It has been about a month since the last earnings report for Synchrony (SYF). Shares have added about 14.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Synchrony due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Synchrony Shines in Q3: Expense Management Drives Earnings Beat
Synchrony reported third-quarter 2024 adjusted earnings per share (EPS) of $1.94, which comfortably beat the Zacks Consensus Estimate of $1.77. The bottom line also increased from $1.48 per share a year ago.
Net interest income improved 5.7% year over year to $4.6 billion in the third quarter. Also, it beat the consensus mark by 2.1%.
The strong quarterly results were supported by increased interest and fees on loans and an expanding loan receivables portfolio. While expenses did increase, they were managed well enough to not offset the revenue gains substantially. As such, the efficiency ratio improved in the third quarter.
Despite consumer spending becoming selective, its diversified portfolio continues to augment growing demand from customers. The positives were partially offset by lower purchase volume.
Q3 Results in Detail
Retailer share arrangements of Synchrony fell 6.6% year over year to $914 million due to increased net charge-offs. Total loan receivables of Synchrony grew 4% year over year to $102.2 billion but missed the consensus mark of $103.3 billion in the quarter under review.
Total deposits were $82.3 billion, which rose 5.4% year over year, but missed our estimate. Provision for credit losses increased 7.3% year over year to $1.6 billion due to increased net charge-offs, partly offset by lower reserve build, 2.5% higher than our estimate.
The purchase volume of Synchrony declined 4% year over year to $45 billion in the third quarter because of selective consumer spending and credit actions. Also, the figure missed the consensus estimate of $46.5 billion.
Interest and fees on loans of $5.5 billion improved 7% year over year on the back of a growing average loan receivables portfolio. Net interest margin deteriorated 32 basis points (bps) year over year to 15.04% but came above the Zacks Consensus Estimate of 14.46%.
New accounts of 4.7 million slipped 18% year over year. Average active accounts remained stable at 70.4 million in the third quarter.
Total other expenses of Synchrony increased 3% year over year to $1.19 billion but remained below our estimate of $1.21 billion. The efficiency ratio of 31.2% improved 200 bps year over year in the quarter under review and remained below the consensus mark of 32.78%.
Movement in Individual Sales Platforms
Home & Auto period-end loan receivables climbed 3% year over year on the back of lower payment rates and the Ally Lending acquisition. However, the purchase volume declined 7% year over year in the third quarter as lower consumer traffic, fewer large ticket purchases, and the impact of credit actions more than offset the effects of the Ally Lending acquisition. Interest and fees on loans grew 9% year over year on the back of growth in averageloan receivables and increased benchmark rates.
Digital period-end loan receivables rose 4% year over year in the quarter under review on lower payment rates. Purchase volume was down 3% year over year due to decreased spend per account and the impact of credit actions. Interest and fees on loans climbed 4% year over year, driven by growth in averageloan receivables, higher benchmark rates, and lower payment rates.
Diversified & Value period-end loan receivables grew 3% year over year in the third quarter on decreased payment rates. Purchase volume fell 3% year over year, attributable to the impact of credit actions and a decline in spending per account. Interest and fees on loans advanced 4% year over year on higher average loan receivables and benchmark rates and lower payment rate.
Health & Wellness period-end loan receivables rose 10% year over year in the quarter under review on reduction in payment rates. Purchase volume fell 3% year over year on the back of decreased spending in Dental, Cosmetic, and Vision, and the impact of credit actions, partly offset by growth in Pet and Audiology.Interest and fees on loans improved 13% year over year on increased average loan receivables.
Lifestyle period-end loan receivables advanced 5% year over year in the third quarter on payment rate moderation. Purchase volume declined 5% year over year, due to reduced transaction values and credit actions’ impact. Interest and fees on loans climbed 8% year over year, thanks to growth in average loan receivables and benchmark rates.
Financial Position (as of Sept. 30, 2024)
Synchrony exited the third quarter with cash and equivalents of $17.9 billion, higher than the $14.3 billion recorded at 2023-end. Total assets rose to $119.2 billion in the third quarter from $117.5 billion at 2023-end. Total borrowings fell to $15.63 billion from $15.98 billion at the end of 2023. Total equity of $15.98 billion increased from $13.9 billion at 2023-end.
Synchrony’s balance sheet was consistently strong in the reported quarter, with total liquidity of $22.4 billion accounting for 18.8% of its total assets.
Return on assets of 2.6% improved 30 bps year over year in the third quarter, and return on equity rose 170 bps year over year to 19.8%.
Capital Deployment
Synchrony returned capital worth $300 million through share buybacks and paid common stock dividends of $99 million in the third quarter of 2024. It had a leftover share buyback capacity of $700 million.
2024 Guidance
It now expects 2024 earnings per share within $8.45-$8.55, assuming no late fee rule implementation this year, above the prior expectation of $7.60-$7.80, which assumed implementation of the rule on Oct. 1. The new estimate is also up from 2023 level of $5.19 per share.
For the fourth quarter, it expects purchase volumes to decrease low single-digit year over year. It expects loan receivables growth of low single digit. Net interest income is expected to remain flat sequentially in the fourth quarter. Other income is expected to remain near the third-quarter level in the December quarter. Retailer share arrangements are expected to decrease sequentially due to seasonal increases in net charge-offs.
It expects the net charge-off rate to be lower in the second half compared with the first half level of 6.37%. It also expects Other expenses to increase in the fourth quarter from the third quarter level. It estimates the year-end reserve coverage ratio to be in line with the fourth quarter of 2023.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
The consensus estimate has shifted 43.7% due to these changes.
VGM Scores
At this time, Synchrony has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Synchrony has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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