Image source: Synchrony Financial.

Synchrony Financial (NYSE:SYF) sailed past concerns over credit quality in the third quarter. The company reported that net income grew by 5.2% compared the the year-ago period, as higher interest income from larger loan balances offset a small increase in problem loans.

Synchrony's third-quarter results: The raw numbers


Q3 2015

Q3 2016

Growth (YOY)

Purchase volume

$29.2 billion

$31.6 billion


Loan receivables

$63.5 billion

$70.6 billion


Diluted earnings per share




Tangible book value per share




Data source: Synchrony Financial. YOY = year over year.

What happened this quarter

There were a number of needle-moving trends and developments in Synchrony Financial's third-quarter results:

  • Credit quality was better than many had anticipated, given the company's frequent warnings about the "normalization" of credit trends and the potential for higher losses going forward. The percentage of loans 90-plus days past due is trending about 13% higher than the year-ago period, at 1.89% of its average loan receivables. 
  • Net charge-offs fell to 4.38% of average loan receivables, down from 4.49% sequentially, but up from 4.02% a year ago. The company increased its allowances for loan losses to 5.82% of its average loan receivables, up from 5.31% a year ago, an indication that it is accounting for an uptick in losses going forward.
  • Purchase volume increased at a healthy 8.2% clip compared to the year-ago period, and increased about 0.3% compared to the sequential quarter. A greater percentage of payment volume is turning into interest-earning balances, as loan receivables grew at a faster rate of 11.2% year over year and 3.5% sequentially.
  • Synchrony renewed several contracts with large retailers including TJX Companies and hhgregg during the quarter. On the conference call, management noted that there is "really nothing material" to renew until 2019 or 2020.
  • The company's efficiency ratio -- the percentage of revenue spent on non-interest expenses -- declined to 30.6%, down from 31.9% sequentially and 34.2% during the year-ago period. A declining efficiency ratio suggests Synchrony is capturing economies of scale, turning more of every marginal dollar of revenue into earnings as it grows.
  • Synchrony's efforts to attract low-cost bank deposits are paying dividends. Deposits grew 23.1% over the year-ago period, and 7.3% sequentially. Deposits are its least-expensive funding source, and now make up 71% of its funding. Customer retention has "consistently been in the 88% to 89% range" over the past couple of years, according to conference call commentary, suggesting that its deposits are just as sticky as they are cheap.
  • The lender paid its first dividend as a public company in the amount of $0.13 per share, and it spent $238 million repurchasing 8.5 million shares during the quarter.

Looking forward

Management noted that it expected credit losses to rise marginally through the remainder of 2016, consistent with seasonal trends. In his prepared remarks on the conference call, Synchrony CFO Brian Doubles said that "we continue to expect net charge-offs to be around 4.5% for 2016, which is in line with our guidance for the year." For reference, Synchrony's net charge-offs were 4.37% through the first nine months of 2016.

The calendar fourth quarter is by far Synchrony's busiest, as its retail card and payment solutions units benefit from a general rise in retail sales during the busy holiday season. Investors will want to see that Synchrony can capture more of its customers' spending, while turning more of every dollar spent into an interest-earning revolving balance.

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