Store-card issuer and consumer lender Synchrony Financial (NYSE:SYF) reported that it earned net income of $385 million, or $0.49 per diluted share, in the fourth quarter. Excluding the one-time impact from the Tax Cuts and Jobs Act, the company would have earned $545 million, or $0.70 per diluted share.

Synchrony Financial's fourth quarter: By the numbers


Q4 2017

Q4 2016

Year-Over-Year Change

Purchase volume

$36.6 billion

$35.4 billion


Loan receivables

$81.9 billion

$76.3 billion


Adjusted diluted earnings per share




Data source: Synchrony Financial. Adjusted diluted earnings per share exclude the fourth-quarter impact of a reduced corporate tax rate in 2018.

Two hands holding a U.S. dollar bill and credit card.

Image source: Getty Images.

What happened this quarter?

  • Let's get the tax stuff out of the way first: Financial companies like Synchrony have "deferred tax assets" (DTAs) largely resulting from temporary differences between tax and GAAP accounting for money set aside for loan losses. Since the corporate tax rate dropped from 35% to 21%, DTAs had to be written down to reflect the drop in tax rates. Synchrony Financial took a $160 million hit this quarter related to the revision, but it's safe to say that the long-term benefits of lower taxes outweigh a one-time accounting charge. 
  • Period-end loans grew by 6.5% quarter over quarter, helped by a seasonally strong fourth quarter for its retail card partners. In prepared remarks on the conference call, management noted that purchase volume increased 10% among customers with FICO scores of 720 or higher, while purchase volume declined 13% among the cohort of borrowers with sub-660 credit scores. 
  • Net charge-offs came in higher this quarter, rising to 5.78% of average loan receivables, up from 4.65% in the year-ago period. Management noted on the conference call that newer vintages (cards and loans issued more recently) are performing better than older cohorts. Synchrony Financial made changes to its underwriting standards in the second half of 2016 in light of worsening credit performance.
  • Provisions for loan losses increased 25.8% year over year in the fourth quarter; Synchrony Financial has generally accounted for higher credit losses throughout 2017. Its allowance for loan losses now stands at 6.80% of loans, up from 5.69% a year ago, and down slightly from 6.97% in the third quarter.
  • The company renewed relationships with Men's Wearhouse, Home Furnishing Association, and Bosley, among others. Synchrony Financial generates most of its loans from store credit cards and consumer financing offered in retail stores, so it's good to see that retailers stay with it as a financial partner.

What management had to say

In the press release, CEO Margaret Keane said:

We are making investments in our robust data, analytics and digital capabilities, further enhancing the experience of our partners and cardholders. And we are supporting our business with continued growth in our direct deposit platform. We accomplished all of this while maintaining a strong balance sheet and returning capital to shareholders through growth and the execution of our capital plan.

In my view, the most interesting tidbit from this quarter was Synchrony's commentary surrounding purchase volume by credit score cohort. The fact that purchase volume among truly prime credits (those with FICO scores above 721) grew 10% while volume declined 13% for customers with sub-620 credit scores may offer a clue about why the company believes net charge-offs should moderate in the quarters to come. 

Looking ahead

Synchrony Financial expects rapid loan growth in 2018, driven primarily from its acquisition of a PayPal loan portfolio that it expects to close in the third quarter of 2018. For the full year, Synchrony Financial guided for loan receivables growth of 13% to 15% including PayPal, and 5% to 7% excluding that transaction.

The company also expects net charge-offs to level off at 5.5% to 5.8% of loans in 2018, slightly higher than the 5.4% of loans it charged off in 2017. As credit quality is by far the most important metric for any lender, investors will want to see that Synchrony's actual loan performance matches its guidance for the year ahead. 

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