Synchrony Financial (SYF) 2015 Q3 法說會逐字稿

Welcome to the Synchrony Financial third-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.

And I will now turn the call over to Greg Ketron, Director of Investor Relations. Greg, you may begin.

Thanks, operator. Good morning everyone and welcome to our third-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 earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website. Margaret Keane, President and Chief Financial 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 up the call for questions.

Now it is my pleasure to turn the call over to Margaret.

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

As most of you probably know by now, we received approval from the Federal Reserve Board to become a standalone savings and loan holding company following the completion of GE's proposed exchange offer. This approval represents a major step forward in Synchrony Financial's journey to become a fully independent company. We are very pleased that we have reached this point and want to thank everyone for all the hard work that has gone into this process including my team, our employees and the help GE provided to us. And we also want to thank the Federal Reserve and our regulators for working with us through this process.

The next step in the process is the exchange offer where GE will exchange its shares of Synchrony Financial common stock for shares of GE common stock. At this point we are very limited in what information we can provide around the Fed approval in the exchange offer other than what has been made public. As a result, we will not be able to discuss any details around these issues on the call today.

I will begin our discussion today on slide three. Third-quarter net earnings totaled $574 million or $0.69 per share. Overall, strong momentum continued across our business platforms driving significant receivables, deposits and revenue growth this quarter. Growth remained robust with purchase volume up 12%, loan receivables growth of 12%, and platform revenue growth of 9%. We continue to offer attractive programs that resonate with customers such as our Amazon Prime card where cardholders receive 5% back; our Sam's Club 5C1 cash back credit card program, the low 5% discount on purchases every day and reward programs with BP and Chevron in addition to our ongoing promotional events.

Our partners work with us as we continually search for innovative ways to drive program growth.

Asset quality improved with a 3 basis point decline in our net charge-off rate and a 24 basis point improvement in 30+ day delinquencies. Expenses were in line with our expectations impacted by investments we made to support growth, separation related costs and the completion of the EMV card rollout for active Dual Card holders.

Deposit growth continued at a very strong pace with deposits increasing $8 billion or 24% over the third quarter of last year. Deposits now comprise 63% of our funding, moving further into our target range of 60% to 70%. Our ongoing efforts to provide increasing value to our depositors with new features and enhancements are yielding notable results.

Our balance sheet remains strong with a common equity Tier 1 ratio of 17.5% calculated on a transitional basis and liquid assets totaling $15 billion or 19% of total assets at quarter end.

Key business highlights during the quarter included the extension of key existing contracts including PayPal, one of our top 10 partners, the signing of two new partners, expansion of our CareCredit network and further advancement of our technology platform to enhance the engagement experience with our customers.

We are pleased to announce a long-term extension with PayPal to provide Dual Cards to consumers. Our program with PayPal dates back to 2004 and these programs enable digital and mobile payments to online and off-line merchants for qualifying cardholders. We are excited to extend our decade-long relationship with PayPal who is at the forefront of digital payments.

We are also pleased to have renewed our partnership with Sleepy's, the third largest mattress retailer in the United States further enhancing the number of top retailers where we provide financing in the bedding space.

Regarding new partners, we signed a multiyear agreement with Citgo, a leading US refiner and marketer to provide a private label credit card program for new and existing customers. We expect to launch the program in the first quarter of 2016 and Citgo cardholders will be able to earn rewards and save on fuel purchases at any of the nearly 5500 locally owned and operated Citgo locations in the US.

In addition, we are pleased to announce a new partnership with The Container Store, the nation's leading retailer of storage and organization products. This is a multiyear agreement to offer a private label credit card program and the card will be available for use in the retailer stores and online. The program is scheduled to launch in the spring of 2016.

Additionally, we expanded our CareCredit network through a new agreement with Rite Aid, one of the nation's leading drugstore chains. Rite Aid will accept our CareCredit card for in-store purchases and health services in their nearly 4600 stores nationwide. We also added a new multiyear agreement with Premier Dental Holdings, one of the nation's largest dental providers.

We are very excited about these new and extended partnerships and our ability to add significant value to these relationships. Driving organic growth continues to be a key source of future opportunity and we continue to pursue initiatives to promote card usage and deepen penetration across all of our partnerships.

As we have noted in the past, the online and mobile channels are increasingly important channels for our business. As reflected in our 2015 digital study, a comprehensive mobile strategy is central to the ability of retailers to effectively engage with our customers. In our national survey, we found that 45% of shoppers are now shopping with a mobile device and this is up 4 percentage points from last year. Additionally, one-third are purchasing products after viewing them on social media and one-third indicate that text offers would drive an incremental shopping visit.

Given these trends, we have been active in capitalizing on this evolving environment. Our digital strategies have helped drive an increase in online and mobile purchase volume which is up 21% from last year and nearly one-third of our credit applications are now done through digital channels. The adoption of our digital cards also continues at a healthy pace.

We continue to progress in our leading mobile wallet strategy and we are very pleased to be among the first issuers to offer private label cardholders the ability to add their cards to Samsung Pay which launched in late September. We have currently enabled the use of over 12 million active accounts across our CareCredit and Payment Solutions platforms and we intend to build on this.

As many of you know, we have Dual Cards enabled and will be one of the first issuers with the capacity to offer private label credit cards through Apple Pay.

Through our innovation and strategic partnerships, we are helping to shape the future of how private label cards function in mobile wallets and provide value to our merchants and their customers. We have developed a mobile platform that can be rapidly integrated across retails and wallet. The speed at which we have been able to develop the capability for our cards to be in mobile wallets while maintaining the benefits for both our cardholders and partners, speaks to our commitment to being at the forefront of this evolving payments landscape and our ability to capitalize on our leadership position.

Moving to slide four which highlights the performance of our key growth metrics this quarter, loan receivables growth remained strong at 12% primarily driven by purchase volume growth of 12% and average active account growth of 4%. The addition of the BP program last quarter also contributed to the growth rate. Platform revenue was up 9% over the third quarter of last year. Many of our partners had positive growth in purchase volumes and we continue to drive incremental growth through strong value propositions and promotional financing offers.

On the next slide I will discuss the performance within each of our sales platforms before turning it over to Brian to review the financial results in more detail.

We continue to drive strong performance across all three of our sales platforms in the third quarter. Retail card had a very strong performance this quarter generating purchase volume of 12% and receivables growth of 13%. The addition of BP last quarter also contributed to the growth rate. Platform revenue growth was 10%.

In addition to our new agreement with Citgo, we continue to expand our brand distribution through the launch of the Athleta Credit Program, where the brand names under Gap.

In addition to adding new partners that are a good strategic fit, renewing and extending our programs is a key priority in this business. Within the long-term extension of our program with PayPal, we now have nearly 92% of our retail card receivables that are under contract through 2019 and beyond.

The strong position we maintain in this space and the collaborative partnerships we have developed provide a solid foundation for further growth.

Payment Solutions delivered another strong quarter. Purchase volume growth was 13% and loan receivables growth totaled 12% driving platform revenue growth of 8%. Average active accounts increased 8% over last year. The majority of our industries have positive growth in both purchase volume and receivables with particular strength in home furnishing and automotive products. We exhibited significant success in signing multiple new partners this quarter including the Container Store and our pipeline remains strong.

We also launched a new program this quarter, most notably Guitar Center, which included a portfolio conversion from another issuer and now gives us a preeminent position as the key financing partner in the music retail market. As noted, we extended our long-term relationship with Sleepy's. As a result of this coupled with the announcement of Mattress Firm from this summer, we now have programs with each of the top four bedding retailers in the US.

CareCredit had a solid quarter and entered into important new agreements. Purchase volume was up 13% and average active accounts increased 5% helping to drive receivables growth of 5% and platform revenue growth of 3% over the same quarter of last year. Receivable growth this quarter was led by dental and veterinary specialties.

Regarding the new agreements, the agreement with Rite Aid will expand the utility of our CareCredit card to nearly 4600 Rite Aid stores nationwide and the agreement with Premier Dental Holdings which has nearly 200 clinics with nearly 1 million consumers in the Western part of the US, will result in the origination and the acceptance of CareCredit cards in their offices. Plans are in place to launch our CareCredit native application in the fourth quarter which will feature the CareCredit digital card and be available to cardholders via the Apple and Google Play App stores.

In summary, each platform delivered solid growth and continued to make progress in the signing of new partnerships and the extension of existing programs while continuing to drive organic growth.

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

Thanks, Margaret. I will start on slide six of the presentation. In the third quarter, the business earned $574 million of net income which translates to $0.69 per diluted share in the quarter. We continued to deliver strong growth this quarter with purchase volume up 12%, receivables up 12% and platform revenue up 9%. Overall, we are pleased with the growth we have generated across the business.

We continue to see evidence of the value propositions on our cards are resonating with customers. Purchase volume per active account was up 8% compared to last year and the average balance per account increased as well.

We also closed the BP portfolio acquisition last quarter so that helped improve our growth rate year-over-year.

Net interest income was up 8% 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 $30 million or 4% compared to last year. RSAs as a percentage of average receivables were 4.6% for the quarter which was slightly lower than the 4.8% we reported in the third quarter last year. The lower RSA percentage compared to last year is due to programs we exited last year where we paid a higher RSA as a percentage of average receivables as well as higher loyalty costs that are directly shared through the RSA with our retailers.

For the year, we would expect RSAs as a percentage of receivables to be in the 4.5% range, consistent with the prior two years.

The provision increased $27 million or 4% compared to last year. The increase was driven primarily by receivables growth, partly offset by the improvement in asset quality. The improvement in asset quality is reflected in lower 30+ delinquencies which improved 24 basis points versus last year at 4.02% and then the net charge-off rate which fell to 4.02%, 3 basis points below last year.

Our allowance for loan losses as a percent of receivables was down 15 basis points compared to the third quarter last year to 5.31%. However, measured against the last four quarters of net charge-offs, the reserve cover remained at 1.27 times virtually the same coverage level as the prior three quarters. Overall, our reserve coverage metrics were fairly stable.

Other income decreased $12 million versus last year primarily driven by higher loyalty and rewards costs partially offset by an increase in interchange revenue.

More specifically, interchange was up $34 million driven by continued growth in out of store spending on our Dual Card. This was offset by loyalty expense that was up $38 million primarily driven by 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 $7 million from last year due to the fact that we only offer the product now through our online channel.

Other expenses increased $115 million versus the third quarter last year. In addition to the infrastructure build, the majority of the increase is driven by three items. First, we continue to make investments to support ongoing growth across all of our platforms.

Second, we had expenses associated with the rollout of the EMD cards for active Dual Card holders. The rollout was completed this quarter, ahead of the October liability shift date.

Lastly, we continued to make strategic investments in our deposit platform in our digital and mobile capabilities.

The efficiency ratio for the quarter was 34.2% and 33.3% year to date which is in line with our annual guidance of below 34%. I will cover the expense trends in more detail later.

Overall we had strong topline growth that drove a solid quarter generating an ROA of 2.9%.

I will move to slide seven and go through our net interest income and margin trends. As I noted on the prior slide, net interest income growth was strong at 8%. Interest and fees on loan receivables was up 8% partially offset by higher interest expense driven by growth and the additional liquidity we are carrying on the balance sheet compared to last year.

The net interest margin declined to 15.97% which is fairly consistent with prior quarters and better than the outlook we provided back in January.

As you look at the net interest margin compared to last year, there are a few dynamics worth highlighting. The majority of the variance, 77 basis points, was driven by the build in our liquidity portfolio. We increased liquid assets on the balance sheet to $15.3 billion which is up $1.2 billion versus last year. We have the cash 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 down 33 basis points compared to last year. This was the result of slightly higher payment rates and the impact of portfolio mix given the strong growth in promotional balances in our Payment Solutions platform.

Lastly, on interest expense, the overall rate increased to 1.8%, up 9 basis points compared to last year. This was in line with our expectations given the changes in our funding profile. I will walk you through a breakdown by funding source.

First, the cost of our deposits was relatively stable at 1.6%, the same level as the third quarter last year. Our deposit base increased nearly $8 billion, or 24% year-over-year. We are pleased with the progress we've made growing our direct deposit platform. Deposits are now 63% of our funding, which is in line with the target we set of between 60% and 70%.

Securitization funding costs were relatively flat at 1.6%. Our other debt costs increased 53 basis points to 2.9% due to the higher mix of bank term loans and unsecured bonds compared to last year.

While the third-quarter margin was a little above the range we set out back in January, this is primarily driven by the benefit of using some excess liquidity to pay down the bank term loan.

As we look out to the fourth quarter, we typically see some seasonality in our margins and expect them to decline slightly due to the seasonal buildup in receivables. Overall, we continue to be pleased with our margin performance, which has exceeded our guidance for the year.

Next, I will cover our key credit trends on slide 8. As I noted earlier, we continue to see stable to improving trends on asset quality. 30 plus delinquencies were 4.02%, down 24 basis points versus last year, 90 plus delinquencies were 1.73%, down 12 basis points. We continue to 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 compared to last year.

The net charge-off rate also improved to 4.02%, down 3 basis points versus last year and lastly, the allowance for loan losses as a percent of receivables was 5.31%, which was down 15 basis points from the prior year. If you measure the reserve coverage against the last 12 month's charge-offs, we are currently at 1.27 times coverage which equates to roughly 15 months loss coverage on our reserve. And as I noted earlier, this is very consistent with prior quarters.

Looking to the fourth quarter, we typically see an uptick in net charge-offs and a decline in the allowance for loan losses as a percent of receivables due to holiday spending and the seasonal build in receivables.

So overall, we continue to feel good about the performance of our portfolio and the underlying economic trends we are seeing.

Moving to slide nine, I will cover our expenses for the quarter. Overall expenses continue to be in line and we are delivering on our efficiency ratio guidance of below 34% for the year. Year to date through the third quarter we are at 33.3%.

Expenses came in at $843 million for the quarter and compared to last year are largely driven by separation-related costs and growth of the business. As I mentioned earlier, we also had approximately $20 million in expenses related to the EMV card rollout this quarter.

Looking at the individual expense categories, employee costs were up $29 million as we have added employees over the past year in key areas to support the infrastructure build for separation as well as growth in the business.

Professional fees were up $13 million due to both separation-related cost and growth. Marketing and business development costs were flat as we had increases driven by investments in the growth of our retail programs as well as marketing associated with our direct deposit products. These increases were offset by lower spend on brand advertising.

Information processing was up $30 million driven by higher IT investments and the increase in transactions and purchase volume compared to last year. Other increased $43 million versus prior year primarily driven by growth in the infrastructure build.

As we noted last quarter, the costs associated with the infrastructure build are now largely reflected in our run rate and total expenses remain in line with our expectations. We expect to finish the year within our efficiency ratio guidance of below 34% for the year.

Moving to slide 10, I will 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 continue to view this as a stable, attractive source of funding for the business. Over the last year, we have grown our deposits by nearly $8 billion primarily through our direct deposit program. This puts deposits at 63% of our funding which is in line with our target of being 60% to 70% deposit funding.

While we have now moved further with 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 are also looking at additional ways to increase the stickiness of the deposit base including the rollout of new products later next year such as checking and online bill pay.

Funding through our securitization facilities has been fairly stable in the $14 billion to $15 billion range which is approximately 21% of our funding. We did issue $600 million in securitization bonds in September with three- and five-year maturities. This is consistent with our approach to maintain the source of funding at between 15% and 20% of our total funding.

We also issued $1 billion in 10-year fixed-rate senior unsecured notes in July. 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 the more expensive source of funding for the business compared to deposits and other lower-cost funding sources. We have continued to pay this down during the quarter making a $500 million prepayment in August.

Since the IPO, we have paid down the bank term loan facility from $8.2 billion last year to $4.7 billion today and expect to continue to pay this down in future quarters.

Overall we feel very good about our access to a diverse set of funding sources. We will 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 and liquidity, we ended the quarter at 17.5% CET1 under the Basel III transition rules and 16.6% CET1 under the fully phased in Basel III rules. Total liquidity increased to $21.9 billion and includes $15.3 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 us well above the required LCR levels.

Overall we are executing on the strategy that we outlined previously. We have 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 11 and then we will begin with the Q&A portion of the call.

During the quarter, we exhibited broad-based growth across several key areas making progress on several fronts and continuing the momentum that we have generated over the last several quarters. We continue to win and renew important partnerships as well as opportunities to expand our network and the utility of our cards and our pipeline of additional opportunities remains strong.

Our digital wallet strategy continues to deliver meaningful partnerships with attractive opportunities. Our innovation and adaptability enabled us to be among the first private label issuers to make our cards and their functionality available through Samsung Pay. We are pleased with the ongoing success of our fast-growing deposit platform.

Finally, with the Fed approval to become a standalone savings and loan holding company, we look ahead to the next step in this process, the proposed exchange offer. Again, I want to acknowledge all of the hard work that has gone into this process. We are proud of having achieved the important step in our progress towards separation. As I noted earlier, we are restricted in what we can say today but please stay tuned on this front as additional details on the exchange offer become available.

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). Sanjay Sakhrani, KBW.

Thank you. Good morning. Congrats on getting the approval from the Fed. Just reading through that 17 page order, I didn't notice any language around CCAR and I understand you were approved as a savings and loan holding company. Does that mean that CCAR doesn't apply to you guys and if yes, what exactly is the process of getting to return capital to shareholders and also maybe taking liquidity down from the levels that you have it? Thanks.

Good morning, Sanjay. It is Margaret. I will hand it over to Brian but I just wanted to reiterate how important this milestone was for us in getting the separation from GE. It really is the biggest part of the milestone. Brian is really going to take you through a little bit of our learnings around CCAR and where we are going to go forward on that.

Yes, Sanjay, you are absolutely right, there is nothing in the order that specifically subjects us to be CCAR process. And as we have discussed in the past because we are a savings and loan holding company and not a bank holding company, we are not technically subject to the CCAR process so that is where we stand as of today.

With all that said, it is still our expectation that we are going to file a capital plan with the Fed and it is going to be based on the Fed's CCAR assumptions. So it is very likely that even though we are not part of the public process we are going to follow a very similar process to the other banks in terms of using the same assumptions, following the same timeline and we think that gives us probably the best chance of success in 2016.

So it is going to look similar but you are not going to see it as part of the formal public process.

Okay, and this is as far as liquidity is concerned. Just one follow-up, you would just put through your own assumption -- you would follow the assumptions of CCAR but put through your own model? Right?

That is our expectation, exactly. So we would grab those assumptions when they are published in February, we will run those through our models. We formulate a capital plan and we would submit that to the Fed. It just wouldn't be part of the public process. That is our expectation as we sit here today. So that is capital.

You asked about liquidity as well. I think liquidity is going to be consistent with what we have said in the past. We feel like we have got more than adequate liquidity today. I think we've got a couple of opportunities to optimize the amount of liquidity that we are holding. We've also got an opportunity I think to look at different ways to invest that excess cash.

You have seen us do that a little bit all year where we run our internal models, we look at rating agency considerations, regulatory considerations, we look at our maturities coverage and to the extent that we have, we feel we have some excess liquidity. You have seen us use that prepay the bank term loan. You are going to continue to see us do that. That is part of the reason obviously why our net interest margins trended better than the guidance we provided back in January.

But I wouldn't expect going forward to see a step change in how we manage liquidity. The regulatory considerations are just one piece of the puzzle. We add up all the other considerations, our internal models and that is what we use to size the amount of liquidity we have. So I think there is some opportunity there but it's going to be more around the margin, it is not going to be a step change from what we are doing today.

Great, thank you.

Ryan Nash, Goldman Sachs.

Good morning, everyone, and congrats on getting approval. I guess for starters, your loan growth is coming in well above the 6% to 8% that your outlook had called for. I was wondering, maybe can you give us a breakdown of how much of the growth is coming from actually improved penetration rates versus portfolio wins? And as you look forward, clearly the PayPal renewal is a big win for you but how should we think about your ability to sustain loan growth at or near the current rates?

Most of the loan growth year to date has been organic, core organic growth and that is really tender shift, that is the value props that we have launched at Sam's Club and Amazon. And the only portfolio acquisition we have done which impacted the results so far year to date is BP which we closed in the second quarter and obviously continues to impact our results in the third quarter when you look year-over-year. I think the fundamentals are very strong. As you pointed out, we are ahead of where we thought we would be back in January.

We've still got the holiday season; that is going to largely determine where we end up for the year. The forecasts are somewhere between 3% and 4%, similar to what we thought last year so we are optimistic.

And when you break down the components of the growth, the underlying trends are positive too so we are seeing purchase volume per active account was up 8%. When you look at the average balance per active account, that was up 5%. So when you break down the different components, the fundamentals are strong as well.

And I'll turn it over to Margaret to talk about PayPal.

Yes, so we are really excited about the PayPal extension. As I have said in the past, we've had a really good partnership, a long-term partnership with PayPal since 2004 and I think as they were working through their strategy, we were working through our strategy, we continued to have a really good dialogue through that process. And as a result, some good thinking on both sides we have come together and we will be extending our partnership. So it is a win for them, a win for us and we feel pretty excited about being able to keep them.

Got it. Maybe if I could just ask one question on the margin. When I think about how it's trended over the past year or so it has obviously come down but clearly better than expectations had been. And when you think about it you have had call it a 30 basis point drag from yields and 70 from the big liquidity build. But when I think about the comments that you made on the ability to optimize by investing some of the cash, if we were to assume that yields do continue to come down in the loan book is there enough deployment for you to do such that you can largely offset a lot of the core pressure on the margin and we can maybe see a margin level that is similar to the performance that you have had thus far in 2015 as we look forward?

Yes, Ryan, there is a couple of things. Let me just start with one of your premises that loan yields will continue to come down. I think one of the things that we have seen year to date when we look at the loan yields, they have come down primarily driven by higher payment rates which we are obviously getting a benefit when we look at 30+, 90+ in charge off performance year to date. So to the extent that loss performance kind of levels out from here, then we would expect loan yields to level off as well and we might not see that deterioration. So I think that is just one kind of starting point.

We have also, when you look at the loan yields, part of that is also driven by just the really strong growth in Payment Solutions and we are putting that volume on. It is largely promotional financing so it is coming on at the lower yield initially and then as those accounts start to revolve, we expect a little bit of lift there in the yield.

Now on liquidity I think there is nothing that we see that is going to result in margins coming down significantly from where they are today. They have performed better year to date because we have been able to use some of what we view as excess to pay down the more expensive forms of financing. We are going to continue to do that. We've still got a big chunk to go on the bank term loan so I think we still have some opportunity there and then I think we have a little bit of opportunity on the how that cash is invested.

So you are going to see us continue to optimize that in terms of more specific outlook. We are going to give you some guidance on the January call for 2016 and we can be a little more specific then.

Great. Thanks for taking my questions.

Mark DeVries, Barclays.

Just a follow-up question on the CCAR process. Since you will be opting into that kind of voluntarily and not going through the public process, will that impact your ask at all in terms of capital returns? Can we expect something potentially in excess of what peers might be asking for?

Yes, Mark, I just would be careful we are not opting into CCAR, what we are doing is we are filing a capital plan using the CCAR assumptions. And the reason we are doing is it is pretty straightforward. The Fed has a process they measure all of the other banks on and similar banks of our size and we think that our best chance of success is to be measured kind of on the same basis. That is why we are doing it.

But I wouldn't view it as opting in, we just think that we are trying to take what we feel is the path here that gives us the best chance of success and I think following the Fed's framework and the process that they have allows us to do that.

We are not going to be specific around our capital asks the first time out. What I would tell you though is it is more important for us to get a dividend approved, a buyback program approved than it is to go out in our first time and swing for the fences. So we are going to be fairly prudent, it is our first time out and again, we want to have a successful first outing here as opposed to trying to go for something that is greater than our peers right out of the gate.

Mark DeVries.

Okay. But is something comparable to your peers given your even stronger capital position, does that feel reasonable and conservative to you?

Mark, I'm not going to give you more than that right now. We are going to get the assumptions in February. We're going to run them. We've got to obviously review it with our Board. We've got to go through all of our own internal governance processes and then we are going to submit it to the Fed.

So there is work to do between now and when we actually submit. It would be premature to give you any kind of indication at this point. I will tell you obviously we have a lot of capital when you compare us to our peers. The return profile in our business compares very well to our peers. Those are all real positive for us and we think the long-term capital return presents for this business is significant.

Okay, that is helpful. And then just one more follow-up on PayPal. I think our sense was that you were kind of expecting -- who were you expecting that to go away so the fact that you are able to renew it is a win. Am I right that you were expecting kind of a 2% to 3% headwind to loan growth from that going away and therefore not going away could be a big help for your loan growth in 2016?

Yes, that is right.

Yes, PayPal was disclosed is $1.5 billion in receivables that was expected to go away toward the end of 2016. Now we will be retaining it.

Got it. Thanks.

Moshe Orenbuch, Credit Suisse.

Great, thanks. You guys talked about two essential wins I guess that you probably took away from other issuers, both Citgo and Guitar Center. Could you just talk a little bit about the competitive environment and kind of what is out there and how you were able to get those, what else, what other areas you are looking at?

Sure. So I would say that we feel really good about our pipeline and activity in our pipeline. I think we've said in the past we have teams really dedicated across all three platforms. There is a competitive environment out there. I don't -- we don't see it being any worse in the private label space than or as competitive maybe as the bigger co-brand deals. We think that the competition is playing in the right areas.

I think for us we are winning really on capabilities. I think it is around some of the investments we have made in terms of mobile and analytics and data that are really helping us to win these partnerships. I think having a more focused process in the three platforms has also helped us. And frankly, I think the other thing that has really been interesting for us is sense we separated out, I think we are actually getting calls in which is new to us. So we feel like we are in a really good spot. I think we have said before we don't have to win every deal because we grow mostly by organic growth and so I think it allows us to really be thoughtful on the deals that we do want to get.

At the end of the day the most important thing for us is getting partnerships where we feel like we are bringing value to that partner and then the partner sees that value because that is really how you make these relationships long-term and sticky going forward. So we feel pretty good about the pipeline going forward.

Just to follow up, one of your large kind of partners, Sam's, did announced that they were going to be taking another card brand and could you talk a little bit about how you can kind of defend against that at the point of sale (multiple speakers)?

Sure. It is really not that unusual for merchants to accept another network. As a matter of fact, Sam's had already been accepting AmEx on their online portal already. I think for us it is somewhat of an opportunity because if folks start coming in using their AmEx card, we have the opportunity to cross sell our card and I think the uniqueness of the way the card works in Sam's, our credit card is a membership card. It becomes one so it is really easy for consumers to use or customers to use when they are in club. And I think the other is we have a fantastic value proposition on our Sam's MasterCard.

So we feel -- listen, no one likes anyone coming in, we look at these things and we have a good discussion. We have a great partnership with Sam's. We are very integrated with them and in some ways this could be an opportunity for us to cross sell.

Great. Thanks, Margaret.

David Ho, Deutsche.

Good morning. I had a question about the implications from the separation on potentially expenses and kind of what you can do to drive efficiency gains now that you are separate from GE and possibly not being part of the CCAR process and having greater transparency and kind of what you need to do on the qualitative aspects. Is there any opportunity there?

Yes, David, I wouldn't think about a significant opportunity there just related to separation. As we have said in the past, the infrastructure build costs are now in the run rate so when you look at the expenses and you look at the sequential build from second quarter to the third quarter, it was relatively modest. It is driven by growth and EMV. And we always see a seasonal increase in the third quarter. But the infrastructure build costs and everything that we have built to prepare for separation is reflected in the run rate.

And just based on the earlier comments I made, even though we are not technically subject to CCAR, the expectations are going to be similar, they are not going to be exactly the same but they are going to be similar and so I think it would be premature to talk about any kind of expense benefit that we expect from this because we are holding ourselves to the same standards as the Fed is holding others to.

So we are going to go through a couple of rounds here on filing a capital plan and doing the liquidity test and we will see how it goes and maybe there is a longer-term opportunity but nothing we see in the near-term.

Okay, that is helpful. Separately, the renewal at PayPal was obviously a big positive. Can you talk about the implications on maybe the RSA and kind of marketing expenses and kind of the upfront impact from that renewal? Has the Company been at similar economics or worse than you expected and maybe renewals in general, what do you expect there going forward?

All of the renewals that we have done probably with the exception of PayPal are reflected in our run rate. So that is I guess a broad comment on renewals.

On PayPal specifically, we can't get into the pricing or the economics but I can tell you that as Margaret said, we are really excited about extending the relationship with PayPal. We are able to do that. Our return is very attractive for us so we are going to continue to look to extend these programs and I think we are able to do that in a way that is attractive for us, attractive for PayPal and PayPal customers. And one of the things that we are going to do as part of a new relationship is we are going to upgrade some of the accounts to Dual Cards, a big portion of the accounts to Dual Cards. We think that will help us drive growth going forward.

So there's a number of things that we changed in the program but from our perspective all very much aligned with growing the program and we are going to do that at a return that is attractive for us.

Great, thank you.

Don Fandetti, Citigroup.

Sort of building on that same question, Brian, on the Amazon prime deal, can you talk a little bit about how that is progressing? And then secondarily, clearly there have been some mixed economic data points from your numbers it looks like things are pretty steady. Can you talk about if you have seen any sort of ups and downs in credit or spend trends?

Maybe I will start with where consumer spending and where we see a trend and then turn it over to Brian to some of the other points that you ask.

I think what we are seeing is that the trends continue to indicate the consumer is getting stronger. Brian will talk a little bit about credit, we will see that getting a little better. I think gas prices and unemployment are certainly helping the consumer.

I think the consumer is still cautious and they are definitely looking for deals and promotions. So I think our value propositions are really playing very favorably to the consumer.

The one area that I have mentioned before that continues to be performing well are things related to the home so things like furniture for instance are pretty strong. We feel pretty good about where the consumer is right now and I think a combination of our marketing, the data analytics, the building out of our mobile capability is really helping us drive some of this volume.

So the other question you had was around Amazon. I think similar to what we said earlier, we are really excited about the 5% value proposition for prime customers. We are measuring that every day, we are looking at the new account flow. We are looking at the purchase volume. Anytime you make a significant change to a value proposition like we did at Amazon, you want to do that in a way where you are kind of soft launching it, you are doing a lot of test and control so you make sure that it is delivering the economic performance that we expect and it is a good customer experience for the Amazon cardholders. And so far it is performing very much in line with our expectations and we are optimistic that we can do some more marketing around that offer here in the near-term.

Okay, thank you.

Rick Shane, JPMorgan.

In some ways Don really asked my question but I will pursue it a little bit more deeply. Obviously the Amazon value proposition is very compelling. It is a new program, it strikes me as a program that could have a high degree of seasonality given the nature of your partner. Can you just talk about what we should be thinking about in Q4 in terms of potential impact on volume but more importantly in terms of RSA and provision expense?

Why don't I start off a little bit. First of all I think one of the positives of the Amazon 5% for prime customers, it is really encouraging everyday spend. So I think that is really what the customer -- Amazon is really trying to do, they're trying to get that prime customer to not only buy big-ticket items and things like that but groceries and other things. So the 5% really encourages you to go there to that side versus somewhere else. So we think that is really great.

Our business is a seasonal business so obviously holiday is a big opportunity for us. We are heading into that. We think the Amazon 5% is going to be just a fantastic offering and we hope to see some broader offering of that as we go into the holiday season.

So I think overall this is a great offering and one that as Brian said we are really watching because I think as we get into the holiday season, a key for us is really making sure the consumer is getting everything they need and things are working in the right way and that is why we have really been thoughtful both on our side and the Amazon folks on their side to ensure the experience for the customer is really very good. I don't know, Brian, if you --?

In terms of more specific fourth quarter impact, it is really hard to estimate at this point because obviously we've got to determine and work out with Amazon to what extent and how broad we are going to go with the marketing in the fourth quarter, what the adoption rate is going to look like, what the spend is going to look like and this is very fluid. As I mentioned earlier, we are monitoring this thing almost hourly with Amazon. Our teams sit with them and they look at the spending patterns, the types of purchases, the repeat purchases. And then from our perspective from a credit perspective, we are also looking at the population and transacters versus revolvers and the credit mix and the through the door population so there is just a number of factors that we are looking at and I can tell you so far it is performing in line with our expectations but it is a little too early to give you any kind of specific forecast.

Okay, fair enough. Second question, you mentioned in third quarter $20 million of EMV reissue expense. Can you just help us understand where we are in that process? I am assuming you are most of the way through that but could you just let us know what the fourth quarter will look like?

We are 100% complete with our active Dual Cards being rolled out to our EMV. Obviously we will have an ongoing expense as new cards come due but the bulk is behind us.

Great, thank you.

Jamie Friedman, Susquehanna.

Thanks for taking my questions. Margaret, I think in your opening comments you had discussed that one-third of the applications are now coming mobile and online. I guess that is [Amaplay].

I was wondering how that helps your business process, does it improve the credit quality? Does it improve the data or the speed? If you could talk in that direction that would be helpful.

Yes, I think it is two things. Obviously the speed part is really good but I think the other is we are continually looking at ways to ensure that -- it is almost like a seamless process so for instance if you were to apply for the Amazon card and you are doing that online, it becomes your preferred card in the wallet. So we are continually looking at ways at how do we get to the speed of the answer, get you the card and then make it the card of choice if you will. So that helps us in our positioning.

The other is as customers and our research shows this -- as customers in particular are looking to make bigger purchases by being able to put online offers out there in terms of discounts depending on the promotion or type of senior purchasing, the ability for you to apply and buy right on while you are looking at those items is really a big opportunity for us. So I think that is another big area of focus for us.

And then lastly, I think as we continue to look at how people are shopping, the mobile channel and online has just become a much bigger part of how people are really looking to purchase. So it is a combination of things. It is really having that application process be really seamless but then connecting your marketing offers to make that customer really realize -- oh, I can get a bigger item or I can get a bigger basket if I get X card from any of our retailers because I have credit available to me. And that is really a combination of all of the things we are really trying to play out.

I also wanted to ask about CurrentC or MCX, they seem to be finally making some progress. There has been a couple of trades that have tracked their introductions in the market just this month. I was wondering if you could give us an update as to where you stand with them? I know you have partnerships in place but some sort of visibility would be helpful.

Yes, you know, obviously we have Sam's and Walmart who are a big part of CurrentC. We continue to build out the CurrentC capability and will launch as soon as they are ready to launch in the Walmart and Sam's Club organization and some of our other partners as soon as they are ready. So I think they are working through some of the functionality and doing some more testing. So I think in the near-term you will hear something of that being out in the marketplace.

Great. Appreciate the update.

Betsy Graseck, Morgan Stanley.

Good morning. A question on the CareCredit platform. Some competitors, some market place lenders have been suggesting that they are interested in competing in that space. And I just want to take the opportunity to understand how you feel your penetration has been going, how your progress has been against goals that you set out and whether or not you have seen any incremental competition coming from these new lenders or not?

I would start off with we have an incredible platform with CareCredit and we have enormous penetration in the industries that we are in so I think when you start with that, one of the things that I think is unique in CareCredit and let's just use the dental space as an example, it is not like you can go in and sign up at Walmart and you get a whole bunch of volume. You literally have to go dental office to dental office to dental office across the United States. So to gain traction and build out that platform from a startup is extraordinarily hard.

So we are not really seeing that competition really have any impact on us at this point. Many of the competitors also are doing more of an installment type lending versus revolving lending. And I think one of the unique things that we have really been able to build out -- first of all, we have incredible brand name. Our brand, when we do market testing is received extraordinarily well by the customers who use that product. We are getting 50% of our transactions now repeat purchases. So I went into my vet and I use it in the dental office or things like that.

I think our example today of partnering with Rite Aid where we are really looking at how do we increase the utility of the card because the customers who have that card have a great affinity to it. So we are not really seeing these guys. I know they are out there. We obviously keep an eye on all our competition but I think given our experience in this space we have this business for 25 years -- been out there for 25 years so I think we are well ahead of those guys and I think it will take a little time for them to even really have any kind of an impact on us if they even do.

I think the other thing you can look at is the purchase volume trends have also been pretty strong year to date. In the first quarter, purchase volume was up 5.6%, second quarter was 8.5%, this quarter it was 12.5%. So we are very encouraged by the trends we are seeing around purchase volume as well.

Right. It is a little bit more expensive a channel to run than the other two platforms. Is that an accurate statement?

I think you need infrastructure behind both this platform and Payment Solutions because you are dealing with thousands of merchants and you need a merchant process behind the scenes to ensure things are working the right way. So it is a bigger build out I would say and we have been at this for a really long time so I think we certainly have scale in that.

And then just second thing, one of your major retail partners, Walmart obviously this week had an analyst day where they highlighted a little bit of a lower expectation for spend trajectory and I wondered if you could comment about that and the impact on your business?

Sure. So obviously we saw the same thing. What I would say to you is that traditionally -- and we have shown charts on this -- we outperform the retailer two to three times from an organic growth perspective on our card programs. We are always doing better than the retailer and I would say that our program both with Sam's and Walmart are very strong. We are doing really well.

I would also say to you that this isn't always -- when retailers go through challenging times and we have been in this business 80 years so for sure we have seen people win and lose at different points. This is where our partnership becomes even that much more valuable and this is where I think our unique business model makes a difference. So this is where you have to stick by your partner and our goal is to figure out ways that we can help Walmart even further.

It usually becomes more of an engagement on how our card can help them grow theirself. We are watching it. We are not worried. Our performance is very strong. They are great partners. We have great relationships. We have 80 people sitting out in Bentonville, who all they think about every single day is Walmart and Sam's Club and that is their job. Their job is to figure out how to grow sales for our partner and that is the model that drives who we are.

So we feel okay. I think they've got a bumpy road but we will be with them all the way and I think we will help them as they go through that process.

Thanks.

John Hecht, Jefferies.

Good morning. Thanks for taking my questions. Most of my questions have been asked. But I thought I would just ask one about the penetration rates. You highlight ongoing organic growth as the primary source of growth. It appears that is really the result of improving penetration at your partners. Are you seeing any changes in the pace of penetration or should we just assume some consistency there?

It varies by partner so we have partners where we have very high penetration and then partners we have single-digit penetration. I think the way to think about it is there are a couple of different areas where I think our marketing and the way we are approaching the market is really just helping us. So we talked about this repeat purchase concept and CareCredit and Payment Solutions. So we are doing a lot more marketing in those two platforms around getting customers to use the card again.

That is a good example because if you went to this business four years ago, five years ago, with the bigger ticket purchase we thought of it as a one and done, you bought whatever you bought and that was it. Our ability to really get customers to reuse the card I think is a really big factor in those two platforms.

I think on the Retail card platform, I think probably one of the things that is really helping us besides the great value props that we have put out there, the Sam's, the Lowe's and Amazons, the ones we have talked about, mobile and online is definitely helping us.

We are outpacing the industry so the industry for online sales year-over-year is about 14% and we are growing at 21% year-over-year and I think that is having an impact. We know for a fact through our research if a customer shops both brick and mortar and online and mobile, that we have a tighter relationship with that customer and they will make more shopping trips and they will have bigger baskets.

So I think the more we can connect those dots in making that brick and mortar and online digital experience seamless to the consumer, I think we have an opportunity to continue to grow penetration.

That is very helpful. Thanks. A second question is just in thinking of your new program ramps, I mean was BP, Guitar Center, Citgo, are those in the ramp stage or are they fully normal run rates at this point in time to just think about how those might influence the near-term?

BP is obviously in the run rate as of the second quarter and that is lifting our growth rates and we saw that in the second quarter and the third quarter. The other two are in -- Guitar Center is in, Citgo is not in. So you will see a little bit of a ramp there but I can't give you the actual size of either one of them but they are smaller in relation to BP. So you just have to take that into account.

Great. Thanks very much.

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.

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