Synchrony Earnings: Decent Results as Good Loan Growth Is Offset by Higher Credit Losses

No-moat-rated Synchrony Financial SYF 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.

Synchrony continues to deliver impressive loan growth, with average receivables increasing 10.9% from last year to $92.5 billion. We do expect this growth to decelerate as credit conditions deteriorate but for now Synchrony’s larger loan book is the primary driver behind its net interest income growth. That said, the bank’s net interest margin showed continued pressure from higher interest rates, falling from 15.6% last year and 15.22% last quarter to 14.9% during the second quarter. This was in line with our expectations, as while rising interest rates are a positive for many lenders, private-label card issuers like Synchrony do not consistently benefit from higher rates as the already high rates charged on their cards leave less room to increase rates.

Synchrony’s credit costs continued to rise as well, with net charge-offs in the quarter rising to 4.8% of total loans, up from 4.5% last quarter and 2.7% last year. That said, this is still below the bank’s historic range of 5.5%- 6%. Additionally, Synchrony’s 30-day delinquency rate has shown signs of stabilization, increasing only 1.1% from last year and remaining effectively flat from last quarter at 3.8%. We continue to expect net charge-offs to reach normal levels by the end of 2023 and to be elevated in 2024.