Company Reports

No-moat-rated Synchrony Financial reported decent first-quarter earnings that benefited from a one-time gain from the sale of its Pets Best business. Excluding the impact of the Pets Best transaction, revenue increased 16.6% from last year to $3.7 billion. Adjusted earnings per share decreased from $1.81 last year to $1.18. These results translate to an adjusted tangible return on equity of 16.8%, which is modestly below the bank’s historical average. As we incorporate these results, we do not plan to materially alter our $46 fair value estimate for Synchrony.

We are reducing our fair value estimate for Synchrony Financial from $47 per share to $46, as we incorporate a higher chance that the Consumer Financial Protection Bureau's new rules on credit card late fee limits are implemented as proposed. These new rules would limit late fees to $8 dollars per violation from the current $30 for first-time offenses and $41 for additional missed payments. While these rules will impact all the card issuers in our coverage, private label card issuers like Synchrony are more exposed to these changes due to the weaker credit quality of their card business and higher reliance on late fee income.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer.

Returning to no-moat-rated Synchrony following earnings, we are raising our fair value estimate to $47 per share from $42, more than we had initially anticipated. Our new fair value estimate translates to a 2024 price/earnings ratio of 9 times.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer. These headwinds can be particularly intense if the retailers that Synchrony partners with fail during a recessionary period, which adds to the already meaningful macroeconomic exposure of credit card issuers in general.

No-moat-rated Synchrony Financial reported fourth-quarter results that were in line with our expectations, as rising credit costs more than offset strong loan growth. Net interest income increased 8.8% from last year and 2.4% from last quarter to $4.47 billion. Earnings per share decreased 18.3% from last year to $1.03, which translates to a return on tangible equity of 14.7%. As we incorporate these results, we do not plan to materially alter our $42 fair value estimate.

No-moat-rated Synchrony Financial reported decent third-quarter earnings as it benefited from good loan growth and resilient credit quality. The bank reported an 11% year-over-year increase in net interest income to $4.36 billion, while Synchrony's net income fell 10.7% to $628 million, primarily due to higher provisioning expenses. This translates to a return on tangible equity of 22.9%. As we incorporate these results, we do not expect to materially alter our $42 per share fair value estimate. We see the shares as undervalued.

Returning to no-moat-rated Synchrony Financial following second-quarter results, we are raising our fair value estimate to $42 per share from $39. Around $1.50 of the increase comes from earnings since our last update. About $1 comes from higher loan growth assumptions. The remaining $0.50 comes from lower near-term net charge-off expectations; while Synchrony’s credit costs have risen in 2023, they have done so slower than we initially expected. In our view, the shares are modestly undervalued at their current price.

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer. These headwinds can be particularly intense if the retailers that Synchrony partners with fail during a recessionary period, which adds to the already meaningful macroeconomic exposure of credit card issuers in general.

No-moat-rated Synchrony Financial reported decent second-quarter earnings as the negative impact of higher credit costs was partially offset by a lower retailer arrangement expense and strong loan growth. Net interest income of $4.1 billion was 8.4% higher than the year-ago period and 1.7% higher than last quarter. Diluted earnings per share during the quarter fell 17.5% from last year to $1.32, which translates to a return on tangible equity of 21.7%. The decrease in profitability was primarily due to higher credit costs as the bank's 2022 results benefited from unusually low credit costs. As we incorporate these results, we expect to maintain our $39 per share fair value estimate for Synchrony.

No-moat-rated Synchrony 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.

Many of the credit card-focused firms under our coverage have developed deep discounts to our fair value estimates as concerns about rising credit costs have been aggravated by recent turmoil in the banking sector following the failure of Silicon Valley Bank. While the market has gone too far in discounting many of these names, the concern is not entirely unwarranted. Rising interest rates, debt levels, and shelter costs have increased financial pressure on consumers as a larger portion of their income becomes tied up in servicing financial obligations, and we expect this pressure to continue to build in the near term.

Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and cobranded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer. These headwinds can be particularly intense if the retailers that Synchrony partners with fail during a recessionary period, which adds to the already meaningful macroeconomic exposure of credit card issuers in general.

No-moat-rated Synchrony Financial reported decent fourth-quarter earnings that were largely in line with our expectations, as impressive loan growth was offset by rising credit losses and funding costs. The bank’s net interest income increased 7.2% from last year and 4.5% sequentially to $4.1 billion. Earnings per share fell 14.8% from last year to $1.26, which translates to a return on equity of 17.5%. The drop in earnings was primarily due to higher credit loss provisioning, with Synchrony building $425 million in reserves versus $72 million last year. As we incorporate these results, we are maintaining our $41 fair value estimate.

Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. While the company’s promotional financing and installment loans have consistently performed well, its private-label and cobranded credit cards, co-marketed through partnerships with retailers, faced more headwinds both during and after the pandemic, with credit card receivables outstanding falling sharply in 2020 and 2021. This decline can be tied to elevated repayment rates on the company's cards as consumers used fiscal stimulus money to pay down debt.

No-moat-rated Synchrony Financial reported solid third-quarter results, though strong loan growth was offset by higher credit costs. The bank’s net revenue grew 5.9% from last year to $3.97 billion, while earnings per share fell 26.5% to $1.47. This translates to a return on tangible equity of 26.6%, still above the firm’s long-term average despite the drop in profitability. As we incorporate these results, we do not plan to materially change our $43 fair value estimate and see the shares as undervalued as consumer credit firms remain out of favor by the market.

No-moat-rated Synchrony Financial reported solid second-quarter results with resilient credit costs and good core loan growth being offset by higher expenses. The bank’s net interest income grew 14.8% from last year to $3.8 billion. Net income shrank 35% to $804 million, as the prior year's quarter benefited from a significant release of loan loss reserves, but still translated to an impressive 24% return on equity. During the quarter Synchrony repurchased $701 million in shares, leaving it with a remaining share repurchase authorization of $2.4 billion. With Synchrony’s market capitalization of roughly $16 billion, these repurchases represent a significant return of shareholder value. We appreciate the use of buybacks, as we see Synchrony as undervalued at the current price and the bank has room on its balance sheet to support the returns, with a common equity Tier 1 capital ratio of 15.2% versus its long-term target of 11%. After incorporating these results, we are maintaining our $43 fair value estimate for Synchrony.

Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. The company’s promotional financing and installment loans offered through its Home and Auto segment and its CareCredit program have performed well, and receivables have been relatively resilient in the current cycle. The company's private-label and cobranded credit cards, co-marketed through partnerships with retailers, have faced more headwinds both before and during the pandemic, and credit card receivables outstanding are well below their 2018 peak.

No-moat-rated Synchrony Financial reported solid first-quarter results as it benefited from accelerating loan growth and low credit costs during the period. Revenue grew 10.2% year over year to $3.9 billion, while diluted earnings per share grew a more modest 2.3% from the year-prior quarter to $1.77. These results equate to a return on equity of 27.5%, well above the bank’s historical average. Along with the results, Synchrony announced an additional $2.8 billion in share repurchases and a 5% increase in its dividend. While these were good results, they do not materially change our thesis for Synchrony, and we will maintain our $43 fair value estimate.

With persistent inflation and global supply issues, expectations are set for an end to the Federal Reserve's highly accommodative monetary policy. After an initial 25-basis-point increase in the federal-funds rate announced March 16 and futures markets implying six to eight more interest-rate hikes in 2022, it has become clear that we have entered a period of rising interest rates. Owing to their tendency to charge variable rates, credit card issuers are typically seen as significant beneficiaries of rising interest rates. However, in practice we find interest-rate sensitivity of the credit card issuers to be more complex, with firms that have cardholder bases that lack a tendency to borrow or have private-label card exposure benefiting less from rising interest rates.