Synchrony Financial's (NYSE:SYF) loan portfolio is swelling in size, but that growth isn't making its way to the bottom line. In the third quarter, the store credit card issuer and consumer lender revealed that its earnings declined about 8% despite 9% growth its loan portfolio versus the year-ago period.

Earnings fell as the loan portfolio grew largely because Synchrony Financial is taking higher provisions now to build up reserves against credit losses in the future. Here's what shareholders need to know.

Synchrony Financial's results: The raw numbers


3Q 2017

3Q 2016

Year-Over-Year Change

Purchase volume

$32.9 billion

$31.6 billion


Loan receivables

$72.9 billion

$70.6 billion


Diluted earnings per share




Tangible book value per share




Source: Synchrony Financial investor relations website.

What happened this quarter?

  • Loan receivables rose approximately 9% year over year, as the retail card and payment solutions divisions saw end-of-period loan balances rise about 9%. CareCredit receivables grew 10% year-over-year in the third quarter. On the conference call, management indicated that relatively higher growth in CareCredit, which finances consumer healthcare expenses, is due to a general trend of rising medical costs.
  • Net charge-offs are still running slightly higher compared to the year-ago period, rising to 4.95% of loans on an annualized basis, compared to 4.39% in the year-ago period. That said, net charge-offs were lower in the third quarter than during the first two quarters of 2017.
  • Provisions during the quarter were up 33% from the year-ago period, partly the result of expectations of slightly higher losses and growth in the loan portfolio. Since the company is taking larger provisions than it is experiencing in net charge-offs, its allowance for loan losses rose to 6.97% of period-end loans, the third sequential quarterly increase. 
  • The company renewed important contracts with Yamaha, Nautilus, and Evine. It also launched new programs with At Home and zulily, and partnered with PayPal on a new 2% cash-back credit card. 
Photo of woman's hands selecting a card from a handful of credit cards.

Synchrony Financial primarily makes its money by acting as the lender for store credit cards. Image source: Getty Images.

What management had to say

At its core, Synchrony Financial is a lender like any other. The spread it earns between its funding costs and interest earned on its loan book, minus losses on bad loans, is what drives its profits. After seeing elevated net charge-offs throughout 2017, how it is provisioning for credit losses remains an important point of discussion on the company's conference calls.

"If you break [provisions for losses] down more specifically, think about approximately $20 million was related to hurricanes and recoveries, the two items that we spiked out individually for you guys, and then the balance of $340 million was really split roughly 50-50 between growth and normalization," said Executive Vice President and CFO Brian Doubles in response to an analyst's question about increased loan loss provisions. "So, I think, as you alluded to more importantly, just based on the trends that we're seeing and the impact of the underwriting changes that we've made, we think the reserve will start to moderate beginning in the fourth quarter and then trend from there as we head into 2018. Obviously, we'll give you a more complete outlook when we do our January call."

A look ahead

It's generally been a very good time to be a consumer lender. The U.S. unemployment rate fell to 4.2% in September, its lowest level since the 2008 financial crisis, and inflation-adjusted weekly earnings for full-time workers recently hit an all-time high.

These factors help keep credit losses low, but all cycles eventually turn. Given an industrywide uptick in consumer lending charge-offs this year, Synchrony Financial's results are likely to be muted for the remainder of the year.