Image source: Synchrony Financial.

Private-label card issuer Synchrony Financial (SYF -2.13%) reported that its customers spent more and carried higher balances in the fourth quarter. However, slightly higher charge-offs and provisions for loan losses somewhat dampened the impact. All in all, earnings grew 5.3% compared to the year-ago period. 

Synchrony Financial's Q4 by the numbers


Q4 2016

Q4 2015

Year-Over-Year Change

Purchase volume

$35.4 billion

$32.5 billion


Loan receivables

$76.3 billion

$68.3 billion


Diluted earnings per share




Tangible equity per share




Data source: Synchrony investor relations.

What happened this quarter?

  • Credit quality worsened, but not to any particularly concerning level. Balances 90-plus days past due tipped over 2% to rise to 2.03%, up from 1.86% last year. Net charge-offs rose to 4.62%, up from 4.23% in the year-ago period. The company is very adequately reserved for losses, carrying allowances equal to 5.69% of its loan book.
  • Average active accounts grew 7%, while purchase volume grew 9%, and loan receivables grew by nearly 12% year over year. Synchrony's average cardholder is spending more per card, and carrying higher balances on average, resulting in more revenue per card.
  • Growth in receivables resulted in revenue growth in excess of expense growth. The company's efficiency ratio came in at 31.6% compared to 34% in the fourth quarter of 2015. Lower is better, as the efficiency ratio measures non-interest expenses as a percentage of revenue.
  • Shareholders should admire the company's growing scale. Synchrony saw its average active accounts grow to 68.7 million accounts in the fourth quarter.
  • Net interest margin expanded to 16.22% from 15.73% last year, due in part to increases in interest rates and more effective use of its balance sheet. On the conference call, company executives noted that higher revolving balances put more of its capital to work, reducing cash and liquidity drag on its earnings.

What management had to say

In Synchrony's press release, President and Chief Executive Officer Margaret Keane said:

We are pleased with the significant progress we made in 2016. We generated strong organic growth across our sales platforms which resulted in significant revenue growth, substantial operating leverage, and attractive returns. We also signed and renewed several key relationships, expanded our network, continued to drive digital innovations and analytics capabilities, and supported our business with robust growth in our direct deposit platform.

Looking ahead

Key items in Synchrony Financial's 2017 guidance are receivables growth of 7% to 9%, and a net charge-off rate of 4.75% to 5%, suggesting a slowdown in receivables growth from 2016 and a continued increase in charge-offs as credit quality "normalizes" in 2017.

Investors should keep an eye on the competition. Fierce competition in general purpose and co-brand credit cards may be spilling over into Synchrony's store card business. After the quarter ended, announced improvements to Chase's Amazon card, which competes with Synchrony's Amazon store card. Chase's card matches the 5% rewards of Synchrony's card, and offers the ability to spend anywhere Visa is accepted. By contrast, Synchrony's card is a store card that can be used only at Amazon.

For its part, Synchrony downplayed the competitive threat, suggesting that the cards compete for different customers. Chase cards are typically geared toward high-spending, high-income customers with excellent credit. Store cards are typically issued to borrowers across the income and credit spectrum.

That said, it's something worth watching, as Synchrony's private-label business has benefited from being relatively isolated from especially competitive corners of the card industry.