Synchrony: Increasing Fair Value by 8% on Strong Loan Growth and Better-Than-Expected Charge-Offs

Returning to no-moat-rated Synchrony Financial SYF 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 ended the second quarter with $94.8 billion in loan receivables, 14.7% higher than last year. While this growth is impressive, we expect it to decelerate significantly, as most of the increase has come from more debt per cardholder and not new card acquisition: The number of average active cards increased only 1.1% over the same period. As credit standards tighten in the face of rising credit costs and more financially encumbered consumers, we see meaningful headwinds to loan growth in the near future. That said, our initial loan growth projection of 5% for 2023 is no longer realistic, given Synchrony’s performance in the first half of 2023; we now expect receivables to increase in the very low double digits in 2023.

Synchrony has also outperformed our expectations for credit losses so far in 2023. While net charge-offs have risen industrywide, Synchrony’s have risen at a slower rate. The bank’s net charge-offs are still below their normal historical range, while most peers have already returned to normal levels in the most recent quarter. We still expect credit losses to continue to rise before becoming elevated in 2024, but Synchrony is likely to see its full-year net charge-offs come in cleanly below its 5.5%-6% historical average.