Synchrony Financial (NYSE:SYF) reported that its first-quarter net profit declined by 14% year over year as the company increased provisions for loan losses. The company primarily operates as a private label card issuer that funds store cards offered by Wal-Mart, J.C. Penney, and Lowe's, to name a few of its largest partners.

First-quarter earnings for other consumer lenders and card companies, notably Capital One Financial, were similarly struck by higher provision expenses in the first quarter of 2017. Recent vintages (credit lines extended in 2015 and 2016) were specifically called out as being a source of higher credit losses and delinquencies.

Synchrony's first quarter by the numbers

Some key metrics in the company's earnings release are reflected in the table below, complete with the change from the year-ago period.


1Q 2017

1Q 2016

Year-Over-Year Change

Purchase volume

$28.9 billion

$30.0 billion


Loan receivables

$73.4 billion

$65.8 billion


Diluted EPS




Tangible book value per share




Data source: 8-K filed with the SEC.

What happened this quarter?

Roughly 29% of Synchrony Financial's credit card exposure is to borrowers with FICO scores of 660 or lower, making it more sensitive to credit quality among higher-risk borrowers than other card companies. Here's what investors should know about its performance this quarter.

  • Loan losses increased markedly. Net charge-offs grew to roughly 5.3% of loans on an annualized basis, up from about 4.7% last year. Loans more than 30 days past due rose to 4.25%, up from 3.85%.
  • The company recorded $1.3 billion of loan loss provisions in the first quarter, up 45% from the year-ago period. (Notably, not all losses are Synchrony's burden to bear, as it recoups a portion of the provision from reduced payments to its retail store partners.)
  • Period-end loan receivables grew to $73.4 billion, up from $65.8 billion last year, an increase of 11.4%. The core credit card business was the primary driver of loan growth, as balances increased to $70.6 billion at the end of the first quarter, up from $63.3 billion a year ago.
  • Net interest margin, or the difference between what Synchrony pays on its liabilities and what it earns on its assets, grew to 16.18%, up from 15.84% a year ago. A six basis point (0.06%) decline in its total funding costs and a 27 basis point (0.27%) increase in asset yields helped drive the increase. The company continues to displace higher-cost sources of funding with lower-cost deposits, helping it hold down funding costs despite generally rising interest rates. Deposits make up 72% of its funding, up from 69% a year ago.
Woman choosing between handful of credit or debit cards.

Investors sold shares as the company forecast higher loan losses for 2017. Image source: Getty Images.

What management had to say and a look ahead

Management updated its outlook for the remainder of the year, highlighting its expectations for higher net interest margin and a lower efficiency ratio (good), while forecasting elevated net charge-offs (bad).


New Outlook

Previous Outlook

Net interest margin

16% to 16.25%

15.75% to 16%

Net charge-offs

5% to low 5%

4.75% to 5%

Efficiency ratio



Data source: Earnings conference call.

On the conference call, analysts dialed in on management's loan loss commentary. When pressed on the issue, management suggested it will build reserves for the next two quarters in line with its reserve build during the first quarter, or approximately $300 million per quarter for the next two quarters. (In other words, provisions for each of the next two quarters will likely exceed net charge-offs by roughly $300 million.)

Part of the first-quarter reserve build, approximately $50 million, is the result of a decrease in so-called "recovery pricing," or what the company receives when it sells poorly performing loans to collection specialists. Management indicated that it doesn't have much visibility into how recovery pricing will trend in the future, but that a recovery pricing trends was partly to blame for higher loan loss guidance. Any improvement in pricing would therefore soften the blow of provisions going forward.

At the end of the first quarter, Synchrony's allowance for loan losses stood at 6.37% of its loans outstanding, an increase from 5.50% in the same period a year ago. That Synchrony will continue to build reserves after growing its allowance for loan losses by 0.87 percentage points in the past year indicates that it expects particularly elevated losses to flow through its earnings for some time to come.

Shares opened down about 15% from where they closed prior to the April 27 earnings release.

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