year. It is worth noting that despite the significant increase, Synchrony’s net charge-off rate is still below its 5.5% to 6% historical range. However, with rising economic pressure on consumers, we expect Synchrony’s net charge-off rate to return to normal levels by the end of 2023 and become modestly elevated in 2024.