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Synchrony Spreads Its Wings as It Flies Solo

Private-label leader capitalizes on commerce trends.

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 Synchrony Financial (SYF) recently announced that it expects net charge-offs on its credit card portfolio for the next 12 months will be 20-30 basis points higher than recent history. In addition, its allowance coverage ratio is likely to increase by 20-30 basis points. These expected higher net charge-offs in cards are coming off very low historic levels and are more in line with longer-term assumptions, in our opinion. Our fair value estimate already accounts for these higher charge-off levels, with overall modeled net charge-off levels higher by 50 basis points than in 2015.

Investor misunderstanding of Synchrony centers on the attractive nature of the firm's closed-loop model, particularly its retail sharing agreements, funding picture, and growth prospects. Retail sharing agreements with Synchrony offer more detailed information on consumer behavior and lower interchange fees. For cardholders, Synchrony offers unique discounts and rewards on future purchases. Given this attractive proposition, Synchrony's receivables growth has been double that of general-purpose cards over the past few years, and we expect these growth trends and market share gains to continue. Credit losses in the 4%-5% range are easily offset by significantly higher net interest margins, and we believe the market overestimates future credit risk.

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Dan Werner does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.