Shares of Synchrony Financial (NYSE:SYF) notched a 4.5% gain on Friday after its second-quarter earnings report showed only a modest increase in charge-offs after a rapid increase in losses in the first quarter. While credit losses may be elevated compared to last year, these most recent results suggest that credit performance is merely "normalizing," as opposed to being a warning signal about further significant growth in defaults and losses.

Synchrony Financial's results: The raw numbers


2Q 2017

2Q 2016

Year-Over-Year Change

Purchase volume

$33.5 billion

$31.5 billion


Loan receivables

$75.5 billion

$68.3 billion


Diluted EPS




Tangible book value per share




Data source: Synchrony Financial.

What happened this quarter?

  • The company charged off 5.42% of loans in the second quarter, up from 4.51% a year ago and 5.33% in the sequential quarter. On the conference call, management indicated that an underwriting change in the second half of 2016 is paying dividends in the form of lower losses compared to earlier cohorts. Therefore, losses should moderate over time.
Chart of Synchrony Financial's net charge-offs in cards

Image source: Author.

  • Synchrony recorded loan loss provisions of $1.33 billion this quarter, up approximately 30% from the year-ago period. Provisions grew just 1.5% compared to the sequential quarter, however -- further evidence that Synchrony doesn't expect rapid credit deterioration going forward.
  • Period-end loan receivables grew to $75.5 billion, up from $68.3 billion last year, an increase of 10.5%. Credit cards remain its primary driver of loan growth and interest income, making up $72.5 billion of period-end receivables.
  • Net interest margin (NIM), or the difference between what Synchrony earns on its loans and what it pays on its borrowings increased to 16.20%, up from 15.94% in the year-ago period. The company added $1.3 billion of lower cost deposits through its banking platform during the quarter.
  • Loyalty program expenses jumped in Q2 as expenses of $206 million topped interchange revenue (fees issuers earn when cards are used) of $165 million. On the conference call, management suggested that the increase was due to a change that makes it easier for cardholders to redeem their rewards, and that the increase should be at least partially absorbed by a decrease in revenue-sharing payments to retailers who use Synchrony as their store card issuer.
Close up photo of a credit card

Image source: Getty Images.

What management had to say

"Organic growth remains an important business driver and contributed meaningfully to this quarter's results," said President and CEO Margaret Keane in the press release.

"A primary funding objective for us is growing deposits, and we continued to execute on this, achieving double-digit growth again this quarter," she noted. "We were pleased to announce a meaningful increase in our capital return to shareholders through dividends and share repurchases -- this is a key priority, along with continued growth of the business while maintaining solid returns and a strong balance sheet."

Synchrony Financial is increasing its quarterly dividend to $0.15 per share from $0.13, and has authorization to repurchase up to $1.64 billion of stock.

A look ahead

Credit losses remain a primary focus on Wall Street after card lenders broadly reported higher credit loss in Q1. Notably, Capital One Financial reported a sequential decline in credit losses in its Q2 earnings results after a large increase in Q1.

Aside from credit performance, loyalty spending and retail share arrangement expenses are likely to remain key areas of interest. Card issuers are increasingly giving bigger kickbacks to card users via loyalty programs, while stressed retailers are more likely to negotiate for larger revenue sharing payments from card issuers.

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