Synchrony Financial (SYF) 2015 Q1 法說會逐字稿

Welcome to the Synchrony Financial first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations. Mr. Ketron, you may begin.

Thanks, operator. Good morning everyone and welcome to our first-quarter earnings conference call. Thanks for joining us this morning.

In addition to today's press release we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website.

Before we get started I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings which are available on our website.

During the call we will refer to non-GAAP financial measures in discussing the Company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call.

Finally Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

Margaret Keane, President and CEO, and Brian Doubles, Executive Vice President and CFO, will present our results this morning. After we complete the presentation we will open the call up for questions.

Now it's my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone. Thanks for joining us today.

I'll start on slide 3. The overall fundamentals of the business remain strong in the first quarter with net earnings of $552 million or $0.66 per share. Our growth drivers continued their solid trends helping to drive purchase volume growth of 10%, loan receivables growth of 7% and platform revenue growth of 5%.

We are seeing the impact of compelling new value propositions such as the Sam's Club 5-3-1 cash back program which was recently recognized with a Payments.com innovator award. Programs like this demonstrate the impact of engaging deeply with partners to help them develop innovative and effective ways to drive sales. Our focus on enhancing value for our partners and cardholders through digital offerings has also helped to drive significant increase in online purchase volume.

For the first quarter digital purchase volume increased 18% compared to prior year. I will spend a few moments this morning outlining how our digital, loyalty and analytics capability are bringing value to our partnerships.

Asset quality improved with a 33 basis point decline in the net charge-off rate and a 30 basis point improvement in delinquency. Expenses were in line with our expectations, impacted by investments being made to support the buildout of our standalone infrastructure as well as to help grow the business.

We continued to generate solid deposit growth with deposits increasing $8 billion, or 28% over the first quarter of last year to $35 billion. Deposits now comprise 59% of our funding sources. And our balance sheet remains strong with Tier 1 common capital of 16.9% and liquidity of $14 billion at quarter end.

Moving to our business highlights, we continue to capitalize on new business opportunities forging partnerships across all three of our platforms. We extended our partnership with Amazon and now over 85% of retail card receivables are under contract to 2019 a beyond.

We also announced a new top 40 agreement with Guitar Center, the world's largest provider of musical instruments and recording equipment which we expect to launch in the second half of this year. Additionally we launched a new CareCredit exclusive endorsement agreement with VSP, the nation's largest vision insurance provider.

We are excited about these new partnerships and our ability to bring significant value to these relationships. At the same time we still have a meaningful opportunity to drive organic growth and we continue to pursue initiatives to promote card usage and deepen penetration. Also, further progress has been made in our efforts to prepare for separation and we are on track to have the application submitted to the Fed in the second quarter.

Our plans have not changed with GE's announcement last week that they are reducing the size of GE Capital's asset base. We continue to target separation by the end of this year.

Moving to slide 4, I want to spend the next few minutes outlining the achievements we have made to expand the value we deliver to partners and customers specifically as it relates to our digital, loyalty and analytics capabilities. We have long viewed online and mobile as important channels for our business. These channels have evolved considerably over the last several years and will continue to evolve.

As customers' shopping behaviors have increasingly moved to digital the importance of credit has followed suit. Our digital strategies have helped drive a market increase in online and mobile purchase volume which is up 18% from last year and nearly a third of our credit applications are done through digital channels.

Our mobile capabilities cover the entire credit lifecycle from acquisition to servicing to loyalty and payments. Our offerings include MFI which allow shoppers to securely apply for credit on their mobile device and instantly access their approved credit line. We also offer mService which allows customers to pay bills and service their accounts on their mobile device including obtaining their rewards.

During the first quarter we announced that our mApply product would be available to our payment solution customers. Since launching mobile applications in 2011 we have processed nearly 5 million applications through this channel for our retail card, CareCredit, and now our payment solutions platform.

We also offer digital card, a proprietary digital version of our cards that enables in-store account look up and mobile payment functionality. Piloted in 2014, the digital card leverages geolocation for authentication and home screen icon for easy access post-enrollment for participating retailers.

In March we announced that we extended our digital card to our CareCredit platform enabling access to a digital version of our CareCredit card on their mobile device. Since nearly half of all CareCredit purchase volume is from existing cardholders this was an important initiative. This coupled with our CareCredit online provider locator which receives 600,000 hits monthly provides a powerful tool for increasing repeat purchases in this platform.

Mobile wallets are an important development in the mobile payment space and we are excited to announce our participation in Samsung Pay leveraging both MST and NFC technologies. Samsung Pay is accepted at 90% of retail merchants and allows our partners and customers to access the unique features and benefits of our cards.

As you know we also announced our participation in Apple Pay and we have partners that are engaged with MCX and their currency platform. So we plan to support that technology as well. Through our innovation and strategic partnerships we have developed a mobile platform that can rapidly integrate with mobile wallets while preserving the benefits of our cards.

We recently made a strategic investment in GPShopper, an innovative developer of mobile apps with a focus on the retail industry. This partnership helps us build on our existing mobile platform to more easily integrate credit into the shopping experience with personalized offers, enhanced account servicing and loyalty programs. We continue to design and launch new loyalty and value propositions for our partners.

We are enhancing our loyalty capabilities by leveraging Kobie's Alchemy platform to provide multi-tender loyalty programs allowing us to create a single, seamless, fully integrated loyalty solution regardless of tender type. Multi-tender loyalty programs will enable our partners to market to an expanded customer base, give our cardholders access to a more seamless loyalty rewards program and it allows us to access the additional prospective cardholders.

Our analytics capabilities are an important component of the value we bring to our partner and customers. Currently we receive SKU or category level data on over half of all transactions that occur on our network. We offer our retailers actionable analytics, market research and creative services to help them drive sales.

Our data access affords us a wide array of opportunities to better analyze cardholders' spending patterns to understand what they are buying and how they are shopping. We then work with our partners to customize offers that will increase engagement, sales and loyalty.

Underlying our ability to provide distinct value to our partners and cardholders is our proprietary closed-loop network. Our private label and co-branded dual cards run on our network which means that the transaction comes directly to us enabling us to see the date of the purchase, name of the retailer, what brand and items were purchased and the channel through which the transaction occurred, in-store, online, or via a mobile device. The volume of data to which we have access is immense and we have built the capabilities to transform this information into actionable insights.

In summary, we will continue to seek ways to build, partner and invest in the latest technologies to further benefit our partners and customers. It's an exciting time in the evolving digital landscape and we are committed and positioned to continue to deliver value.

Slide 5 highlights the performance of our key growth metrics this quarter. Purchase volume was $23 billion, an increase of 10% over last year. This helped drive loan receivable growth of 7% to $58 billion.

Our average active accounts were up to 62 million, a 4% increase from last year. And platform revenue was up 5% over the first quarter of last year. Many of our partners had positive growth in purchase volume and we continue to drive incremental growth for our value propositions and promotional financing offers.

On the next slide I'll spend a few minutes discussing the performance with each of our sales platforms before turning it over to Brian to give you more details on our financial results. We delivered solid performance across all three of our sales platforms in the first quarter. Through our retail card platform we offer private label credit cards and our proprietary dual cards as well as small business products.

The addition of BP which we announced last quarter will bring us to 20 retail card partners nationwide. Our retail card platform accounts for 68% of receivables and 69% of platform revenue. Our retail card performance was strong with purchase volume growth of 10%, receivable growth of 7% and platform revenue growth of 5%.

Renewing and extending our programs have been a key priority in this business and as I outlined earlier, we have been very successful in this regard and we now have over 85% of our retail card receivables under contract through 2019 and beyond. The strong position we maintain in this space and the partnerships we have developed provide a solid foundation for future growth.

Payment solution which accounts for 20% of our receivables and 15% of our platform revenue is a leading provider of promotional financing for major consumer purchases primarily in the home furnishing, consumer electronics, jewelry, automotive and power product markets. Purchase volume was up 10% and average active accounts were up 8% over the same quarter last year driving receivable growth of 11% and platform revenue growth of 8%. The majority of our industries had solid growth in both purchase volume and receivables including home furnishings, automotive products and power equipment.

We recently signed a new partnership with Guitar Center and expanded our top 40 partnerships with MEGA Group USA, a 1,700 member national home furnishings buying group of independent retailers. We also extended our Pep Boys partnership, a key partner in our CarCareONE auto network. We continue to actively pursue a solid pipeline of potential new partnership opportunities in this platform.

CareCredit, which accounts for about 12% of our receivables and 16% of our platform revenue, is a leading provider of financing to consumers for elective healthcare procedures that include dental, veterinary, cosmetic, vision and audiology services. Our partners in this platform are largely individual and small groups of independent healthcare providers. The remainder are national and regional healthcare providers.

During the quarter the majority of our specialties showed year-over-year growth in both purchase volume and receivables with dental and veterinary turning the highest receivable growth. Purchase volume and average active accounts both increased 6% helping to drive receivables growth of 4% and platform revenue growth of 5% over the same quarter of last year. Across each of our sales platforms we delivered solid performance and continued the momentum of signing new partners, renewing and extending partners and working to drive organic growth.

I'll now turn the call over to Brian to provide a review of our financial performance for the quarter.

Thanks, Margaret. I'll start on slide 7 of the presentation.

In the first quarter the business earned $552 million of net income which translates to $0.66 per diluted share in the quarter. Overall the Company continued to deliver strong top-line growth with purchase volume up 10% and receivables up 7%.

Net interest income was up 5% compared to last year. This includes the impact of higher interest expense driven by the funding that was issued to increase liquidity in the third quarter last year.

Interest income was up 7% which was in line with our receivables growth. RSAs were up $66 million or 11% driven by growth in the programs and improved credit performance compared to last year. RSAs as a percentage of average receivables were 4.5% for the quarter consistent with the trends in both 2014 and 2013.

We do expect the RSAs to trend just under the 4.5% level for 2015 consistent with what we communicated back in January. The provision declined $77 million or 10% compared to last year. The decrease was driven primarily by improving asset quality trends.

There are a couple of things worth pointing out here. First 30-plus delinquencies declined 30 basis points versus last year to 3.79%. And the net charge-off rate fell to 4.53% which is 33 basis points below last year.

Our reserve coverage was fairly consistent compared to the first quarter last year, up slightly from 5.52% to 5.59%. Measured against the last four quarters of net charge-offs the coverage remained relatively stable at 1.26 times.

Other income decreased $14 million versus last year. The main driver here is higher loyalty expense related to the new value propositions we launched in the third quarter of last year.

Interchange was up $24 million driven by continued growth in out-of-store spending on our dual card. This was offset by loyalty expense that was up $35 million primarily driven by the new value propositions.

As a reminder we run the interchange and loyalty expense back through our RSAs so there is a partial offset on each of these items. Debt cancellation fees of $65 million were down $5 million from last year due to the fact that we only offer the product now through our online channel. Other expenses increased $136 million versus the first quarter last year.

Last year's results included a $44 million benefit related to a reduction in reserves for certain regulatory matters. Adjusting for that expenses were up $92 million or 14%. The remaining increase was due to three main drivers all of which are consistent with prior quarters.

First, we're making investments to support ongoing growth particularly in our retail card programs. As many of you are aware we have completed long-term extensions with many of our large partners and as part of those renewals we set aside more dollars in the marketing and growth funds to support those programs.

Second, we also launched our new branding campaign in September and continued our marketing efforts with a focus on our deposit products. And lastly we continued to invest in the infrastructure build as we execute our plan to separate from GE.

So overall the business had a solid quarter. We had strong balance sheet growth and good top-line growth generating an ROA of 3%.

I'll move to slide 8 and I'll walk you through our net interest income and margin trends. As I mentioned on the prior slide interest income growth was strong at 7% in line with our receivables growth. This was partially offset by higher funding costs related to the additional liquidity we are carrying on the balance sheet compared to last year.

The net interest margin declined to 15.79% which was a little better than our expectations. This was due to using some of the liquidity that seasonally builds up in the first quarter to pay down the bank term loan facility and pay off the GE Capital loan. I will cover this later when I discuss our funding profile.

As you look at the net interest margin compared to last year there are a few dynamics worth highlighting. The majority of the variance, approximately 250 basis points, was driven by the build in our liquidity portfolio. We increased liquidity on the balance sheet to nearly $14 billion which is up $9 billion versus last year.

We have the cash conservatively invested in short-term treasuries and deposits at the Fed which results in a lower yield than the rest of our earning assets. The yield on our receivables decline 34 basis points as a result of slightly higher payment rates in the quarter compared to last year and the impact of portfolio mix given the strong growth we're seeing in our promotional offers and payment solutions. As Margaret mentioned earlier, payment solutions grew receivables 11% over last year.

Lastly on interest expense the overall rate increased to 1.9%, up 28 basis points compared to last year. This was in line with our expectations given the changes in our funding profile.

I'll walk you through a breakdown by funding source. First, the cost of our deposits was relatively stable, up 9 basis points to 1.6%. The increase was driven by extending the average tenor of our direct retail CDs partially offset by growth in our lower rate savings account product.

Our deposit based increased $8 billion or 28% year over year. We continue to be very focused on growing our deposit base and making this a larger funding source going forward.

Securitization funding costs increased 20 basis points to 1.5%. This was driven by extending some maturities in our master note trust and the addition of $6.6 billion of undrawn securitization capacity. Our other debt costs increased 84 basis points to 3.2% due to the higher rates on the GE Capital and bank term loan facility as well as the unsecured bonds.

It's worth noting here that the majority of the new bonds we issued in the quarter are fixed-rate, so we've replaced some variable rate funding for long dated fixed-rate funding. This will benefit us in a rising rate environment.

Over the past several quarters our margin has changed significantly due to the factors I just mentioned. The primary drivers are the liquidity build and the cost of the new funding sources we put in place after the IPO.

While the first-quarter margin was a little above the range we set out back in January this was primarily driven by the benefit of using some excess liquidity to pay down the GE Capital and bank loans. Given we don't expect a similar benefit in future quarters we will likely see our margin move back into the 15% to 15.5% range we communicated back in January.

Next I'll cover our key credit trends on slide 9. But before I get to that I thought it would be helpful to provide some perspective on the seasonal trends that impact allowance coverage from the fourth quarter to the first quarter.

As you'd expect we typically see a significant receivables build during the holiday season. The allowance coverage as a percentage of receivables typically comes down a bit in the fourth quarter as customers pay down a significant portion of the holiday balances in the first quarter and a higher proportion of delinquent accounts don't translate into losses.

Then in the first quarter as the holiday balances are paid down you will see the allowance covered revert back to levels more consistent with other quarters. As you look back at the 2014 allowance coverage this will give you a sense for the seasonality. The coverage was in the 5.5% range for the first three quarters very similar to our results this quarter.

So looking more specifically to the first-quarter results, as I noted earlier we continued to see stable to improving trends on asset quality. 30-plus delinquencies were 3.79% down 30 basis points versus last year. 90-plus delinquencies were 1.81% down 12 basis points.

We believe these improvements are driven at least in part by lower gas prices and generally a healthier consumer. The net charge-off rate also improved to 4.53% down 33 basis points versus last year. Lastly the allowance for loan losses as a percent of receivables was 5.59% which increased from the prior quarter for seasonality but was fairly consistent with the first quarter last year.

Another metric you can use to measure reserve coverage is to compare the reserve to the last 12 months charge-offs. We're currently at 1.26 times coverage which equates to roughly 15 months loss coverage in our reserve. This is also fairly consistent with the levels throughout 2014.

So overall we continue to feel good about the performance of our portfolio and the underlying economic trends we're seeing. So given those factors we believe that our credit trends will continue to be stable.

Moving to slide 10 I'll cover our expenses for the quarter. Overall expenses were in line with our expectations. As I noted earlier, last year's results included a $44 million benefit related to a reduction in reserves for certain regulatory matters.

After adjusting for that item, expenses were up $92 million or 14%. And this increase was driven primarily by incremental investments in our programs as well as the infrastructure we're building as part of our separation from GE.

Employee costs were up $46 million as we added additional employees over the past year to support growth in the business and the infrastructure build as we prepare for separation. Professional fees were up $32 million due to both growth in the business as well as the cost to separate from GE. Marketing and business development costs were essentially flat to last year.

We continue to invest in our programs and our marketing efforts around our deposit platform as well as branding. However, given the significant success in growing deposits and the excess liquidity in the first quarter we did see an opportunity to dial back some of the marketing costs for deposits. Information processing was up $11 million on higher IT investment and transaction volumes compared to last year.

So overall our efficiency ratio was 32.2% for the quarter which is below the 34% target we provided back in January. We continue to believe we have a very scalable platform and while the efficiency ratio will climb modestly from here through the remainder of the year we expect to stay below our target level of 34%.

Moving to slide 11 I'll cover our funding sources, capital and liquidity position. Looking at our funding profile first, one of the primary drivers of our funding strategy is the continued growth of our deposit base. We view this as a stable attractive source of funding for the business.

Over the last year we've grown our deposits by $8 billion primarily through our direct deposit program. This puts deposits at 59% of our funding so we are well-positioned to meet our long-term target of being 60% to 70% deposit funded.

Funding through our securitization facilities has been fairly stable in the $14 billion to $15 billion range which is approximately 24% of our funding. We did issue $750 million of new debt in March. The debt was five-year fixed and priced at 2.37% which was a little better than we expected given the strong demand.

Our unsecured bond offerings have also been well received. In January we issued $1 billion of five-year unsecured bonds, $750 million of which was fixed-rate and priced at 2.7%. The remaining $250 million was floating-rate.

Lastly I want to highlight some recent developments related to the bank term loan facility and the GE Capital loan. First as we've said in the past our strategy is to continue to reduce our reliance on the back term loan facility and GE Capital for funding. These are more expensive forms of financing for us and not part of our long-term strategy.

So in the quarter we made $3.2 billion of prepayments on the bank and GE Capital loans. This included $2.8 billion of pro rata payments in January and February and then in March we made an additional $400 million payment on the GE Capital loan which paid the loan off in full.

Since the IPO we have paid down the bank and GE Capital loans from $9.5 billion to $5.7 billion today which is ahead of our original expectations. So we've really made a lot of progress on the strategy to reduce our reliance on these sources.

Overall we feel very good about our access to a diverse set of funding sources. We'll continue to focus on growing our direct deposit platform and using the proceeds from future unsecured bonds to further prepay the bank term loan facility.

Turning to capital, we ended the quarter at 16.9% Tier 1 common under Basel I. This translates to 16.4% common equity Tier 1 under the fully phased-in Basel III guidance.

And consistent with prior communications we do not plan to return capital through dividends or buybacks until we complete the separation from GE. So we do expect our capital levels will continue to increase during that time.

Post-separation we would expect to begin returning capital in line with our peers.

Moving to liquidity, total liquidity increased to $20.4 billion and is comprised of $13.8 billion in cash and short-term treasuries and an additional $6.6 billion in undrawn securitization capacity. This gives us total available liquidity equal to 28% of our total assets.

We expect to be subject to the modified LCR approach and these liquidity levels put as well above the required LCR levels. Overall we're executing on the strategy that we outlined previously. We've built a very strong balance sheet with diversified funding sources and strong capital and liquidity levels.

With that I will turn it back over to Margaret.

Thanks, Brian. I will close with a summary of the quarter on slide 12 and then we will begin the Q&A portion of the call.

During the quarter we exhibited strong broad-based growth across several key areas continuing the momentum we have generated over the last several quarters. We continue to make our cards valuable to consumers, retailers and merchants.

Notably in the first quarter we announced that our cards would be available in the new Samsung Pay mobile wallet leveraging the early investment we made in LoopPay. From a business development perspective we continued to win and renew important partnerships as well as sign key endorsements and maintain a healthy pipeline of additional opportunities.

Our focus is steadfast. We will continue to deliver value to our partners and customers by leveraging strong engagement, innovation and advanced analytics to drive growth.

At the same time we remain acutely focused on our preparation for separation from GE and look forward to providing you updates as we move closer to the finish line. I will now turn the call back to Greg to open up the Q&A.

Thanks, Margaret. That concludes our comments on the quarter. Operator, we are now ready to begin the Q&A session.

(Operator Instructions) Moshe Orenbuch, Credit Suisse.

Great, thanks. I guess you had 7% growth in receivables in the core platform and across the Company in what is now turning out to be a little bit more sluggish probably industry setting than we had been thinking just a couple of months ago. Can you talk a little bit about how much the industry setting affects that and what might happen if things were to get a little better from a consumer standpoint?

This is Brian. I think it certainly impacts it a little bit. Retail sales in January and February were pretty soft. They came back a little bit in March.

We saw a little bit of pickup as well in our sales which is maybe a positive. I don't think it's enough to really read too much into it.

If you look at our growth year over year certainly the value propositions that we rolled out in the third quarter helped us a bit. If you adjust for portfolio exit our active accounts were up 8%. We're also seeing pretty good purchase volume per active account.

It was up 6% versus last year, so that tells you that even though we're in a relatively weak retail sales environment consumers are still seeing real value on our cards and they are spending more on their accounts which is a positive. Online sales were up 18%. That continues to be a positive for us.

And then if we look at CareCredit and payment solutions specifically as we talked about in the past one of the things that's benefiting our results are a little bit is just the amount of reuse that we're getting on the cards. So reuse for CareCredit as a percent of purchase volume was about 49%. That's up from 45% last year so that continues to grow which is helpful.

Payment solutions reuse was 26% which is up a little bit versus last year as well. So a lot of what we're doing to market to consumers in both of those platforms and create awareness around where you can use the cards is helping.

As we said back in January, we were calling for retail sales to be in the 2% to 3% range. So our 6% to 8% receivables forecast was really based on that, so we didn't have we didn't really have a lot of lift in the numbers based on retail sales. So I'd say they are coming in maybe a little bit below what we expected but not that dramatically off.

Got it. Just on a completely separate topic, Brian, you mentioned marketing growth. It looked from the slides that the marketing expense actually was flat and that the was it in investments in other areas that were part of marketing?

Yes, so there's a couple of things going on there. If you look at just the marketing line we made continued investments in the programs but that was offset by lower marketing spend on retail deposits.

So one of the dynamics that you see when you look year over year when we were in the first quarter of 2014 we were really ramping up the deposit platform ahead of the IPO, we were spending a lot on marketing related to retail deposits. You fast-forward to the first-quarter 2015 and we were still growing retail deposits but we were in an excess liquidity position so we saw that as an opportunity to dial back a little bit on the marketing spend related to deposits. So what you really got is incremental investments in the programs offset by lower spend on retail deposits.

Great. Thanks very much.

Sanjay Sakhrani, KBW.

Thank you, good morning. I guess I had a question on liquidity. Understanding you guys want to stay on the conservative side could you just talk about how liquidity will ramp or not going forward just based on growth?

And then maybe how you might be able to reallocate some of the investments that you're investing in towards a little bit higher return by both assets? Thanks.

Sure. So it's a little bit going from the fourth quarter to the first quarter you're always going to see an increase in liquidity just given the paydown on receivables. So we definitely saw that in the first quarter.

We did use about $2 billion of that excess liquidity to make prepayments on the GE Capital and the bank loans. So as we said in the past if we have the opportunity to optimize the amount of liquidity that we're carrying we'll certainly look to do that. I wouldn't think about it going forward I wouldn't think about a step change either up or down in terms of the absolute amount of liquidity that we're holding on the balance sheet.

We're going to continue to run a very conservative balance sheet. We think that's prudent just given where we're still building a track record in the capital markets. We've got rating agency considerations, regulatory considerations, etc.

So I can tell you it's something we spend a lot of time on. We run a lot of internal stress tests. We obviously look at the LCR guidance.

That's clearly not a constraint for us. We're looking at our maturities coverage and then in quarters where we do think we have an opportunity to use some of that liquidity to take out some higher cost funding we will certainly look to do that.

The other thing that we're looking at right now we've got about $14 billion of liquidity, $4 billion of that is in short dated treasuries, $10 billion roughly is sitting in cash deposit at the Fed. We're clearly not earning a lot on that liquidity portfolio. I think that's an opportunity going forward if rates start to move we may look to do something a little bit different there.

We don't have any plans to invest in anything that's not a high-quality liquid asset and you get 100% credit for under the LCR guidance. But there's some opportunity to go out a bit on duration and pick up a little more yield. So you might see us do that in the future.

Okay, that's helpful. Just one quick follow-up.

Just on the opportunities out there for portfolio acquisitions within the private label area or co-brand area, maybe Margaret you could just talk about what's out there. I've heard there's a number of deals out for renewal at some point in 2016 through 2017. Do you guys have an eye on those as well? Thanks.

So actually we see that our pipeline is pretty strong. I think we mentioned we invested in additional business development resources and we've really aligned ourselves around the three platforms. So I would say from a pipeline perspective in all three platforms we feel pretty good.

I would also tell you that we're seeing opportunities to in really two key areas. One is the first one you're saying which is portfolios that are up for renewal that are with competitors that we can go after. And then the second is startups for us.

So I've mentioned in the past that we like startups. Many of our big portfolios that we have today were actually startups. So I think the team is diligently focused on growth.

I think for us the real opportunity is really ensuring that we pick those portfolios that really work for us. As we said in the past we have the biggest opportunity is really in organic growth, so as we continue to focus on organic we can be a bit choosier on the portfolios we go after to make sure they really align with the returns we're trying to achieve for the overall business.

Okay, great. Thank you.

Ryan Nash, Goldman Sachs.

Hey, good morning everyone. I just had a question on credit, the provision I think came in on the low end of expectations and your delinquency trends continue to show improvement.

And Brian I think you said your outlook is for relatively stable but how should we think about the trajectory of provisions for the remainder of the year? Should we expect to see losses show any further improvement and could we actually start to see the level of reserves coming down a bit just given the positive improvement in credit losses?

Yes, sure, Ryan. I think as I mentioned charge-offs for the quarter 30-plus, 90-plus were probably a little bit better than we expected. We do think we're getting a little bit of a benefit here on lower gas prices, improving employment helps but it's really one quarter so it's hard to draw much of a trend from it at this point.

The studies around gas prices say that consumers they are using 25% of those gas savings to reduce debt. We definitely feel like we're feeling a piece of that in the numbers.

That's why you see the reserve coverage has held pretty stable. We didn't make a big move up or down, it's 5.59%, it was really more or less flat to where we trended all last year, up a little bit for seasonality but very consistent where we were last year.

So I don't think -- we're not seeing anything absent a little bit of improvement from gas that would prompt us to call anything other than we think we're in a pretty stable environment right now. We don't see losses creeping up in the next 12 months. We don't see them getting a lot better from here, absent a significant change on gas prices.

Got it. And then just on your comment Brian about the NIM moving back into the 15% to 15.5% range, does that assume any further paydowns to the term loan and could we end up seeing more term loan paid down and maybe replacing that with deposits so we could actually see the NIM maybe running above the top end of the range?

Well, I would say, Ryan, we had kind of a base plan that assumed a certain level of prepayments on the bank loan. So that's already a portion of that's already incorporated in the guidance that we provided back in January.

Now in the first quarter we had an incremental opportunity to what we had originally forecast and we took advantage of that in the quarter. We don't see anything incremental to the plan right now but if we were to find ourselves with excess liquidity again our strategy is to make some additional prepayments if we can.

The bank term loan facility runs out until 2019. We're obviously going to prepay well in advance of that maturity. And we'll just go quarter by quarter here and see if we can lean into it a little bit more.

Got it. If I could squeeze one quick one last one in there. Margaret, just given what we've seen across the industry competitively you guys seem to be in a very good position in terms of your maturities and your partnerships but has there been any consideration to trying to extend some of your bigger partnerships to lock in the relationships?

Well, you know, I think we mentioned that we actually had locked in many of our relationships as we were going through the IPO process and into this year. So we're always looking at ways to extend our partnerships and usually something pops up along the way where whether it's a new product they want to roll out or maybe a different value prop, so it's kind of how we run the business.

We're always looking at ways to really expand and expand the relationships. Right now we feel pretty good where we are. 85% of the retail card relationships are locked up 2019 and beyond.

We just did Amazon which was a really nice win for us. There are a couple more we're working on so I think this is how we run the business and always looking to see how we can lock those up for a longer term.

Thanks for taking my questions.

John Hecht, Jefferies.

Yes, good morning, thanks for taking my questions. A little bit follow-up to Moshe's question on growth. Is there any way to attribute either the loan growth or the purchase volume growth to increase penetration in various accounts versus average balance trends at the customer level?

You know, I would say if you look at the industries or the platforms themselves we actually saw a very nice growth in our payment solutions business. And a lot of that was actually attributed to things related to housing so we saw good and solid furniture sales, auto, our auto business as well in that vertical as well.

So I think the positive is that it seems like consumers are back spending on their home and reinvesting in their home. So we see that as a positive trend. I'd turn it over to Brian to see if he would add anything else on penetration.

Well I think the other thing that might just be helpful is to describe a little bit how we measure our platforms. So if you take retail card we start at the beginning of the year with a sales plan for the retailer that we work with them on and then we measure those retail programs based on gaining penetration.

So if the retailer is growing 2% we're looking to grow sales on our card at least 4% to 6%. And that's how we measure ourselves.

So if you think about how we built the plan it assumed generally retail sales 2% to 3% and purchase volume for us was 10%. And the delta there is largely tender shift from general-purpose card, other payment types on to our card.

That's great color. Thanks. And a little bit of a homework question that I know I can get from the 10-Q but if you have it handy do you have the net charge-offs on cards versus installment loan versus commercial credit handy?

I don't think we report that separately.

Okay. Thanks very much.

Don Fandetti, Citigroup.

Yes, Brian I guess at this point the most probable scenario is you would be regulated at the savings and loan. Is there any chance that you would have to go through formal CCAR and then can you talk a little bit more specifically about a targeted payout ratio as the card issuers tend to have much higher payout ratios than some of the banks?

Yes, Don you're right we will be regulated as a savings and loan holding company, so we're not technically subject to CCAR. It will be up to the Fed on what they want to put us through.

I can tell you, though, that we've been preparing as if we will be subject to CCAR so we're running the same stress tests, using the same assumptions, building the same models. We're putting in the same governance processes around our stress tests and our capital plan.

And so that's how we're preparing and we do think that whether or not we're subject to the formal CCAR, the Fed is very likely going to regulate us just like they regulate similar banks of our size. So that's our plan. (multiple speakers)

Sorry. Go ahead.

In terms of a payout ratio expectation I think there's a couple of things. Obviously we don't report anything publicly on our stress test so it's tough to get into a lot of detail but there are a couple of things to think about.

First we're starting off with very strong capital levels. We reported close to 17% Tier 1 common.

Business generates very strong returns. The business model is fairly resilient in the stress similar to what you see from the other credit card peers.

So we think we perform in a very similar fashion and over time we would expect to have payout ratios that look very similar to our peers. Did you have one other question?

Yes, Brian, thank you. Margaret, is there any update on a potential general-purpose card issuance and then maybe other additional businesses given the success of your bank so far?

I didn't hear the second part.

In terms of any other potential products that you may look at given the bank's success in the ramp up.

Sure. So we've mentioned in the past that we would like to launch a general-purpose Synchrony Financial card to our bank. The teams are evaluating that and working on it.

It will be probably more of a 2016 launch than 2015 launch but the team is working on that. In terms of other products I think we said we're really looking at the bank platform as a way to launch some other products like checking, debit, bill pay.

So that's another whole area the team is working on. Again I think that will be more of a 2016 launch but plans are in place for that in the teams are hard at work figuring out the right way to do that.

Thanks.

Betsy Graseck, Morgan Stanley.

Hi, good morning. Just two questions. One was on the NIM pressure that came from receivable yield and I know you highlighted that that was in part from growth in promotional balances.

So I just wanted to get a sense of how you're thinking about promotional balances. Is it a little bit more seasonal in the first quarter or should we anticipate a ramp as we go through the year? Just a little bit of color on how you're thinking about that.

We tied it to promotional balances. It's really driven by payment solutions just having a really great quarter and a lot of growth year over year. They were up 11% and if you look at payment solutions yield just compared to the average for the portfolio or compared to CareCredit or retail card it is a lower yielding book.

So that's the biggest driver. I wouldn't assume a ramp or seasonality in that Betsy. I think payment solutions growth was just a little bit better than we expected which drove a little bit of that yield decline.

Then the other factor that did have an impact in the quarter is we did see some higher payment rate, lower delinquencies. That obviously has an impact on yield as well. So those are really the two drivers.

So high-quality problems?

It's a high-quality problem, we agree.

Okay. And then separately on the plan of shifting more private label card to dual card could we talk a little bit about the plans and strategies of the rollout for that and should we be baking in an acceleration in the models?

I wouldn't bake in an acceleration. I think what we're always looking to do is look at growth both from our private label and dual card. One of the things we're always looking at is getting more of our partners to participate in the dual card and there are still some opportunities there that we're working through.

Dual card definitely is a positive for us in terms of driving growth on the overall portfolio. And the other positive it gives us is when we can offer both products in a partnership, a private label and dual, if we were to hit a cycle or a bump we can always just shift to giving out more private label credit cards to ensure we get the customer a card in their hand but really protect us on the backend from losses. So that's kind of our strategy and how we think about dual card.

Okay. And you get some nice fee bump on the dual card as well. So again just thinking out loud about how to model that, should we take in kind of the growth rates that you've been generating recently or do you anticipate that there's going to be an acceleration there and I guess your point is it's more steady-state than acceleration?

Yes, this is a strategy that we've had in place for four years where we start consumers off with a lower line on PLCC and we upgrade them over time and that strategy has been pretty consistent. If we were going to change that in the future and do something big we would obviously come and we would describe it at that point. But it really is something that's been fairly consistent I'd say over the last three or four years.

Okay, thanks a lot.

Kevin St. Pierre, Sanford Bernstein.

Good morning. If we could just approach the competition for existing portfolios from a different perspective there's been a lot of news flow over the past year-plus about retailers looking for potentially a credit utility to use a term that American Express put out there. Are you seeing any shift in your conversations or shift in the market towards retailers who are just looking for the best possible terms for themselves or has nothing changed in your mind?

You know, we haven't really seen a change here. What I would say is that the retailers that we talk to are the partners that we're going after.

The number one thing the retailer really wants is for us to describe how we're going to bring more sales in and how we're going to bring more customers and how we're going to have their customers be more loyal. And they really first start off by focusing on our capabilities and I think things like mobile becoming a much more important aspect of their business as well is where we can come in and help them from a data analytics perspective helping them do the marketing campaigns and really driving sales.

We have not seen that shift where they are asking for things that would be outside of the normal things we would do in a standard contract. So I haven't really seen any of that in any of the conversations that we've had.

Okay, great. And separately on the deposit platform obviously strong growth year over year kind of flattish quarter to quarter but as you said you sort of backed off a bit in the marketing. Do you have any sense or any metrics you could share with us in terms of marketshare gains either of deposits or deposit growth and how you're of faring against other direct deposit gatherers?

We're definitely taking share. I don't have a specific number for you but our growth rates have far outpaced direct, other online direct retail program growth rates. So that continues to be a big focus for us.

So we've been very pleased by the growth that we're seeing. I'd say we're also the other place we're really focused is on retention rates and the retention rates on our CDs. When we bought the platform from MetLife back in January of 2013 retention rates were around 80%, they are up to 88% today so there's evidence that our efforts there are definitely paying off.

We rolled out a loyalty program where our deposit customers depending on how much they have deposited with us and how long they have been a customer they get access to travel savings and benefits. And so we think it's really a combination of paying attractive rates, getting the right advertising program in place but then also offering something else as part of the equation. And that's what we're trying to do with the loyalty programs that we've rolled out.

Great, thanks very much.

David Ho, Deutsche Bank.

Hi, good morning. Just going back on the competitive environment any view on the emerging online lenders and marketplace lenders looking into obviously disrupt some of your channels like CareCredit and point of sale financing and also there is obviously more talk about coalition partners in the US. Do you see that as a threat or on the flipside potentially an opportunity for you guys?

Sure. I will take them separately. So the first one, you know I would say we see competition really holding the way it's been through the cycle and our pipeline continues to be strong.

So we're not feeling some of the pressure that I think others are seeing out there particularly on the bigger transactions. So for us as I said earlier our pipeline is really robust, we see it strong in all three platforms and we feel really good about where we're positioned.

I think on the coalition question I think it's a really good question. We have some experience in coalitions.

We have a network called CarCareONE which actually is a network comprised of our retail partners that are in the auto space if you will and that coalition actually has turned out to be a very positive for us. We're seeing nice growth in that and that's where your card can be used in multiple places, so if you have a Pep Boys card for instance you can use it in some of the other retail auto retailers that are in that coalition. So we like this concept.

It's something that we're evaluating to see can you expand that into other verticals. Is there for instance an opportunity in a home vertical for instance is something we've been talking about?

We're definitely keeping our eye on this. I think as consumers shop they continue to look for opportunities, rewards and feeling like they need some little lift to shop so things like creating a coalition and offering rewards across networks I think is really important.

In terms of the competition from some of these online states we're really not feeling the pressure from them. I think their products are different, their installment products not revolving. I think Brian mentioned earlier particularly in our CareCredit business we're seeing multiple reuse of our card so we've really been able to really gain brand in the marketplace.

And then lastly in terms of how they have to sell into the market they have to actually sell -- in the CareCredit space you're actually going dental office by dental office to try to create an overall business. So we've been at this for over 25 years and we think it's going to take them a little bit a while to catch up to us. So we feel pretty confident about where we are against those competitors.

Great, thank you very much. That's helpful.

Operator, we have time for one more question.

James Friedman, Susquehanna.

Thanks, Greg, for working me in. Margaret, in your opening remarks you had commented about some of the growth in digital referencing slide 4. I realize in the footnotes it says digital is both online and mobile.

I was just wondering if you could parse those a little bit? What do you see in terms of the dynamics of mobile versus online? If you could share with us that that would be helpful.

You know, it's hard to break that out. We're working on trying to figure out if we can get that metric because we go by device and so for instance your iPad looks like an online versus a mobile phone. So it's a little hard for us to break that out.

What I would suffice it to say we think a lot of that is happening on more of the mobile side and the iPad side of things if you will. So a little hard to break that out. But needless to say I think all of us now if you just go I know by me how I shop I think more and more this is a big growth area for us and something that we continue to have to really make that experience for that customer pretty seamless.

Just one quick follow-up. You say that the digital growth was 18% year over year.

Is that a lot or a little? Could you give us a reference point as to what it was previously? Is it accelerating?

We think it's pretty decent. If you look at it compared to what there's a metric out there that says overall in the US it grew 15%, we grew 18% so we think we're beating out what the norm is. So that's a measure to go on.

I think again it just continually grows quarter over quarter and it's not only on sales. We see it on everything.

The number of logins, the number of people who are on mService now, the number of people who start mobile and only use mobile in terms of mService. So for us it's just a metric we continue to watch and know that it's a very important one and one that just continues to grow from all aspects of the platform.

Thank you.

All right, thanks everyone for joining us on the conference call this morning and your interest in Synchrony Financial. The Investor Relations team will be available to answer any further questions you may have and have a great day.

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