Synchrony Financial (SYF) 2015 Q2 法說會逐字稿

Welcome to the Synchrony Financial second-quarter 2015 earnings conference call. My name is Vanessa and I will be your operator for today's 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 second-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 the 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 Chief Executive Officer, and Brian Doubles, Executive Vice President and Chief Financial Officer, 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 begin on slide 3. The overall fundamentals of the business remained strong in the second quarter, with net earnings of $541 million or $0.65 per share. We drove strong growth again this quarter with purchase volume up 11%, loan receivables growth of 12%, and platform revenue growth of 9%.

We continue to see the impact of offering compelling value propositions, including our Sam's Club 5-3-1 cash-back credit card program and the Amazon 5% reward program, wherein Amazon Prime customers receive 5% back every day on their Amazon store card purchases. In addition, we rolled out an attractive new value proposition through a driver rewards and loyalty program with BP, a new partner which we've onboarded this quarter; and we also announced a new rewards program through our expansion with Chevron.

Asset quality improved with a 25 basis point decline in the net charge-off rate and a 29 basis point improvement in delinquencies. Expenses were in line with our expectations, impacted by investments we made to support growth and the buildout of our standalone infrastructure.

Our balance sheet remains strong, with a Common Equity Tier 1 ratio of 17.2% and liquidity of $14 billion at quarter end. We continue to generate solid deposit growth, with deposits increasing $7 billion or 24% over the second quarter of last year to $38 billion. Deposits now comprise 61% of our funding sources, within the lower range of our targeted 60% to 70%.

Our ongoing efforts to grow deposits and provide increasing value to our depositors with new features and enhancements are yielding results. To improve the online experience for our customers, we recently redesigned our online banking platform, building in new technologies such as a responsive Web design so that customers can have the same user experience regardless of which device they use. Popular features such as mobile check deposit, customized email alerts, and account balance snapshots are seamlessly integrated into the site.

We have also streamlined access to our [perks] loyalty and rewards program and completely redesigned our online account opening experience, demonstrating our commitment to bringing value and a great experience to our banking customers. During the quarter, we signed new partners across each of our platforms, extending key existing contracts, and made technology investments which are yielding innovative, value-added services for our customers and partners.

In fact, we were recently recognized by InformationWeek for our innovative mobile solutions across the entire credit lifecycle, ranking 48th on this year's InformationWeek Elite 100, a list of the top business technology innovators in the US. We were also recognized by CIO Magazine as part of their 2015 CIO 100 award program, which recognizes organizations worldwide that exemplify operational and strategic excellence in IT.

We announced several new partners. Among the biggest were Mattress Firm, the largest seller of bedding in the US; Newegg, a leading tech-focused e-tailer; and Stash Hotel Rewards, an award-winning loyalty program for independent hotels in the US and Caribbean.

And as I noted, we extended our partnership with Chevron, one of our 20 largest partners. With that we now have nearly 88% of retail card receivables under contract to 2019 and beyond.

Additionally, we renewed a CareCredit endorsement with the American Society of Plastic Surgeons. 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 across our partnerships.

The online and mobile channels are increasingly important channels for our business. As customer shopping behaviors have migrated to digital, the importance of credit has followed suit.

Our digital strategies have helped drive a marked increase in online and mobile purchase volume, which is up 20% from last year; and nearly a third of our credit applications are now done through digital channels. We have been working hard to ensure that the key benefits cardholders enjoy and the data our partners need are retained when transactions move to mobile devices.

The big question with enabling private-label credit cards in Apple Pay has been around whether the capture of valuable transaction data would still occur. I'm pleased to report that we have implemented a solution that will provide us and our retailers access to the same level of data on transactions that go through Apple Pay.

Another key point is that we've developed a mobile platform that can rapidly integrate across retailers and wallets, which will allow us to offer our unique value proposition to Apple Pay users. Benefits such as loyalty and rewards programs and point-of-sale discounts will be retained for our cardholders.

We were excited to announce this quarter that we will be among the first issuers to offer private-label cardholders the ability to add their cards to Apple Pay. And JCPenney will be the first of our partners to offer its private-label cardholders the ability to make purchases with Apple Pay.

We are also finalizing preparations to enable our private-label and Dual Cards in the CurrentC wallet, and anticipate the launch to occur later this year. And we are in active discussions regarding the integration of our private-label and Dual Cards with Android Pay.

We are pleased with the progress we have made on mobile wallets. The speed at which we been able to adapt to ensure our cardholders can use our cards in their wallet of choice, while maintaining the benefits for both cardholders and our partners, speaks to our commitment to being at the forefront of this evolving landscape.

Lastly, regarding our separation from GE, progress continued in the second quarter and we filed our application to separate on April 30. The Fed has assigned a dedicated team to us, and they have initiated their fieldwork which we expect will continue through the summer.

After they wrap this up, we expect that their findings will be submitted to the Board of Governors for review and decision. We believe that obtaining approvals to separate will be focused on our financial strength and the infrastructure we have built to be a standalone business.

Slide 4 highlights the performance of our key growth metrics this quarter. Loan receivables growth remained strong at 12%, primarily driven by purchase volume growth of 11% and average active account growth of 4%. Additionally, the close of the BP acquisition contributed to the growth.

Platform revenue was up 9% over the second quarter of last year. Many of our partners had positive growth in purchase volume, and we continue to drive incremental growth through strong value propositions and promotional financing offers.

On the next slide I'll discuss the performance within each of our sales platforms before turning it over to Brian to review the financial results in more detail. We continued to drive strong performance across all three of our platforms in the second 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 closed this quarter, brings us to 20 Retail Card partners nationwide.

Our Retail Card platform accounts for 69% of our receivables in platform revenue. Retail Card performance was exceptionally strong this quarter, with purchase volume growth of 12%, receivables growth of 14%, and our platform revenue growth of 10%.

We had strong receivables growth across our partner programs, and the addition of BP contributed. However, the majority of our growth continues to be organically driven.

In addition to adding new partners that are a good strategic fit, renewing and extending our programs is a key priority in this business. During the quarter, we extended another one of our top 20 largest partners with the renewal of the Chevron contract; and now nearly 808% of our Retail Card receivables are under contract through 2019 and beyond. The strong position we maintain in this space and the engaged partnerships we have developed provide a solid foundation for future growth.

Payment Solutions, 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. This platform also delivered another quarter of strong performance, with purchase volume and average active accounts each up 8% over the same quarter last year.

This drove receivables growth of 11% and platform revenue growth of 7%. The majority of our industries had positive growth in both purchase volume and receivables, including home furnishing, automotive products, and power equipment.

Both acquisition and renewals are also important in this business. We've had a lot of success on these fronts with the announcement of new partnerships such as Mattress Firm and Newegg, as well as a number of program extensions.

CareCredit, which accounts for about 11% 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.

Purchase volume was up 9% and average active accounts increased 6%, helping to drive receivables growth of 5% and platform revenue growth of 8% over the same quarter of last year. Receivables growth this quarter was led by our dental and veterinary specialties.

In addition to the important endorsement we renewed with the American Society of Plastic Surgeons, we also announced a new CareCredit partnership with Vets First Choice. With this program, CareCredit cardholders will be able to use their cards to pay for online purchases of pet medicines and diet food products at more than 10,000 veterinary practice websites nationwide.

Each platform delivered solid results and continued to make progress in the signing of new partnerships and the extension of existing programs while driving 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 6 of the presentation. In the second quarter, the business earned $541 million of net income, which translates to $0.65 per diluted share in the quarter.

We continued to deliver strong growth this quarter, with purchase volume up 11%, platform revenue up 9%, and receivables up 12%. Overall we're pleased with the growth we're seeing across the business.

We saw increases in both purchase volume per active account as well as our average balance per account. These are both good indicators that our value propositions are resonating with consumers and they continue to see real benefits when they use our cards. We also closed the BP portfolio acquisition in the quarter, which was a little ahead of schedule.

Net interest income was up 7% in the quarter. 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 9%, which is in line with our average receivables growth.

RSAs were up $31 million or 5% compared to last year. RSAs as a percentage of average receivables were 4.1% for the quarter, which was fairly consistent with the second quarter last year.

Going forward, we would expect our RSAs as a percentage of receivables to move back in the 4.5% range for the balance of the year. We typically see RSAs as a percentage of average receivables trend higher in the third quarter, as seasonally lower charge-offs lead to a higher RSA level.

The provision increased $59 million or 9% compared to last year. The increase was driven primarily by receivables growth.

The key asset quality metrics improved compared to last year. 30-plus delinquencies improved 29 basis points versus last year to 3.53%, and the net charge-off rate fell to 4.63%, which is 25 basis points below last year.

Our allowance for loan losses as a percent of receivables was down 10 basis points compared to the second quarter last year to 5.38%. Measured against the last four quarters of net charge-offs, the reserve coverage was 1.27 times. Overall, our reserve coverage metrics were fairly stable.

Other income increased $8 million or 7% versus last year, driven by strong growth in interchange revenue and a pretax gain of $20 million from two portfolio sales. This was partially offset by higher loyalty and rewards costs associated with program initiatives.

Interchange was up $31 million, driven by continued growth in out-of-store spending on our Dual Card. This was offset by loyalty expense that was up $31 million, primarily driven by the new value propositions. As a reminder, the interchange and loyalty expense run back through our RSAs, so there is a partial offset on each of these items.

Debt cancellation fees of $61 million were down $9 million from last year due to the fact that we only offer the product now through our online channel. Other expenses increased $8 million versus the second quarter of last year, primarily driven by growth in the infrastructure build, partially offset by a consumer remediation expense last year. We continue to make investments to support ongoing growth across all platforms and also had expenses related to the launch of the BP program, the EMV rollout, higher marketing in our programs, and technology to support our mobile wallet strategy.

The efficiency ratio for the quarter was 33.5%, which is in line with our annual guidance of below 34%. I'll cover the expense trends in more detail later. Overall we had a solid quarter with strong top-line growth generating an ROA of 2.9%.

I'll move to slide 7 and walk you through our net interest income and margin trends. As I noted on the prior slide, net interest income growth was strong at 7%.

Interest and fees on loan receivables was up 8%, 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 15.77%, which was slightly better than our expectations.

As you look at the net interest margin compared to last year, there are a few dynamics worth highlighting. The majority of the variance, 207 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 $7.5 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 is relatively stable, down 3 basis points compared to last year. This was the result of slightly higher payment rates in the quarter compared to last year.

Lastly on interest expense, the overall rate increased to 1.8%, up 20 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 10 basis points to 1.6%. The increase was driven by extending the average tenure of our direct retail CDs, partially offset by growth in our lower-rate savings account product.

Our deposit base increased $7 billion or 24% year-over-year. We're pleased with the progress we've made growing our direct deposit platform. Deposits are now 61% of our funding, which is in line with the target we set of between 60% and 70%.

Securitization funding costs increased 5 basis points to 1.5%. This was driven by extending some maturities in our master note trust and the addition of $500 million of undrawn securitization capacity. Our other debt costs increased 68 basis points to 2.8% due to the higher rates on the bank term loan facility as well as the unsecured bonds.

While the second-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 bank term loans. Looking ahead, we continue to expect that our margin will move back in the 15% to 15.5% range in the second half of the year.

Next I'll cover our key credit trends on slide 8. As I noted earlier, we continued to see stable to improving trends on asset quality. 30-plus delinquencies were 3.53%, down 29 basis points versus last year; 90-plus delinquencies were 1.52%, down 13 basis points. We believe these improvements are driven at least in part by lower gas prices and generally a healthier consumer, given the continued improvement in employment trends.

The net charge-off rate also improved to 4.63%, down 25 basis points versus last year.

Lastly, the allowance for loan losses as a percent of receivables was 5.38%, which was down 10 basis points from the prior year. If you measure the reserve coverage against the last 12 months' charge-offs, we're currently at 1.27 times coverage, which equates to roughly 15 months' loss coverage in our reserve.

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

Moving to slide 9 I'll cover our expenses for the quarter. Overall, expenses were in line with our expectations.

While reported expenses increased 1% versus last year, as I noted earlier we did have a $42 million consumer remediation expense in the second quarter of last year. Adjusting for this, expenses grew 7%, which is more in line with our receivables growth, but also included expenses associated with the infrastructure build as we prepare for separation from GE as well as startup costs to launch the BP program and our EMV rollout.

More specifically, the largest driver of the increase in expenses were employee costs, which were up $43 million as we added employees over the past year in key areas to support the infrastructure build for separation as well as growth of the business. Professional fees were up $11 million due to both separation-related costs and growth.

Marketing and business development costs were up $11 million as we continued to invest in our partners' program growth as well as marketing associated with our direct deposit products. Information processing was up $21 million driven by higher IT investment and transaction volumes compared to last year.

Other decreased $78 million versus prior year, primarily driven by the consumer remediation item I mentioned earlier, as well as the GE cost allocations last year that were replaced by expenses in other categories. The costs associated with the infrastructure build are now largely reflected in our run rate; and while we will have incremental expense in the second half of the year related to growth and the EMV rollout, as well as investments in our digital capabilities, we expect our efficiency ratio will be in line with our annual guidance of below 34% for the year.

Moving to slide 10, 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 has been the 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 $7 billion, primarily through our direct deposit program. This puts deposits at 61% of our funding, which is in line with our target of being 60% to 70% deposit funded.

While we have now moved within our target range, we expect to continue to drive growth in our direct deposit program by continuing to offer attractive rates and great customer service, as well as building out our digital and mobile capabilities. We're also looking at additional ways to increase the stickiness of this deposit base, including the rollout of new products later next year such as checking and bill-pay capabilities.

Funding through our securitization facilities has been fairly stable in the $14 billion to $15 billion range, which is approximately 23% of our funding. As we've said in the past, our strategy is to continue to reduce our reliance on the bank term loan facility, as this is a more expensive source of funding for the business.

We have continued to pay this down during the quarter, making a $500 million prepayment on May 5. Since the IPO, we have paid down the bank term loan facility from $8.2 billion last year to $5.2 billion today. We also completely paid off the $1.5 billion GE Capital loan last quarter.

So 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 17.2% CET1 under the Basel III transition rules, and 16.4% CET1 under the fully-phased-in Basel III rules. 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'd expect to begin returning capital in line with our peers.

Moving to liquidity, total liquidity increased to $19.8 billion and is comprised of $13.7 billion in cash and short-term Treasuries and an additional $6.1 billion in undrawn securitization capacity. This gives us total available liquidity equal to 26% of our total assets. We expect to be subject to the modified LCR approach, and these liquidity levels put us well above the required LCR levels.

So 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'll turn it back over to Margaret.

Thanks, Brian. I'll close with a summary of the quarter on slide 11, and then we will begin the Q&A portion of the call.

During the quarter, we exhibited strong growth across several key areas, making progress on several fronts and continuing the momentum we have generated over the last several quarters. We continue to make our products valuable to our retail partners, merchants, providers, and consumers by enhancing our capabilities, developing compelling value propositions, and creating innovative technologies such as our digital wallet capabilities.

We are happy to see our digital wallet strategy taking hold. We will be one of the first issuers to offer private-label credit cards on Apple Pay, and we recently launched our BP Dual Card in this digital wallet. We continue to win and renew important partnerships and maintain a healthy pipeline of additional opportunities.

And we are pleased with the ongoing success of our fast-growing deposit platform. With the application now filed we look forward to providing you updates as we continue to move closer to our separation from GE.

I'll 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) Mark DeVries, Barclays.

Yes, thank you. First question, interested to get any updated thoughts you may have on whether you will be included in the CCAR process following the separation from GE.

Yes, sure, Mark; this is Brian. We're not technically subject to CCAR just given our charter. We're a savings and loan holding company, not a bank holding company, so we're not technically subject to CCAR.

With that said, we're certainly preparing as if we're going to be subject to the same oversight by the Fed, the same processes. So when the CCAR scenarios come out, we run those scenarios; we're developing our models in such a way that we believe they're CCAR compliant and meet the regulators' expectations.

That's how we think about the governance of our capital. So we're building those processes, but it's unclear as of right now as to whether or not we'll be formally subject to CCAR.

Obviously, as part of the application and the approval to separate, the Fed can subject us to CCAR or something that looks a lot like it. So that's how we're preparing.

Okay. But no communication yet from them on whether they seem inclined to do that?

Well, we can't comment specifically on our discussions with our regulators. But I think what's important here is we're preparing as if we're going to be regulated, just like other banks of similar size. And you should assume that, whether it's through CCAR or another means, that the Fed is going to regulate our capital levels in a similar way.

Okay. Fair enough. Then for Margaret, do you have any sense for when Amazon may start to more aggressively market the new 5% cash-back rewards for Prime customers?

I've got to tell you, I'm an active Prime customer, and I had to find out about the offer through Greg. So they're clearly not doing a great job of getting it out there.

He is our great marketing guy, isn't he? Yes, so we rolled this out a couple of weeks ago, and I think with any new offer we really want to make sure that the offer is working.

Obviously, the Prime customer is an incredibly important customer to Amazon, and so working jointly together with them we wanted, one, to make sure the offer was working; and two, that all of our processes and Amazon's processes were working really well to really give the best experience to the customer.

So I would stay tuned. The plan is for this to be a big part of what Amazon is looking to do in the future.

And obviously, as you said, it's a great offer. So we're pretty excited about the potential.

Okay, great. Thank you.

John Hecht, Jefferies.

Morning, guys; thanks very much. One question. I think you said you purchased the BP portfolio in the quarter. Can you tell us what the dollar amount of that was?

Then in addition to that, when should we see the impact of the new partnerships and the BP coming into the receivables volume?

Yes, sure, John. We acquired BP towards the end of May, so it's in the EOP, but you don't have a full quarter's worth of purchase volume. I can't give you the exact size of BP; I can't disclose it.

But I can tell you that our entire oil and gas portfolios are less than 3% of our receivables, so that will give you kind of an upper bound. That includes BP, Chevron, P66.

Okay, great. Then I wonder if you guys could give us maybe an update of the prioritization of your deployment of excess capital, once the split-off is complete and you either go through a CCAR-like process or at least work with the regulators to determine appropriate capital levels.

Sure. The prioritization hasn't changed. Organic growth is first and foremost the top priority, along with portfolio acquisitions.

We think that we've got a robust pipeline in all three of our platforms. We will continue to look to bring on new relationships.

We brought on the BP portfolio we just talked about. We announced Mattress Firm, which we think will be a great deal for us. That's going to launch in April of 2016. So we'll continue to compete and try and grow the business organically, so that's first priority.

Second priority would be to establish a regular dividend and share repurchase program. And then I'd say lastly we'll look at M&A. We're always looking at M&A opportunities. I will tell you, we will be a lot more disciplined around M&A compared to the other three alternatives as a use for capital, just given the risk profile.

I think if you see us do something on the M&A front, it will most likely be a very close adjacency to what we do today. So it will be something that will help us build out our capabilities, help our partners, drive incremental sales in the programs -- that type of acquisition opportunity.

Great. Appreciate the color. Thanks, guys.

Eric Wasserstrom, Guggenheim Securities.

Thanks very much. Just a couple of follow-ups related to separation. In terms of the costs, I know at the end of the first quarter there was about an incremental $40 million of annualized costs still to come. Did that fully make it into the second-quarter run rate, or is there still an incremental portion in the back half?

Yes, it did make it into the second quarter. So you should assume that the second quarter reflects the end of that infrastructure build cost. So that's in the run rate as of the second quarter.

As you think about the second half, as I mentioned earlier, we're going to have -- there will be some incremental costs in the second half, but not tied to the infrastructure build. We're going to complete the rollout of EMV; you typically see marketing expense increase in the second half of the year, so we'd expect to see that again this year.

So you're going to have those types of things that happen in the second half of the year. But I wouldn't expect anything material incremental on the infrastructure build.

Has anything changed in your view about the $470 million sustainable incremental postseparation costs?

If we look at what's in the second quarter run rate, we came in very close to that estimate that we provided last year.

Okay. To the extent that the timing of the approval comes later than the year-end, does that have any meaningful implication for your cost base?

No, it doesn't.

Okay, great. Thanks very much.

Don Fandetti, Citi.

Yes, Brian. A couple questions on interest rate sensitivity. It's my understanding that your estimates for rate sensitivity do not include any pass-through of higher funding cost to the retailers. Can you talk a little bit about your ability to push some of that through, specifically in your retail partnership business?

Sure, Don; you're right. Our -- the shock scenarios that we publish -- and there hasn't really been a change to those; we're still mildly asset-sensitive. So a 100 basis point shock to interest rate takes our net interest income up about $75 million, which is less than 1%.

So that profile has remained relatively consistent. We do have the opportunity in some of our agreements to pass through a higher funding costs. I will tell you that each one of these agreements is different, so there's no -- I can't give you a rule of thumb, because every deal works a little bit differently.

But generally, you should think about the deals working similarly in the fact that we calculate an after-tax return, funding cost is typically a component of that, as well as credit costs and revenue and all the other P&L line items. We earn up to a hurdle, and we share above that hurdle. So that dynamic holds true for the most part on interest expense, but every deal does work a little bit differently.

Okay. Then secondly, can you talk about loan growth expectations? I may have missed it, but I didn't hear guidance discussion.

Yes, obviously we had a very strong quarter. I think we're performing ahead of where we thought we'd be back in January, so we're very happy with the growth that we're seeing so far.

I think the results are particularly good considering retail sales overall were somewhat sluggish. Retail sales in the second quarter were up 1.7% year-over-year, and our purchase volume was up 11%. So we're very encouraged by what we're seeing so far this year.

In terms of the remainder of the year, you've got a couple big factors that you have to take into account. We've got back-to-school; that will give us a good indication on how consumers are spending. We've obviously got the holiday season; that will largely determine where we end up for the year.

But generally the growth trends are all moving in the right direction. When we look at purchase volume per active account was up 6%, we saw an increase in average balance per account as well -- so those are both good indicators that consumers are seeing real value on our cards. Margaret mentioned that online sales were up 20%.

The other thing that we should just highlight, we've talked about in prior calls the reuse that we're seeing in both CareCredit and Payment Solutions. CareCredit reuse was at 50% for the quarter; that's up from 47% a year ago. And Payment Solutions reuse was 27%; that is up from 26%.

So when we break down the quarter and look at the growth trends, they're all moving in the right direction and we're really pleased with where we are for the first half of the year.

Got you. Thank you.

Betsy Graseck, Morgan Stanley.

Hi, good morning. We've talked in the past quite a bit about mobile, and I know you're doing a lot on mobile for the card and the reward programs that you have. I'm just wondering: are you also thinking about developing mobile product for the deposits business, your overall banking business as well?

Yes, actually, in my opening comments I mentioned we have a new mobile platform. We've just rolled that out.

So we took the learnings and the capability we have on our card side and rolled it over to the mobile platform for our deposit customer, and that's going extraordinarily well. The ability to open an account on a mobile phone is much better than it was, and we've added a whole bunch of features on the mobile phone. We'll continue to build that out as we add additional products.

Clearly your cardholders could also be managing their payments through deposits they have with you?

You know, most of what they have with us is CDs and savings products. I think as we move to adding checking accounts later next year, that will be a definite positive there.

Okay. Then just one ticky-tacky question on credit trends. I think you mentioned, Brian, that you expect credit trends to continue to be stable for the balance of the year.

I guess I just wanted to make sure I understood. Are you talking about ratios or dollars?

More ratios. Credit's going to grow in line with growth in receivables; but we would expect the ratios to hold pretty consistent.

And we've said that all year, I think. In the first and second quarter, credit came in a little better than we expected, we think primarily driven by lower gas prices.

It's just a little unclear how much of that is going to continue, so I think everything we look at still feels like credit will be stable.

Right. So NCO ratios stable and provisions moving up with balances, as you do the reserve build associated with the balance growth?

That's exactly right. We would expect to continue to build reserves for the new receivable growth.

Got it. Okay, thank you.

Ryan Nash, Goldman Sachs.

Hey, good morning, Margaret; good morning, Brian. Maybe a question on a comment you made, Margaret, about a healthy pipeline for additional opportunities for business wins. When I look back historically, I think somewhere around 200 to 300 basis points of loan growth has been added via portfolio purchases.

Can you just talk about your appetite for further portfolio acquisitions at this point, for maybe the next 6 to 12 months? And given that you've added a couple of startup programs over the past couple of quarters, how much capacity is there to add more of those?

The first thing I'd say is we have an opportunity to continue to grow organically. So I'd start out by saying we can really be selective about what we go after.

Our appetite to grow with new acquisitions, whether it's an existing portfolio or a startup business, is very strong. We reorganized the business development team well over a year ago. We now have very dedicated resources in all three platforms.

So we have a very healthy pipeline that we're looking at, and it's really great to have a mix between existing portfolio and startups. Some of our biggest programs today were startups, so we're very bullish on startups. We know how to do them.

Obviously it takes a little bit of time to get them to grow out of the gate, but once you get that engine going it really takes off. So we're very focused on both driving the organic side but, more importantly, winning new opportunities in the market.

Got it. Then if I could just ask a follow-up related to split-off on a comment that you made. I think you mentioned, Margaret, that there's an on-site team and they were going to submit something to the Board.

Can you just help us understand, one, the process from here? What should we be looking for in terms of milestones?

Obviously, they're going to make their presentation, and then how should we think about the timing of that? Is it a back-and-forth dialogue?

And if you were to think about areas where you could potentially have concern that could cause us to delay into 2016, what would some of those concerns be?

Yes. Overall, I would say the team is on the ground. I'm not going to -- I can't really comment on the specifics, but I would say it's been a very good process.

I think you all know that we had done a pre-application well over a year ago and got very good guidance through a pre-application process of the things we had to focus on. Obviously we wouldn't have filed the application if we didn't think we were ready.

Brian already mentioned that the cost of the infrastructure is already in our second quarter. So we feel that the things that we needed to focus on -- corporate governance, risk management, our whole capital planning process, model development and governance and IT infrastructure, which was a big one -- are in place.

So they're in here. They will work through the summer. The question then becomes: how quickly can they write up their recommendation?

And then it goes to the Board of Governors, which -- it's a little open to how that process is going to work, whether they do it in an existing meeting or they have a separate meeting. But our view right now is we're still targeting the end of the year.

I think if it does slip into the first quarter it really is just around the ability of the Fed to get through everything that they have. The application is fairly significant, and getting this in front of the Board of Governors in the right time frame -- and I will have Brian comment a little bit about the timing at the end of the year, because we have certain windows we have to do this within.

Yes. Our expectation, Ryan, would be that we receive the approval. That will be public, and very shortly thereafter we would launch the exchange offer.

We do have to manage around earnings blackout periods for us and for GE. So there are specific windows that we can target for the exchange offer. It's got to be open 20 days; it could be extended another 10 days. So those are the things that we're managing as we look at when exactly we could get this completed.

Very helpful. Thank you.

David Ho, Deutsche Bank.

Good morning. Just circling back on the loan growth from Dual Card, I know it's about 20%, 25% of your receivable balances. How quickly is that growing relative to the non-Dual Card portion of your portfolio?

Yes, Dual Card growth -- we don't break it out specifically, but it's growing and it will always grow faster than private-label credit cards. Let me just spend a minute and explain the dynamics there.

we have what we call a loan growth strategy. We start new accounts out with a smaller PLCC line. We increase that line over time as they demonstrate payment behavior and we get more comfortable with the creditworthiness of that consumer.

And then ultimately we upgrade them into a Dual Card account. So just that dynamic of the upgrade from a PLCC to a Dual Card will give you higher growth rates, faster growth rates in Dual Card than what we see in PLCC.

I can tell you that the Dual Card growth rates have been relatively consistent, more or less in line with our expectations. I think right now we have Dual Card programs in 14 of our 20 relationships; so there's still an opportunity, I think, to launch some Dual Card programs in the rest of the portfolio.

Okay. Given that the Sam's Club 5-3-1 card has very attractive similar value prop versus the Costco card, do you expect any benefit from any kind of ongoing Costco card uncertainty as that potentially plays out and may get delayed? Are you baking in any attrition into your core card op there?

We're not baking anything in for that. I think the Sam's Club value prop stands on its own; it's a very attractive val prop at 5-3-1, and we've been very pleased with the results so far since we launched it.

Okay. Then separately, on the deposit beta, there is obviously a lot of discussion this quarter across your banking peers. Seems like you guys should be running closer to 1 versus some of your peers.

Do you still think you could run nearer 75? Or what gets you confident that you could see deposit betas maybe a little lower than what you are running at now?

Well, I think there's a couple things. There's not a lot of history here, so I don't think anybody knows as rates start to rise what deposit betas are going to look like. The landscape's a lot different than the last -- the only time period you can really look at is 2004 to 2007, and deposit betas for online platforms were between 60 and 70.

Are they going to be higher this time around? They could be.

I think as we look at it, first we don't have any significant investment; no investment tied up in brick-and-mortar branches. I think that helps us offset the impact if deposit betas come in higher.

We have obviously got pretty healthy margin. So I think if deposit betas come in on the high end or a little bit higher, that's still fairly manageable for us. So time will tell where this thing plays out.

The other thing that we're doing -- and we've talked about this I think in prior calls -- right now we're competing to some extent on rate and I think customer service. To the extent that we can roll out some of these new capabilities -- Margaret mentioned demand checking accounts, online bill-pay -- that will help us lower the deposit beta over time. That's absolutely in the plans, and we're looking at rolling those out next year.

Okay. None of that is baked into your published asset-sensitivity scenarios?

No, it's not.

Okay. Great. Thanks.

Moshe Orenbuch, Credit Suisse.

Great; thanks. Most of my questions actually have been asked and answered, but I actually was intrigued that you had both loan growth that was better than your spending volume growth -- and I guess a little bit of that was the acquisition of the portfolio -- but still better and stable yield year-on-year.

Could you talk a little bit about that? I would have thought there was just a natural decay because of the stuff you talked about with respect to the way that portfolio has evolved.

Yes, I think it's -- again, I would attribute a big chunk of it to BP and the fact that we only had a month's worth of purchase volume, but we had obviously brought on all of the receivables at the end of the quarter. So I think that's probably the biggest driver to think about. Other than that, I don't know that there's any other underlying trends to highlight.

With respect to just the yield on the portfolio, I would assume that like Dual Cards and other things like that probably have lower yields than some of your pure retail programs or some of the CareCredit things. Right?

Yes, typically in a Dual Card product, you get back to the net return, but you get there differently. So if I just compare a private-label return to a Dual Card return, Dual Card tends to be a higher FICO customer so you'll see less revolve on the accounts; you see lower finance charges.

But that's largely offset by lower losses. So when you net those two out you get back to a similar return that we earn on PLCC. And again, on Dual Card obviously you're earning on a higher balance, so you are getting incremental earnings.

Sure. Then just separately, you had addressed this part-way, to Ryan's question before about portfolio acquisitions. Maybe just talk a little bit about what you see out there.

You said almost 90% of your business is contracted for the next four years. But what's out there in terms of portfolios that could be available over the next year or two?

There's plenty of portfolios. First of all, the way we look at this is just things coming up for RFP, and there's always a natural set of portfolios that come up for RFP. I wouldn't say, Moshe, there's anything big out there.

I think the big portfolios, there's not a lot of over $1 billion portfolios out there. But there's plenty in the $250 million to up to $1 billion that I think we're looking at and going after.

I think the other is just looking at the startups. It's interesting now to note that a number of retailers still don't have a program.

And believe it or not, we're seeing more activity of people actually reaching out to us, inquiring about doing a portfolio. So there's been a little more activity there.

I think some of that is driven by the fact that as retail sales struggle a bit having a program certainly helps, and we've proven that by the programs that we do have. And then there's the whole online space and things that are happening there.

So from an activity perspective, we're actually going after all of those things and I would say that we're fine with -- and you know this -- going for a smaller deal to a bigger deal. So I think it gives us an opportunity to look more broadly.

Great. Thanks so much.

Rick Shane, JPMorgan.

Thanks, guys, for taking my question. When we look back, I think it's easy to explain the post-crisis growth as a function of Synchrony was in the market providing capital when in general the supply was decreasing. We're now in an environment that's intensely competitive.

Supply has increased; we're seeing peers. And one of the things we noted is line limit increases, so a lot of the consumers with general-purpose cards have been unshackled.

But you guys are still really generating strong organic growth. Brian, you talked about this a little bit, but what do you guys really think is driving this? Are we seeing a behavioral shift between general-purpose and private-label?

Well, I think I would attribute it to really two things. I think, one, I think we're seeing this in terms of consumer behavior. The consumer is still being conservative about how they spend.

And I think the value propositions on our cards and the fact that we've, I think, got a good machine running around how we're putting out the next best offer, how we're using data and analytics, when you talk about what Brian mentioned earlier, about the reuse of our cards on Payment Solutions and CareCredit, those are things that we've really put in place over the last couple of years.

I would say the other big win for us is really our whole digital strategy. Brian mentioned this or I mentioned this in my opening. Our online sales were up 20% year-over-year. If you look at the overall industry, US sales are growing at 14%, so we're getting a greater share of those online sales.

Our mobile applications are really growing. About a third of our applications now come through mobile.

And then 42% of our active customers are actually interacting with us some way using our digital channel. So I think as the consumer behaviors shift to mobile -- and I think one big advantage that we have versus many other general-purpose credit cards is you can apply and buy immediately and you can do it on your mobile phone.

So I think our ability to capture that customer at the site of purchase I think is really a big, big opportunity for us and one that, as we continue to build out our data and analytics teams to really drive that -- and I think I mentioned in the past we've partnered with GPShopper, who actually has some great mobile assets that we're integrating our card programs with.

Particularly true for the smaller retailers, who maybe don't have a team sitting there to help them build out a mobile application, we're working with them to have that happen. So I think the whole digital piece is going to become a bigger part of who we are and an important part of how we go to market.

Got it. Just to follow up on that, as we enter into reporting season for peers as well, there are going to be a lot of questions over the next week about rewards and reward expenses, and that's really where the competition seems to be playing out.

We don't see that particularly in your margin. Or is there anything there that you are concerned about in terms of competitor behavior?

Well, there's nothing we're concerned about. You do see our loyalty costs are up, driven by the new value props that we've launched. But I think we look at these costs fundamentally just different than I think you look at them for a general-purpose card player in that the partner shares in a significant portion of these costs.

What we like is that we can offer a very attractive value proposition, like we launched at Sam's Club and like we just recently launched with Amazon, and when it nets through with the RSA offset we still earn a very attractive return on that program. So these new value props that we've launched are good things.

They're driving growth. They're driving incremental finance charge revenue for the business. The partners share in part of the costs.

So if we have the opportunity to launch better value props in our other programs, we're going to continue to look to do that. So we don't feel it necessarily as competitive pressure, so much as we do as a real opportunity to drive growth going forward.

Got it; great. Thank you, guys.

Okay, Vanessa, we have time for one more question.

Sanjay Sakhrani, KBW.

Thank you. I guess I have one question on Payment Solutions. It seems like you guys are definitely ramping up there in terms of the new relationships. Is there something there in terms of the economy that we can infer from just the acceleration in new relationships there? And should we expect more of that to occur as things get better, in a broader sense?

Then I have another question just on the digital strategy. To the extent that you're able to enhance your capabilities, can that help you ask for more from your merchants in terms of revenues? Thanks.

Sure. Let me answer the first one on Payment Solutions. I think interestingly enough, Sanjay, I think one of the things that has worked to our benefit, believe it or not, is the separation from GE and the fact that many of these partners are seeing us as this is all we're going to be doing. We're 100% dedicated to the retail market.

So our activity overall in Payment Solutions has really picked up. Some of it is, obviously I said we dedicated resources and they're going after that; but even more importantly, we're getting people calling us. So I think there is a focus now that they know this is the business we're in, this is the business we're going to go after.

We're very strong in that business. We have a lot of heritage. That's really the heritage of our business, right?

So we have a strong team there, and I think we've invested in things that I think have really helped us from a technology perspective, which many of those retailers -- you have the bigger guys, but you have a lot of smaller retailers there who really look to us to help them really bring capabilities. I think that's something that's really played well for us.

In terms of looking for more economics out of the payment and mobile wallet, our goal is really to work with our partners to grow sales, and we really see the wallet as really the final step in the process. For us it's really building out the whole spectrum of the credit cycle: applying, buying, getting your rewards, getting your messaging and text messaging from us, and then making the payment.

So I wouldn't anticipate us looking to get more from our partners. We really want to work with them together in the overall relationship to grow the business. So that's how we're thinking about it.

And that's really -- that's our business model, right? Bringing capabilities and making it a better experience for their customers to really help drive volume and growth for them.

All right. Thank you.

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 further answer any questions you may have. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating and you may now disconnect.