Synchrony Financial (SYF) 2016 Q2 法說會逐字稿

Welcome to the Synchrony Financial second-quarter 2016 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 quarterly 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 want to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainties 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 up the call for questions.

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

Thanks, Greg. Good morning, everyone, and thanks for joining us. During the call today, I will provide a review of the quarter and then Brian will give details on our financial results.

I will begin on Slide 3. Second quarter net earnings totaled $489 million, or $0.58 per diluted share. Sold momentum continued each of our business platforms, driving strong growth in purchase volume, loan receivables and net interest income this quarter. Purchase volume grew 9% while receivables grew 11%. Net interest income grew 10% over the second quarter of last year.

Our online and mobile purchase volume also continued its strong growth trajectory. Second quarter sales grew 27% over the same quarter of the prior year. Our online and mobile sales growth has far outpaced US growth trends, which have been in the 14% to 15% range.

As for asset quality metrics, 30-plus day delinquencies were 3.79% compared to 3.53% last year. Our net charge-off rate was 4.49% compared to 4.63% in the second quarter of last year. Expenses were in line with our expectations, increasing 4% over last year, and were largely driven by the growth we are producing.

We generated positive operating leverage and our overall efficiency ratio improved 157 basis points to 31.9%. Our receivables growth is supported by continued deposit growth which increased $9 billion, or 23%, to $46 billion this quarter. Deposits now comprise 71% of our funding sources and though this is slightly above our original target range of 60% to 70%, we plan to continue to drive deposit growth by offering competitive rates, outstanding customer service, and the continued enhancement of our product suite.

One of our strategic priorities is to build Synchrony Bank into a leading full-scale online bank. Given our significant deposit growth, we were able to fully pay off our bank term loan on April 5, well ahead of its contractual maturity in 2019.

Our balance sheet remains strong. With Common Equity Tier 1 ratio of 18.5% and liquid assets totaling $14 billion, or 17% of total assets at quarter end. The strength of our balance sheet and financial performance has enabled us to start returning capital to shareholders.

As we announced earlier this month, our Board approved a $0.13 quarterly dividend and its $952 million annual share repurchase program. We will now begin to opportunistically repurchase our stock and look forward to building on these actions as we look to buy capital through both growth of the business and return to shareholders.

Moving to business highlights, we recently renewed several key relationships including Ashley Homestore, Suzuki, VCA Animal Hospital, and the American Society of Plastic Surgeons. We also continue to sign new partnerships in the travel and entertainment space.

We won a new US-based program with Cathay Pacific Airways. We also signed a new program with Fareportal, one of the largest and fastest-growing online travel companies. These programs add to our growing T&E portfolio that already includes recently launched programs with Stash Hotel Rewards and Marvel Entertainment.

The launch of our new program with Marvel this quarter includes an attractive cash back value proposition where the greatest benefits are accrued on leisure activities, including dining out, movies, concerts and amusement parks. We are excited about these new partnerships, as we believe this is a segment that provides attractive opportunities and we are pleased to extend our presence in it.

We also launched a new program with Mattress Firm, one of the nation's premier specialty bedding retailers. We continue to be highly focused on driving organic growth and pursuing new opportunities to grow our business. We are working closely with our current partners to deliver incremental value and drive program growth and provide value to our cardholders.

Moving to Slide 4, which highlights the performance of our key growth metrics this quarter. Loan receivables growth remained strong at 11%, primarily driven by purchase volume growth of 9% and average active account growth of 8%. Interest and fees on loans grew 10% over the second quarter of last year.

Previously, we had reported platform revenue but starting with this quarter, we will utilize interest and fees on loans as a means of discussing our business performance, favoring this GAAP measure that more closely aligns with the growth metrics of our business. During the quarter, we continued to drive growth by delivering value to our partners and cardholders via attractive value propositions, promotional financing and marketing offers.

On the next slide, I will discuss this quarter's performance drivers across our sales platforms. We continue to deliver growth across all three of our sales platforms in the second quarter, as shown on Slide 5. Retail card generated another strong quarter of results.

Receivables growth of 10% was driven by purchase volume growth of 8%, and average active account growth of 7%. Interest and fees on loans increased 11%, primarily driven by the receivables growth. The strong growth in retail card continued to be broad-based as we saw growth across our partner programs.

As I noted earlier, we had an active quarter with the signing of new partnerships with Cathay Pacific and Fareportal and the launch of the new Marvel program. We have developed strong long-term relationships that solidify our position in the space, and provide the foundation for the addition of new partnerships and the expansion into new sectors, such as Travel & Entertainment.

Payment solutions also delivered another strong quarter. Receivables growth of 15% was driven by purchase volume growth at 16% and average active account growth of 13%. Interest and fees on loans increased 13%, primarily driven by the receivables growth. The majority of the industries where we provide financing had positive growth in both purchase volume and receivables, with particular strength in home furnishing and automotive products.

We had a very active quarter with the renewal of key relationships with Ashley Homestore and Suzuki and the launch of the Mattress Firm program. We continue to extend Card Reuse Payment Solutions, which represented 26% of purchase volume in the second quarter. CareCredit also delivered a strong quarter. Receivables growth of 10% was driven by purchase volume growth of 10% and average active account growth of 7%.

Interest and fees on loans increased 5% primarily driven by the receivables growth. Receivables growth this quarter was again led by our dental and veterinary specialties. We are pleased to renew a important veterinary partnership with VCA Animal Hospitals as well as our strategic partnership with the American Society of Plastic Surgeons.

Expanding the network and utility of our CareCredit card also continues to be an area of focus and Reuse represented 50% of purchase volume in the quarter. Each platform delivered strong results and continue to develop, extend and deepen relationships, and drive value to cardholders.

I will now turn the call over to Brian to provide the details on our results.

Thanks, Margaret. I will start on Slide 6 of the presentation. In the second quarter, the business earned $489 million of net income, which translates to $0.58 per diluted share in the quarter. We continue to deliver strong growth this quarter with purchase volume up 9%, receivables up 11%, and interest and fees on loans up 10%.

Average active accounts increased 8% year over year, driven by the strong value proposition on our cards which continue to resonate with consumers. We also see this in average balances and spend, with growth and average balance per average active account up 4% compared to last year, and purchase volume per active account increasing 2% over last year.

The interest and fee income growth was driven primarily by the growth in receivables. The provision increased $281 million compared to last year. The increase is driven by higher reserve build and receivables growth which I will cover in more detail later.

Regarding asset quality metrics, 30-plus delinquencies were 3.79% compared to 3.53% last year, and slightly better than Q2 2014 of 3.82%. The net charge-off rate was 4.49% compared to 4.63% last year and 4.88% in Q2 2014. Delinquencies were consistent with the range we have seen in the second quarter over the past two years, with net charge-offs being lower than the range.

Our allowance for loan loss as a percent of receivables was 5.7%. As we noted in June, we expected the allowance to increase 20 to 30 basis points in the second quarter compared to the first quarter level of 5.5%.

RSAs were up $43 million compared to last year. RSAs is a percentage of average receivables, or 4% for the quarter compared to 4.1% last year. The lower RSA percentage compared to last year is due mainly to higher provision expense associated with the growth in the programs as well as the incremental reserve bill, which more than offset incremental sharing on the year-over-year improvements in net interest margin and lower efficiency ratio.

Given the increase in the reserve level, we expect that RSA percentage on a full-year basis to trend closer to the 4.2% to 4.3 % range. Other income decreased $37 million versus last year. In the prior year, there was a $20 million gain on portfolio sales which did not repeat.

The remainder of the decrease is attributable to higher loyalty and rewards costs that were partially offset by an increase in interchange revenue. While interchange was up $28 million driven by continued growth and outsourced spending on our dual card, this was offset by loyalty expense that was up $41 million primarily driven by new value propositions, including the Walmart 321 Value Prop.

As a reminder, the interchange and loyalty expense run back to the RSAs so there is a partial offset on each of these items. Other expenses increased $34 million, or 4% versus last year. Now that we are comparing to periods where the infrastructure build is largely in a run rate, we expect going forward expenses to be driven largely by growth as well as strategic investments in our sales and deposit platforms as well as enhancements to our digital and mobile capabilities.

The efficiency ratio for the quarter was 31.9%, which was 157 basis point improvement over the prior year, driven by strong growth in the business and staying disciplined on expenses. I will cover the expense trends in more detail later. Overall, our performance drove a solid quarter, generating a ROA of 2.4%.

I will move to Slide 7 and cover our net interest income and margin trends. Net interest in income was up 10%, driven by strong loan receivables growth. The net interest margin was 15.86% for the quarter, up 9 basis points over last year.

As you look at the net interest margin compared to last year, there are a few dynamics worth highlighting. We benefited from a higher mix of receivables versus liquidity on average this quarter as we used excess liquidity to fully pay off the bank term loan facility in early April.

The yield on receivables declined 14 basis points to 21%, reflecting the slight mix shift due to the continued strong growth in promotional balances, particularly in Payment Solutions. The cost of funding was up 7 basis points to 1.9%, due mainly to an increase from higher short-term benchmark rates.

Our deposit base increased $9 billion, or 23% year over year. We are pleased with the progress we've made growing our direct deposit platform and deposits are now 71% of our funding, or 61% last year.

The second quarter margin was 15.86%, which was 9 basis points better than last year and slightly better than the first quarter of 15.76% and as we discussed on our first quarter call, we expect it to be fairly stable for the balance of the year. Overall, we continue to be pleased with our margin performance.

Next, I will cover our key credit trends on Slide 8. The backdrop for credit is still favorable; however, our forecast indicates that credit will gradually normalize higher from the recent lows. It's important to note that we are not seeing a step-change.

Our view takes into consideration factors like portfolio mix as well as account maturation, consumer trends, and payment behaviors. We consider all of these factors in our underwriting today and we're still seeing very attractive returns across the credit Spectrum.

In terms of the specific dynamics in the quarter, 30-plus delinquencies were 3.79% compared to 3.53% last year. And 90-plus delinquencies were 1.67% compared to 1.52% in the prior year, both in line with the levels we have been operating at over the last past two years.

The net charge-off rate was 4.49% compared to 4.63% last year and 4.88% in 2Q 2014. Net charge-offs were somewhat lower than the range we had experienced over the past two years.

The allowance for loan losses as a percent of receivables increased to 5.7% in the second quarter, in line with the range we provided in June. This results in the allowance coverage of approximately 13 to 15 months of expected charge-offs, which should be fairly consistent going forward.

So as you think about credit normalization from here, we expect net charge-offs will be around 4.5% in 2016, which is largely in line with our guidance for the year. And we've indicated that we expect net charge-offs to trend 20 to 30 basis points higher over the next four quarters, which should be helpful as you think about 2017.

So in summary, while credit will normalize from here, it's important to reiterate that we are still operating in a pretty favorable environment when it comes to credit and the risk adjusted yields we're earning on the new accounts we're bringing on are still very attractive.

Moving to slide 9, I will cover our expenses for the quarter. Overall, expenses continue to be in line with our expectations. Expenses came in at $839 million for the quarter, a 4% increase over last year and are primarily driven by growth of the business.

Looking at the individual expense categories, employee costs were up $51 million as we have added employees over the past year in key areas to support the infrastructure build for separation as well as growth of the business. This increase also reflects costs related to bringing certain third-party services in-house to be managed by our employees as well as the replacement of certain services that were provided to us under the GE TSA.

Professional fees were down $2 million. This is primarily driven by growth in the business which was more than offset by the reduction in third-party services mentioned previously as well as expenses related to last year's EMV rollout, which did not repeat.

Marketing and business development costs were down $1 million. Higher cost driven by increases in portfolio marketing campaigns and promotional offers, which helped drive strong growth and purchase volume receivables, were offset by lower marketing costs related to our deposit platform as well as redirecting some marketing spend into everyday value propositions which is reflected in the loyalty program expense.

Information processing was up $7 million, driven by continued IT investments and the increase in transactions and purchase volume compared to last year. Other expenses, down $21 million due to benefits from EMV as the reduction in TSA costs, which are no longer being billed to us by GE. The efficiency ratio was 31.9% for the quarter, a 157 basis points lower than last year, as the business drove positive operating leverage through strong revenue growth and maintaining discipline on expenses.

We expect the ratio to trend up from this level during the remainder of the year as we see seasonably higher marketing and volume-related expenses in the second half of the year as well as continued spend on strategic investments. However, we expect it to remain below 34%, in line with what we communicated back in January.

Moving to slide 10, I will cover the funding sources, capital and liquidity position as well as recap our capital plans. Looking at our funding profile first. One of the primary drivers of our funding strategy has been the continued strong 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 $9 billion, primarily through our direct deposit program. This puts deposits at 71% of our funding, which is slightly higher than the top end of our target range of being 60% to 70% deposit funded.

While we have now moved slightly over the top end of 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. Longer-term, we would expect to grow deposits more in line with our receivables growth.

We are also looking at additional ways to increase the stickiness of the deposit base, including the rollout of new products over the next couple years which is checking and online bill pay. Funding through our securitization facilities has been fairly stable in the $12 billion to $14 billion range and is now 18% of our funding.

In May, we successfully issued $600 million in 5-year fixed rate notes; this is consistent with our approach to maintain securitization at between 15% to 20% of our total funding. Our third-party debt now totals 11% of our funding sources. This reflects the full prepayment of the bank term loan in early April, well ahead of its contractual maturity in 2019.

We will continue to be a regular issuer in the unsecured debt markets. In May, we did issue $500 million in 18-month floating rate notes. So a fairly active quarter on the issuance front. Overall, we feel very good about our access to a diverse set of funding sources

Turning to capital and liquidity. We ended the quarter at 18.5% CET1 under the Basel III Transition Rules and 18% CET1 under the fully phased-in Basel III rules. This compares to 16.5% on a fully phased-in basis last year, an increase of approximately 150 bps over the past year.

Total liquidity increased to $21 billion and includes $14 billion in cash and short-term treasuries, and an additional $7 billion in undrawn securitization capacity. This gives us total available liquidity equal to 25% 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.

Before I wrap up, I wanted to recap our initial capital plan actions we announced on July 7. Our Board approved a $0.13 quarterly stock dividend as well as the share repurchase program of up to $952 million for the fourth quarters ending June 30, 2017.

We expect to make share repurchases subject to market conditions and other factors, including any legal and regulatory restrictions and required approvals. Our Board also declared our first quarterly cash dividend of $0.13 per share, payable on August 25 to holders of record at close of business on August 12.

Overall, we are executing on the strategy that we outlined previously. We've built a very strong balance sheet with diversified funding sources and strong capital liquidity levels and we're very pleased to be in a position to begin returning capital to our shareholders. With that, I will 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 again delivered significant growth across key areas of our business.

We signed, renewed and launched a number of important partnerships and further expanded the business segments we are serving. And our pipeline of additional opportunities remains strong. Our digital channels remain a key component of our overall strategy and we delivered strong growth there as well.

To support our growth, we are successfully expanding our deposit base and increasing its importance as a source of our overall funding. Our strong capital position and performance has enabled us to begin to return capital to our shareholders, a goal that we are very pleased to have achieved. I will now turn the call back to Greg to open up the Q&A.

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I would like to ask for the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the investor relations team will be available after the call.

Operator, please start the Q&A session.

(Operator Instructions)

John Hecht, Jefferies.

Morning, guys. Thanks very much. First, with respect to credit, obviously, you guys gave us revised guidance a few weeks back. But the quarter reflected fairly strong year-over-year credit trends. Just for our edification, when should we see the paces and see this pick-up based on what you're seeing in delinquencies and roll rate trends at this point?

John, you cut out in the room a little bit, but I think your question was around Q2 credit being a little bit better than you expected; is that right?

Correct; and then what pace should we see it start to normalize given the delinquency in roll rates.

Yes, sure. So I would disconnect the guidance from a little bit from what happened in the quarter. In the quarter, we had a little bit higher recoveries. If you look over the past two years, recoveries have been running in the 1.1% to 1.2% of receivables range. This quarter, they were right around 1.3%. So that drove a bit of the improvement.

Going forward and what was included in our guidance is that recoveries would be pretty similar to where they've been the last two years. So somewhere in that 1.1% to 1.2% of receivables. That's really what was contemplated in the forward guidance.

So no change to what we said in June. We gave you what we think we were going to close the year at for 2016 at around 4.5%. And starting incremental year over year 20 to 30 basis points for the first quarter and the second quarter of 2017.

Great. Thanks for the color there. Then just thinking about net interest margin, obviously, there was a little bit of a benefit this quarter because of the ratio of liquid assets to receivables. Are you able to further optimize that or how should we think about the movement there and what that means to margin in the near term?

Yes, the net interest margin came in pretty similar to where we were in the first quarter. At that point, we had paid down the bank term loan so we were able to optimize liquidity a bit and take some of that excess and pay down the bank term loan.

We're obviously really pleased with that and we thought jumping off in the first quarter, the margin would be pretty stable for the balance of the year which was right around, I think 15.75%. We still think that's a pretty good way to think about the back half of the year.

If deposit growth continues at this pace, we will get a small benefit there. We might be able to do little bit more on liquidity but probably not much. If you look at the year over year, we have been able to improve the yield that we're earning on the cash and the treasuries.

But then there is some, what I would call, modest offsets to those two positives. One, we continue to see really strong growth in Payment Solutions. As you know, those are promotional balances so those come on initially at a lower yield.

Then our guidance initially, back in January, included a small benefit from another 50 basis points of Fed rate increases in the back half of the year. Obviously, that looks a little bit less likely. So it's some -- a few puts and takes, I would say, but the margins should be pretty stable for the back half of the year.

Great. Appreciate the details. Thanks.

Ryan Nash, Goldman Sachs.

Good morning, guys. Maybe I could start off with a question on the RSA, Brian. It was down 30 basis points year over year and I think it's around 4% in the first half, versus the guide for 4.2% to 4.3% and that implies the RSA will be roughly in line with the back half of last year, give or take a couple of basis points.

All else equal, that would probably -- on my math, that implies either provision in the back half of this year that's similar to last year, or we get continued improvement in efficiency. So can you just maybe help us understand why the RSA would go back up to the second half of last year's level given how much it's come down in the first half, or is it just being conservative on the guidance?

Well, I think there's a few things. So if we just -- let's just breakdown the quarter, maybe a little bit on the RSA. The RSA, obviously, included an offset on the reserve bill. That's why you saw it down year over year. That's why we revised the guidance on RSAs from around 4.5% to 4.2% to 4.3%.

You also have to remember that we had a lot of things in the P&L got better year over year. So we had obviously better revenue; margins were little bit better. Efficiency ratio was better, as you indicated. So all else being equal, that would have resulted in a higher RSA percent compared to last year. Then those improvements were both more than offset by the higher reserve bill and the higher provision.

The one thing I'm not sure you're taking into account is, you think about the back half of the year, is the third quarter is typically the high watermark on the RSA. We've got some seasonality and if you look back over the past two years, you do see the RSA percentage trend up a bit in the third quarter seasonally. So as you think about the back half, you've got a factor that in, but that's all included in the outlook for the 4.2% to 4.3% for the year.

Got it. And then maybe I can ask a follow-up on credit. You talked about losses of 4.5% and then up 20 to 30 bps for the four quarters after. Can you maybe just give us a sense of how much the upward bias on losses is actually coming from higher growth so we've all heard about various banks talk about the impact of seasoning on portfolios, how much is actually coming from lower late-stage [cure] rates that you talked about.

Just -- we're obviously up this year and next year and I know you don't have a crystal ball out for three years but at what level would you expect losses to begin leveling off assuming growth level is off?

There's a lot of factors here and some of these are obviously cause and effect. In June, our comments indicated that we were expecting to see this modest increase in net charge-offs. As part of that, we focused specifically around the payment behaviors that were driving the reserve build in the quarter.

Now we're giving you some broader context on some of the dynamics that we take into account when we build the forecast. Those are things like portfolio mix by platform, product, program, channel as well as account maturation or seasoning of vintages as well as the overall consumer trends.

I would say if you look at seasoning of vintages for us is -- it's -- it absolutely plays out similarly in private label as it does it for general purpose cards. We typically see peak losses at around 24 months. I think that's pretty consistent with rest of the industry.

However, our growth rates have been more consistent than, I think, others. So while it certainly plays a factor in what we're seeing in our expectation, our growth rates haven't been perfectly consistent. So I would say it's a factor but it's not a significant, I think, for us as I think what you're seeing for others out there.

Got it. Thank you for taking my questions.

Sure, Ryan.

Don Fandetti, Citigroup.

Margaret, I was wondering if you could comment on the pipeline of potential portfolio partnership acquisitions and then can you talk a little bit about on these larger deals, what you're competitive advantage is versus your larger peer and how you approach those types of transactions?

Sure. So I would say, overall, our pipeline continues to be robust. I think I've mentioned in past calls that we have dedicated resources in each of our three platforms and I think you can tell by, even this quarter, we won some nice deals.

We feel competitively in the $500 million to $1 billion portfolio size. The competition is pretty reasonable. And we really compete effectively there. When you get to the bigger portfolios, obviously, the cost goes and an example of that, it gets much more competitive.

I would say overall on the bigger deals that are out there are people are discussing, I think we start by competing on our capabilities and the history and the level of experience that we have in the industry. That's how most of these conversations start. I would say we generally win on those types of things.

We feel that some of the things we've invested in, in the last couple years, particularly around online and digital and mobile, are really playing to our advantage. We feel we are further ahead than the competition there. I think the other area that we're continuing to invest, it is really the whole data analytics portion of the business and really leveraging some new technology there.

So on a capability point of view, I think we can -- we have a couple areas where I think we're a little ahead. We are very partner focused. I think the key relationships we have today really help reiterate what potential partners, how we work with our partners and that I think is another advantage. So I think it's overall capabilities experience and long-term relationships and partnerships that we have.

Okay. On co-brand deals like Cathay Pacific, can you talk a little bit -- on one hand, it's very good for your loan growth but I wonder if that's a slightly more competitive segment? And can you talk little bit about how you won that deal and the returns relative to private label transactions?

Sure. Co-brand is a little more competitive. But I think -- we're not -- our strategy is really to look at co-brand and dual card opportunities in the business that meet our returns. So Cathay and Fareportal being the other one for this quarter, again, it started out with our capabilities and our partnering experience. That's really how we won both of those deals.

When we look at overall return, every deal that we do, we make sure it's competitive within the overall return for our business. We look to ensure that we're keeping that return in mind as we take on new opportunities. I don't know, Brian, if you have anything on the return.

The only thing I would say, Don, is you're going to see us be pretty selective around co-brand opportunities. We like the space but we are going to be cautious around it. You're probably not going to see us go after the really big marquee deals but we're -- as Margaret said, we can go in and compete and demonstrate our capabilities and win and on that basis and still earn an attractive return. We're going to go after those deals.

Thank you.

James Friedman, Susquehanna.

Hi. In past quarters, Margaret, you've had more commentary on the digital channels. I was wondering if you could share some of the metrics that you've had in the past or at least qualitatively, describe some of the trajectory you're seeing there.

Sure. So it can -- I will say that the digital channels continue to be important as more and more consumers are active on the digital channel. Our online sales for the quarter were up 27% versus the second quarter last year. Approximately one-third of our applications now occur digitally.

That's -- if you go back to 2012 to the -- to current, we've received over 11 million mobile applications. That's growing at about 78% year over year. If you compare us to the industry, I think our growth is much stronger. The industry overall is reporting somewhere around 14% to 15%. I think this is an area where the question earlier of how we compete. I think this is an area where it's extraordinarily important for us to ensure we're investing.

We have a position with GPShopper. We've been able to leverage that partnership and help our partners actually get out mobile applications sooner where we are fully integrated into the application. So those are the types of things that I think as the industry shifts from brick-and-mortar to more online, we just shave to be the best in class in those types of things.

Thank you. I just wanted to ask one follow up, Greg, about the OpEx seasonality. If you could share some perspective on that?

Sure. This is Brian. I assume you meant me, but if you want to hear from Greg, I'm happy to put him on the line as well.

I apologize, Brian.

That's all right. We obviously delivered, I think a pretty strong efficiency ratio in the first half of the year. What I would tell you this quarter is similar to what I told you last quarter which is we do expect the efficiency ratio to rise from here in the back half of the year, really for two reasons.

We do more marketing and promotions in the second half of the year, particularly around holiday. So that drives -- that will drive an increasing efficiency ratio. We also have more of our strategic investment spend stacked against the second half of the year as well. As those investments come in throughout the year, we would expect the ratio to increase but we will still be within the annual guidance of below 34% for the year.

Thank you very much.

Rick Shane, JPMorgan.

Thanks for taking my question this morning. I would like to circle back on the questions related to RSA. And use this as an opportunity to perhaps refine the way we think about this. Brian, I realize you gave guidance and that is really helpful but I would love to delve into the mechanics here.

When we look at the interest income and fees quarter over quarter, they were up about $100 million -- excuse me, and those were roughly flat. Provision was up about $100 million. That would suggest, assuming that there is a 50/50 share on the RSAs that you would expect roughly a $50 million decline in RSA expense.

We didn't see that; that wasn't our assumption either. But I'd love to talk through, is it an accrual issue? Is it a timing issue? How do we think about this on a dollar basis as opposed to a percentage basis?

Rick, part of the reason why we did give you some guidance on this is that we recognize that it's very hard for you to model it based on the information you have. Part of the reason for that is that all of our deals are very unique, very customized. Both in terms of the percentage sharing as well as the level, at which we start to share with the retail partner, and for obvious reasons, we can't provide any visibility around those contractual terms. Our retailers also have seasonality.

So there are a number of moving pieces that make it difficult for you to model it and to have that transparency. So we give you a guidance range for the year.

What you should be able to see from the quarterly results is that when things get better, we tend to share more; when things get worse, we share less with the retail partners. That dynamic whether you're looking at it as a percent of receivables or a percent of pre-tax earnings, excluding RSA, those ratios hold, I would say fairly consistent but for the seasonal components that I mentioned.

Got it.

So I know that's not particularly helpful in terms of how you're going to model it but I would just continue to use the guidance that we're giving you. I think that's probably the best way for you guys to get it right.

Okay. Just one follow-up to that. When we think about the -- let's assume that it's an ROA threshold. Is it on a trailing 12-month basis or does it true-up every quarter in terms of how you accrue it.

For the most part, I assume that it's trued-up in the quarter.

Okay great. Thank you.

Bill Carcache, Nomura.

Thank you. Good morning. Recognizing that you don't give specific EPS guidance, can you speak to your confidence level and your ability to grow earnings in the current credit environment if the current environment holds and you don't necessarily see further declines in unemployment, but you also don't see increases.

It seems to us like your business model enables you to still be able to generate healthy EPS growth in this environment, particularly once you start layering in the upside from capital return, but I think there's some concerns around that. And I would love to hear your thoughts.

Bill, I think the fundamentals of the business are still very strong. If you -- let's just walk down the -- we'll walk down the income statement and look at some of the key indicators. Net interest margin is stable to improving. We feel good about the margins, the resiliency of the margins.

RSAs act as an offset other things that are going on in the P&L. We drove fairly significant operating leverage. I think we're fairly optimistic going forward that we'll be able to continue to do that, particularly given that the infrastructure, growth, spend, that's all in the run rate.

We are really focused on driving operating leverage going forward. And then we're using some of the savings to invest in the long-term ideas and strategies and things like mobile and data analytics. But this is a scalable platform and we should be able to drive that operating leverage going forward.

So then you're really left with what is the outlook on credit and we've given you a view on that as well in terms of what we're seeing. So I would say you've got a whole bunch of positives and then we're going to build reserves based on growth in the business, as well as our expectation in net charge-offs and we will continue to do that. But I think that, that adds up to a pretty positive outlook generally for the business.

Thank you. That's really helpful. If I may ask one follow-up on credit. Just -- it looks like you guys are reserved at very healthy levels. And have -- just looking at yourselves -- you guys relative to peers.

Capital One, which reported last night, is running with reserve coverage of about 12 months in it's domestic card segment while you guys are running well north of that, yet you have less subprime exposure. Can you help us understand why you guys are running with what looks to be relatively higher reserve coverage versus some others?

Well, obviously, I can't speak to how others reserve. That I can't do. But I can tell you that our reserve is based on our best estimate of the incurred losses that we believe exist in the book at the end of the reporting period.

Our models generally look out over a 12-month window. They include our expectations for net charge-offs. We also include qualitative and other factors. Our reserve coverage, we don't book to a specific number of months, but it typically falls in that 13-month to 15-months of expected net charge-offs.

Other than that, there's some really good disclosure in the Qs that you can look at that talks about the other factors that we build in. But it's tough for me to compare; I don't really have visibility into what others do.

Understood. Thank you very much.

Arren Cyganovich, D.A. Davidson.

Thanks. Excuse me, in terms of the platforms, Payment Solutions continues to somewhat grow a bit faster. Is that a function of folks looking for the deferred interest product or is it more a function of just adding a higher number of partners in that over the past year?

I actually think it's a couple of things. It's -- we've had great success in winning more partners there for sure. The second is we've put a fairly robust marketing strategy in place there to actually get reuse on the card. So if you went back four or five years ago in that particular platform, it -- we used to describe it as you bought the product and you were done.

We now do fairly sophisticated marketing using our analytics to get customers to go back and repurchase. That's another positive. I would say, generally speaking, the other positive is a lot of the products within Payment Solutions are related to home.

We definitely have seen that trend of home being positive, where people are investing back in their home. So I think we've seen a positive momentum in that business, really, for the last probably 12 to 15 months and it's just continuing.

Thanks. I guess, In terms of the -- we're hearing from other issuers that the competitive environment may be more so related to the retail card side. It seems to be increasing a bit over the past three to six months. I guess, no big surprise but I'm curious as to what you're seeing from a competitive standpoint?

I don't -- I think it's been the same personally. I think the players are the same players. You get people come and go within that segment. I don't think it's hypercompetitive.

I think -- listen, you need to ensure that you're building and investing in areas that are really going to help the partners. I think as you read, it's pretty -- 2% to 3% retail growth so everyone's looking to try to get that customer back in there.

We feel that we have all the right aspects to compete effectively in the space. We're not going to win every deal nor would we want to win every deal. So in the context of the overall market and what's available, we feel like we're winning the deals we want to win.

Great. Thank you.

Mark DeVries, Barclays.

Thanks. I wanted to drill down a little more, Brian, as you commented on operating leverage in the business. I understand your guidance, the efficiency ratio for 2016, but just hoping you can give us a little bit more to think about in the longer-term outlook for the efficiency ratio and what investments do you need to make to continue to sustain growth in the business?

Well, I would say, generally, the level of investment will be fairly consistent with what we've been doing the past few years. Investing in long-term growth ideas is not a new concept for us. We've been doing that for quite some time. And I think that's why we are -- we have the growth rates that we do and we're -- we continue to win and renew our partnerships.

What I would tell you is we're very focused on driving operating leverage. You saw that in the first half of this year. It's a scalable business. I mentioned the infrastructure cost and the run rate earlier. It will continue to drive operating leverage, but as we get more efficient across the business. We're always running productivity initiatives and we are looking at moving more customers off of paper statements to online statements.

We're improving our call center and collections efficiency metrics. So we're working on eliminating waste in the back-office and things like that. That results in real operating leverage and real productivity.

Then in parallel with that, we look at things that we feel like we need to invest in to be a very successful business for the next 10 to 15 years. Those are things -- some of the things that Margaret talked about.

Investing in mobile capabilities, which is something we've been doing for four or five years. Data analytics, CRM, this is a rapidly changing industry and we've got to stay on top of those things. But even after you take those incremental investments into account, we would expect to and we would hope to continue to generate positive operating leverage.

That doesn't mean we're going to generate positive operating leverage every quarter. We're not going to pass up a long -- good long-term strategic investment to show a few basis points improvement on the efficiency ratio in any one quarter. But over the long term, this is a big focus for us and for the management team.

Okay and just one clarifying question on the guidance itself. I think you indicated remain below 34% on the back half. Are you talking about each quarter should remain below 34% so the full-year average probably remains below 33% or are you just saying, you're still sticking with the full-year below 34%?

We're sticking with full-year below 34%. Thanks for the clarification.

Okay, thanks.

Moshe Orenbuch, Credit Suisse.

Great, thanks. Most of my questions actually have been asked and answered, but maybe just a follow-up on credit. Could you talk a little bit about the industry setting and -- because you've gotten more, I would say, more issuers also talking about the seasoning of their portfolios. Do you think that this helps or hurts if others are in somewhat similar positions? And can you just talk about how that might affect yours and the industry going forward?

Well, it's hard for me to comment on what others are saying. I think the trends are and the commentary seems to be fairly consistent which is that I think the backdrop is still pretty healthy. I think the consumer is still generally healthy. The overall macro environment is pretty strong.

With that said, the consumer continues to take on more debt. They continue to take on more leverage. And while it appears to be modest and it looks like the overall levels are still pretty reasonable and pretty responsible, it's something we're watching carefully. I think others are watching it carefully as well.

So our forecast includes that trend. It also includes the other factors that I mentioned. Portfolio mix, and mix by program and channel and other things. We believe this is going to result in a gradual increase in charge-offs over time.

Some of that is seasoning but as I mentioned earlier, I think seasoning, while everybody has on a vintage, similar seasoning patterns, depending on the growth rates and the consistency of the growth rates, you could end up with a very different result depending on the issuer. And so I think while that is a factor, we have certainly considered in our outlook, it plays maybe less of a role for us as it does with some others.

Okay. Great. Thanks. And maybe just a little bit of an update in terms of some of the new potential activities on the CareCredit front.

CareCredit is a great platform. It's one that we want to grow. So in addition to always signing up and winning new partnerships, which is key, the second area that we're focused on is really the utility of the card. So we're continuing to look at ways.

Actually, the consumers who have that card are looking to use the card more, so things like our partnership with Rite Aid. You will see more of those types of partnerships come out. We have a 50% reuse on that product, which is very high. We are looking at some additional industries that we might want to expand in as well as -- our biggest opportunity really in CareCredit is just getting more of what's in a partner's office.

So if you think of dental as an example, it's getting more of those patients who come in to utilize the payment methodology of CareCredit. So we're working on some initiatives around that to really -- similar to retail, increase our penetration in the office, the card.

Lots of activity going on there. Lots of great marketing. We feel very positive about that business. It's -- it might be a little caboose, but it's a growing caboose.

Got it. Thanks.

David Scharf, JMP Securities.

Good morning. Thanks for taking my question. First, I had a follow-up to really both questions on the pipeline in ROA. Margaret, as we think about the verticals you're targeting and specifically, T&E has been mentioned the last couple of quarters as a priority; you just signed up Cathay.

More holistically, as we think about the T&E vertical, airlines, hotels and the like and other verticals that are in your target area, is the profile or the mix of dual card and in-store going to materially change over the next few years? Should we be thinking about the profile changing, particularly as the T&E sector seems to be obviously almost exclusive to the dual card --

We look at -- I would say no. Dual card is still a very important aspect of our business. We -- I think generally speaking, in our overall portfolio, we always prefer if we can have a private label card and a dual card in our retail segment because it allows us to really grow that portfolio.

In terms of the co-brand aspect of our business, we're really trying to take some of the learning set of our retail dual card space and leverage that across some of these opportunities on the T&E side. And driving value props and even how you sign up and using mobile and digital as a way to really advance there.

As Brian said, we're not looking to be the next big co-brand Company. That's not our strategy. But we think opportunistically in a way for us to grow the business is really to look for these other opportunities and take our capabilities that we have and leveraging those in some of these new markets.

Got it. That's helpful. And then lastly, just one more follow-up on credit. In the broader topic of curing later-stage delinquencies, which was highlighted last month.

Has there been any -- is there any either internal change or external regulatory changes regarding call-center activity? How active your delinquency management is and anything on the collection front? And then in addition, can you provide some color whether historically, you've sold many charge-offs and how that mix plays into the recovery factor?

Yes, sure, so on the first one, I would say, generally, we're always making improvements and refinements to our collection strategies. We're fully compliant with the applicable regulatory guidance, whether it's TCPA or whatever it is. And obviously, those have some impact on our ability to collect, but I would not highlight them as being overly significant in terms of the overall results.

There are things that we adapt to, along with the rest of the industry. And we make other improvements to work offsets to those.

In terms of recoveries, I would just reiterate what I said earlier. The overall recovery rate, which includes a combination of what we collect in-house as well as what we sell has been pretty consistent. If you look over the past two years, it's been right around 1.1% to 1.2% of average receivables. It was a little bit higher this quarter. We think it comes back down into that two-year average going forward.

Got it. Thank you.

Vanessa, we have time for one more question.

Sanjay Sakhrani, KBW.

Thank you. Good morning. I guess I have a follow-up question on credit. It sounds now like you guys are talking about more normalization of losses versus some kind of specific stress as it might have sounded like at a recent conference. Maybe you could just talk about how you delineate the line between stress versus normalization? I think that would be really helpful.

Sure, Sanjay. So in June, our comments indicated that we were expecting to see this modest increase in net charge-offs over the next 12 months. To us that is normalization; I think others may have viewed it differently.

As part of that dialogue, we focus more specifically around the payment behaviors that were driving the reserve build specifically in the quarter. That was the guidance we were providing. Now I think we're trying to give you some broader context on items in the forecast that obviously influenced the forecast and items that drive some of that payment behavior that we're seeing.

That -- the forecast includes things like portfolio mix by platform, by product, program, channel. While seasoning is not as big for us, as I mentioned, as I think it may be for some others. That's included in our outlook as well. And we're also factoring the trends that we are seeing on the consumer.

I would just reiterate what I said earlier that the consumer broadly is still generally healthy. We said all last year that we didn't think the consumer would get better and they continued to get better all last year and now we're seeing those improvements subside. But the overall macro environment is still pretty strong.

The thing that we're watching is the thing that I mentioned earlier, that the consumer continues to take on more leverage. It appears to be responsible at this point. The overall levels are reasonable, if you look at them in a historic context.

It's something that we're watching carefully. As we mentioned, we're watching what's going on in other asset classes as well, and looking at the layered risks. So our forecast includes that trend continuing as well as the items I mentioned earlier.

Okay. My follow-up, Margaret, is just on the pipeline. I know you were asked the question and you characterized it as robust but maybe you could just talk about the probability of something large happening over the near term. Do you feel like that's a possibility?

We'd love to have a big win. As I said earlier, we're going to continue to be disciplined and ensure that whatever we do win is a positive for the overall portfolio.

We're competing on our capabilities. We think in that particular area, we're very strong. We'll play out the opportunities that are out there.

All right. Thank you very much.

Okay. Thanks, everyone, for joining us this morning and your interest in Synchrony Financial. The Investor Relations team will be available to answer any further questions you might have. We hope you have a great day.

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