Leading into Friday's earnings report, Synchrony Financial (NYSE:SYF) shareholders knew it wasn't going to be an ordinary one. The day before, The Wall Street Journal broke the news (subscription required) that it lost a relationship with its largest retail partner, Walmart, putting all the focus not on what it earned in the second quarter, but how it would handle the loss going forward.

Synchrony later confirmed that it couldn't reach a deal to renew its relationship with Walmart, which is responsible for about 13% of its loan portfolio. The retailer decided to partner with Capital One, marking the end of one of Synchrony's largest and longest-running partnerships.

Here's what happened in the second quarter, and what's in store in the quarters ahead.

Synchrony Financial's second quarter: The raw numbers


Q2 2018

Q2 2017

Year-Over-Year Change

Purchase volume

$34.3 billion

$33.5 billion


Loan receivables

$78.9 billion

$75.5 billion


Net income

$696 million

$496 million


Diluted EPS




Data source: Synchrony Financial.

What happened with Synchrony Financial this quarter?

Synchrony Financial's second-quarter earnings report showed steady gains in purchase volumes and loan receivables, as well as some notable improvements in credit quality. Here are the key figures from the second quarter:

  • Loan receivables grew modestly to $78.9 billion at quarter-end, up 4.5% from the year-ago period and 1.3% sequentially. Purchase volume increased by 2.4% year over year to $34.3 billion in the second quarter. 
  • Loan losses moderated in the second quarter. Synchrony Financial's net charge-off ratio fell to 5.97%, down from 6.14% in Q1, but up from 5.42% a year ago. Importantly, loans 30-plus and 90-plus days past due declined quarter over quarter.  
  • Even as credit metrics show signs of improvement, Synchrony continues to build larger reserves for losses. The company's allowances for loan losses now stand at 7.43% of period-end loans, up from 7.37% last quarter and 6.63% in the year-ago period.
  • The company continues to shift toward higher-FICO cardholders. Purchases by customers who had a FICO credit score of 721 or better increased 8% compared to the prior-year period, while purchase volume among customers with sub-660 scores declined by 13%. 
  • The PayPal loan portfolio was brought on the balance sheet shortly after the quarter ended, on July 2. Synchrony Financial purchased the $7.6 billion book of receivables, extending its co-branded card program with the company and becoming the exclusive issuer of the PayPal Credit online consumer financing program in the United States.

What management had to say

Not surprisingly, Synchrony's relationship with Walmart dominated the conference call discussion between analysts and company management. As a private-label issuer of store cards, losing Walmart, the biggest retailer of them all, to Capital One certainly wasn't the kind of news investors take in stride. 

Close-up shot of a credit card.

Image source: Getty Images.

From here, management said that there are two possibilities for the $10 billion Walmart portfolio: It may be simply sold to a new issuer (Capital One), or Synchrony could retain the portfolio, and try to move those cardholders to a general purpose card that can be used anywhere. When Toys R Us went under, Synchrony offered a 2% cash back credit card to its cardholders in its place.

When pressed, management didn't explicitly say which outcome it preferred for the Walmart portfolio, but it did highlight the opportunities and challenges with each. Synchrony's chief financial officer, Brian Doubles, offered some clues about how selling the portfolio would free up capital on the company's balance sheet to repurchase stock, grow its other portfolios, or pursue mergers and acquisitions:

Given the size of the Walmart portfolio of approximately $10 billion this would be around $1.5 billion of capital freed up. There is also the potential gain on the portfolio as well as releasing the reserve held against the portfolio. While we don't know the specifics at this point, we estimate approximately $2.5 billion could potentially be available to buy back shares or utilize on higher-returning alternatives.

On the other hand, Doubles said that retaining the cardholders has its advantages, too, helping Synchrony diversify its portfolio with cardholders who aren't chained to one specific retail partner, among other benefits:

Under this scenario we would begin the conversion of qualifying accounts as early as the first quarter of 2019. For accounts that are not initially converted to a general-purpose card, those cardholders can continue to use their cards at Walmart over the next three years and we will receive royalties from Walmart for card usage over this period.

Regarding the brand marketing of the general-purpose card as well as loyalty costs associated with our offering a very attractive value prop on the card, these costs will be more than funded by the economics we now retain that previously were being shared with Walmart as well as the interchange fees we earn on card usage.

In either case, management believes ending its relationship with Walmart was a net positive, noting that the renewal terms were not particularly attractive. Doubles said, "[U]nder the old agreement we were earning an acceptable return for that risk [with the Walmart portfolio]. In the renewal discussions it became clear that we weren't going to be able to maintain that acceptable return level for the risk that we were taking."

Looking ahead

To be sure, the loss of the Walmart partnership is big news for Synchrony. Sized at about $10 billion, the Walmart book makes up about 19% of Synchrony's store card portfolio, and roughly 13% of its total loan portfolio.

In addition, it calls into question whether or not Synchrony can retain its relationship with Sam's Club, a portfolio of loans worth about $8 billion, according to a Bloomberg report. In all, Walmart and Sam's Club make up about 23% of its loan portfolio.

Whether Synchrony ultimately sells the Walmart portfolio or attempts to retain the customers with its own general purpose cards won't be decided until later, and Synchrony isn't calling the shots. Capital One will have the option to buy the portfolio or let Synchrony hold onto it.

Shareholders have to see how the transition shakes out, but management believes that letting Walmart go rather than competing aggressively for the relationship was the right thing to do.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.