Synchrony Earnings: Better-Than-Expected Credit Costs Seen, but Credit Metrics Are Still Deteriorating

No-moat-rated Synchrony Financial SYF 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.

Synchrony’s net interest income growth was primarily driven by loan growth, with average receivables increasing 14.5% from last year. We expect loan growth to decelerate eventually, as credit card receivable growth has been unsustainably high industrywide. That said, pressure on the bank’s net interest margin did lessen after multiple quarters of sequential declines. Synchrony’s net interest margin was 15.36% compared with 15.52% last year and 14.94% last quarter. Some of the sequential improvement was due to asset mix, with the bank’s high yielding credit card debt making up a larger portion of its total earning assets. We expect to see less pressure on the bank’s net interest margin as we reach the tail end of the Fed’s tightening cycle.

While they were higher, Synchrony’s credit losses were surprisingly good during the quarter and remain below their historical range of 5.5%-6%. Net charge-offs increased to 4.6% of total loans, up from 3% last year, but down from 4.75% last quarter. The sequential decline is notable, as most of the bank’s peers saw rising credit costs during the quarter. We do not, however, expect Synchrony to enjoy a trend of falling credit costs as there was deterioration in other credit metrics, with its 30-day delinquency rate rising to 4.4% of total loans from 3.28% last year and 3.84% last quarter. We expect net charge-offs to rise during 2023, but Synchrony will likely not reach normal levels until 2024.