Synchrony Financial (SYF) 2016 Q3 法說會逐字稿

Welcome to the Synchrony Financial third-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. Sir, you may begin.

Thanks, operator. Good morning, everyone, and welcome to our quarterly earnings conference call. Thanks for joining us. 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, Synchrony Financial.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 uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.

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

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

Margaret Keane, President and Chief Executive Officer, and Brian Doubles, Executive Vice President and Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions. Now it's my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone, 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'll begin on slide 3.

Third-quarter net earnings totaled $604 million, or $0.73 per diluted share. We delivered strong growth in each of our sales platforms, driving double-digit growth in loan receivables and net interest income this quarter. We also grew purchase volume 8% over the third quarter of last year. Looking specifically at our online and mobile purchase volume, sales grew 26%. Our online and mobile sales growth has continued to far outpace US growth trends, which have been around 15%. We remain focused on developing solutions to support this important sales channel.

Looking at asset quality metrics, 30-plus-day delinquencies were 4.26% compared to 4.02% last year and our net charge-off rate was 4.38% compared to 4.02% in the third quarter of last year. We continued our discipline on expenses, which increased only 2% over last year. The strong revenue growth and control over expenses helped generate positive operating leverage and drove our efficiency ratio down to 30.6% from 34.2% last year.

Our growth was supported by another quarter of strong deposit generation, which increased $9 billion, or 23%, to $50 billion this quarter. Deposits now comprise 71% of our funding sources. The number has been trending above our original target of 60% to 70%, but we plan to continue to drive deposit growth by focusing on competitive rates and outstanding customer service, as well as the buildout of our product suite.

Our balance sheet remained strong, with a common equity Tier 1 ratio of 18.2% and liquid assets totaling $16 billion, or 19% of total assets at quarter end. We were pleased to initiate our capital plan in the third quarter. This quarter, we paid a dividend of $0.13 per share and repurchased shares totaling $238 million. We are also deploying capital through our strong balance sheet growth.

Organic growth is the most significant driver of our performance and continues to be our biggest opportunity. This quarter, we renewed several key partnerships, including TJX Companies, a strong performing program and great partnership. Cardholders can continue to access loyalty rewards, mobile account management, and other exclusive benefits with cards which can be used at TJ Maxx, Marshalls, Home Goods, and Sierra Trading Post stores, as well as through online.

We also extended our 17-year partnership with hhgregg, a leading specialty retailer of home appliances, televisions, consumer electronics, and home furnishings. Through our partnership, cardholders will be able to continue to access special financing offers, in-store and online deals, convenient online bill pay, and other exclusive benefits when using their hhgregg card in their 220 stores.

And we renewed our partnership with Nationwide Marketing Group, North America's largest buying and marketing organization. They work beside thousands of appliance, furniture, electronics, and other dealers to help them grow their business, and we are happy to continue to provide consumer financing through this group. We are also pleased to have renewed an important endorsement by the American Dental Association. Endorsements are an integral part to helping us to extend the reach of our CareCredit platform.

We also continue to sign new partnerships. We signed a long-term agreement with Nissan to introduce a new cobranded consumer credit program. The program will be offered through Nissan and Infiniti dealerships in the US as well as online. It will provide Nissan and Infiniti credit card holders with offers, rewards, and exclusive benefits.

In addition, we reached an agreement with At Home, a big-box specialty retailer of home decor products, to introduce a new consumer financing program. At Home card holders will be able to take advantage of promotional financing offers on qualifying purchases, exclusive discounts, loyalty rewards, and other benefits including mobile account servicing.

We launched a new program with The Container Store. The Container Store private-label credit card offers financing options for the purchase of the retailer's more than 11,000 products, customized variety of services, and organization solutions.

We also launched a new program with the Google Store, which was announced in conjunction with Google's release of their new Pixel phone. We have partnered with Google to launch Google Store financing, where we provide financing for their new hardware products, including the Pixel, Google Home, Daydream View VR headsets, Chromecast Ultra, and Google Wi-Fi. We had a very strong program launch and are excited about the prospects of this new partner and program.

We remain focused on pursuing new, profitable opportunities to grow our business, although organic growth remains our biggest opportunity. And as such, we are working closely with our partners to continue to deliver leading-edge capabilities, value, increased penetration, and to drive program growth.

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 8% and average active account growth of 7%. Interest and fees on loans grew 12% over the third quarter of last year. During the quarter we continue to drive growth by delivering value to partners and cardholders via attractive value propositions, promotional financing, and marketing offers.

On the next slide, I'll discuss this quarter's performance drivers across our sales platform. We continued to generate strong growth across all three of our sales platforms in the third quarter, as shown on slide 5. Retail cards delivered another quarter of strong results. Receivables growth of 11% was driven by purchase volume growth of 7% and average active account growth of 6%. Interest and fees on loans increased 11%, primarily driven by the receivables growth.

Broad-based growth across retail card partner programs continued in the third quarter. As I noted earlier, we renewed TJX Companies, a key partnership for us. We also signed two new relationships with Nissan and At Home, and launched a new Google Store program during the quarter. Our long-tenured relationships are an important part of our story. We are able to leverage the expertise we have developed over the decades of running this business into our platform that attracts new, important partners, such as Nissan and Google.

Payment solutions also delivered another strong quarter. Receivables growth of 14% was driven by purchase volume growth of 14% and average active account growth of 13%. Interest and fees on loans increased 14%, primarily driven by the receivables growth. The industries where we provide financing had positive growth in both purchase volume and receivables, with home furnishing, automotive products, and power leading the way.

We renewed several payment solutions relationships this quarter, including hhgregg and Nationwide Marketing Group. This quarter, we also extended our relationship with Kawasaki Motor Corp USA to continue providing consumer financing for power sports products distributed by KMC through a network of approximately 1,100 independent retailers. Qualifying buyers will have access to special financing options for Kawasaki products from Synchrony. And we also launched the new program with The Container Store during the quarter. Repeat usage continues to be strong across payment solutions, representing 26% of purchase volume in the third quarter.

CareCredit also delivered a strong quarter. Receivables growth of 10% was driven by purchase volume growth of 8% and average active account growth of 8%. Interest and fees on loans increased a strong 11%, primarily driven by the receivables growth. Receivables growth this quarter was again led by our dental and veterinary specialties. In addition to the renewal of a key endorsement with the American Dental Association, we also announced program renewals for four prominent dental organizations. Expanding the network and utility of our CareCredit card continues to be a primary area of focus, and our focus on card utility has helped drive a reuse rate of 52% of purchase volume in the quarter.

We are also focused on developing technology that streamlines and enhances the CareCredit experience. This quarter, we introduced CareCredit Direct, a private and secure platform wherein patients can apply for financing privately at the healthcare provider practice; get a credit decision while they are there; and if approved, use their CareCredit card to pay for the services that day. Each platform delivered strong results and continued to develop, extend, and deepen relationships and drive value to cardholders. I'll 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 third quarter, the business earned $604 million of net income, which translates to $0.73 per diluted share in the quarter. We continued to deliver strong growth this quarter, with purchase volume up 8%, receivables up 11%, and interest and fees on loans up 12%.

Average active accounts increased 7% year over year, driven by the strong value propositions and promotional offers on our cards, which continue to resonate with consumers. We also see positive trends in average balances and spend, with growth in average balance per active account up 4% compared to last year, and purchase volume per average active account increasing 1% over last year.

The interest in fee income growth was driven primarily by the growth in receivables. The provision increased $284 million compared to last year. The increase was driven by higher reserve build and receivables growth.

Regarding asset quality metrics, 30-plus delinquencies were 4.26% compared to 4.02% last year, and the net charge-off rate was 4.38% compared to 4.02% last year. Our allowance for loan losses as a percent of receivables was 5.82% compared to 5.31% last year. The asset quality metrics, which I'll cover in more detail later, reflect a gradual pace of normalization that we had highlighted last quarter.

RSAs were up $34 million compared to last year. RSAs as a percentage of average receivables were 4.3% for the quarter compared to 4.6% last year. The lower RSA percentage compared to last year is due mainly to the retailer sharing in the incremental provision expense, which more than offset the increase in sharing from the year-over-year improvements on net interest margin and lower efficiency ratio. We continue to expect the RSA percentage on a full-year basis to trend towards the 4.2% to 4.3% range.

Other income was flat versus last year. While interchange was up $19 million driven by continued growth and out-of-store spending on our Dual Card, this was offset by loyalty expense that increased by $23 million, primarily driven by new, everyday value propositions. As a reminder, the interchange and loyalty expense run back through the RSAs, so there is a partial offset on each of these items.

Other expenses increased $16 million, or 2% versus last year. We continue to expect expenses going forward to be largely driven by growth, strategic investments in our sales and deposit platforms, and enhancements to our digital and mobile capabilities.

The efficiency ratio for the quarter was 30.6%, which was a 362 basis point improvement over the prior year, driven by strong revenue growth in the business and maintaining discipline on expenses. I'll cover the expense trends in more detail later. Overall, our performance drove a solid quarter generating an ROA of 2.8%.

I'll move to slide 7 and cover our net interest income and margin trends. Net interest income was up 12%, driven by strong loan receivables growth. The net interest margin was 16.27% for the quarter, up 30 basis points over last year.

As you look at the net interest margin compared to last year, there are a few dynamics worth pointing out. First, we benefited from a higher mix of receivables versus liquidity on average compared to last year, as we previously deployed some excess liquidity to fully pay off the bank term loan facility in early April. We are also deploying liquidity to support our strong receivables growth.

The yield on receivables increased 13 basis points to 21.58%, driven by a slightly higher revolve rate compared to last year. We typically see the revolve rate increase in the third quarter. We also benefited, to a degree, from the prime rate being higher compared to the prior year. These benefits more than offset the impact of a slight mix shift due to continued strong growth in lower yielding payment solutions receivables.

The platforms receivables have grown, on average, 15% compared to retail cards and CareCredit receivables that have grown in the 9% to 10% range over the past year. The cost of funding was up 3 basis points to 1.85%, due mainly to an increase from higher short-term benchmark rates.

Our deposit base increased by $9 billion, or 23% year over year. The cost of our deposit base is lower than alternative forms of funding, such as wholesale funding, and we are pleased with the progress we made growing our direct deposit platform and increasing the mix of funding coming from deposits. Deposits are 71% of our funding versus 63% last year.

As we look out to the fourth quarter, we typically see some seasonality in our margin and expect the net interest margins to decline back into the 15.9% range, due primarily 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'll cover our key credit trends on slide 8. Overall, the credit environment remains favorable, and we continue to see significant growth opportunities at attractive risk-adjusted returns. However, as we noted previously, we continue to anticipate a modest degree of normalization from the very low credit trends we experienced over the past two years. Given the healthy economic backdrop, we would expect the pace of this normalization to occur gradually over time. Our view on credit takes into consideration factors such as portfolio mix, account maturation, consumer trends and payment behaviors.

In terms of the specific dynamics in the quarter, 30-plus delinquencies were 4.26% compared to 4.02% last year, and 90-plus delinquencies were 1.89% compared to 1.73% in the prior year, both in line with the levels we have been operating at over the past two years. The net charge-off rate was 4.38% compared to 4.02% last year, consistent with our expectations. The allowance for loan losses as a percent of receivables increased to 5.82% in the third quarter, which was largely in line with our expectations. The reserve build reflects the growth in the portfolio, the normalization of net charge-offs, as well as lower recovery pricing, which we believe is partly attributable to the new proposed regulations around third-party collectors.

Part of the increasing credit cost is offset through our retailer share arrangements and is reflected in the decline of the RSAs as a percent of average receivables to 4.3% this quarter compared to 4.6% last year. This is also reflected in our full-year guidance for the RSAs, which is now 4.2% to 4.3%. Looking to the fourth quarter, we typically see an uptick in net charge-offs, and given the seasonal build in receivables, we expect to see a modest decline in the allowance for loan losses as a percent of receivables. However, given the normalization trends, this decline is likely to be smaller than it has been in the past two years.

We continue to expect net charge-offs to be around 4.5% for 2016, which is in line with our guidance for the year. We will provide a full-year view on 2017 in conjunction with the outlook we'll provide in January. So in summary, while credit will normalize from here, it's important to reiterate that we are still operating in a pretty favorable environment, and the risk-adjusted returns we're earning on the new accounts we're bringing on are still very attractive.

Moving to slide 9, I'll cover our expenses for the quarter. Overall expenses came in at $859 million for the quarter, a 2% increase over last year, and are primarily driven by growth of the business.

Looking at the individual expense categories, employee costs were up $43 million, as we have added employees over the past year in key areas to support the 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 previously provided to us under our transition service agreement with GE.

Professional fees were up $12 million. This is primarily driven by growth in the business and certain third-party services. Marketing and business development costs were down $23 million. Higher costs driven by increases in portfolio marketing campaigns and promotional offers, which helped drive the strong growth in purchase volume and receivables, were more than offset by redirecting some marketing spend into everyday value propositions, which is reflected in the loyalty program expense. Lastly, given our strong growth in deposits, we were able to reduce some of the marketing costs associated with that platform.

Information processing was up $10 million, driven by continued IT investments and the increase in transactions and purchase volume compared to last year. Other expense was down $26 million due to reduction in costs which are no longer being billed to us by GE, as well as benefits derived from EMV in the form of lower fraud expense.

The efficiency ratio was 30.6% for the quarter, 362 basis points lower than last year, as the business continued to generate significant positive operating leverage through strong revenue growth and maintaining discipline on expenses. Year to date, the efficiency ratio was 31%, 236 basis points lower than the same period in 2015.

We expect the ratio to trend up in the fourth quarter from the third-quarter level, as we see seasonally higher marketing and volume-related expenses during the holiday season, as well as continued spend on strategic investments. However, given the strong start to the year, we do expect the ratio to be around 32% for the full-year 2016, well below the guidance we provided in January.

Moving to slide 10, I'll cover our funding sources, capital and liquidity position, as well as summarize 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 in a stable, attractive source of funding for the business.

Over the last year, we've 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. 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.

Overall, we are pleased with our ability to attract and retain our deposit customers. Our retention rate on our deposits has consistently been in the 88% to 89% range over the past couple of years. 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 September, we successfully issued just over $750 million in three-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 and reflects the full prepayment of the bank term loan in early April. We will continue to be a regular issuer in the unsecured debt markets, and in August we did issue a total of $700 million in senior unsecured debt, $500 million in 10-year fixed-rate notes, and $200 million of floating-rate notes that mature in November 2017. So, another fairly active quarter on issuance, and 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 18.2% CET1 under the Basel III transition rules, and 17.9% CET1 under the fully phased-in Basel III rules. This compares to 16.7% on a fully phased-in basis last year, an increase of approximately 120 basis points over the past year. Total liquidity increased to $24 billion and includes $16.4 billion in cash and short-term treasuries, and an additional $7.1 billion in undrawn credit facilities. This gives us total available liquidity equal to 27% 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.

During the quarter, we paid a $0.13 common stock dividend per share and repurchased $238 million of common stock out of the $952 million our Board authorized through the four quarters ending June 30, 2017. We will continue to be opportunistic regarding share repurchases, subject to market conditions and other factors, including any legal and regulatory restrictions and required approvals.

Overall, we continue to execute on the strategy that we outlined previously. We've built a very strong balance sheet with diversified funding sources and strong capital and liquidity levels, and we expect to continue deploying capital through growth and further execution of our capital plan in the form of dividends and share repurchases. 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 can begin the Q&A portion the call. We delivered another quarter of strong operational performance across key areas of our business. We drove strong, organic growth and renewed several key partnerships, and signed and launched important new partnerships during the quarter. And looking ahead, our pipeline remains strong.

Supporting our growth is our fast-growing online bank, which delivered another quarter of strong deposit generation, further strengthening our overall funding profile. Our capital and liquidity position also remain strong, and we were pleased to commence the payment of a dividend and also repurchase shares during the quarter. 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'd like to ask 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.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

We have our first question from Moshe Orenbuch with Credit Suisse.

Great, thanks. Brian, your comments about the net interest margin coming back into that level -- what I was struck by is it felt like the seasonal improvement was a little better than -- in both the yields and the margin, a little better than normal. Anything -- you mentioned the revolve rate, so does some of that stick as we go forward? How should we think about over the fourth quarter and into 2017?

Yes, I think as, Moshe, as you think about the fourth quarter, typically, receivable yields come down just for seasonality. So if you look back over the past few years and you look at the receivable yield from the third to the fourth, it generally comes down in the fourth quarter given you're building a lot of receivables obviously for holiday and the fact that they don't generate finance charge yield in the quarter. So it's really that seasonal trend that driving the forecast in the fourth quarter; the other dynamics are relatively stable.

I think if you look at margins more generally, we've been very pleased all year with the margins and the way that they've performed. If you remember, back in January, we thought NIM was going to be around 15.5%. We revised that guidance to 15.75%, something in that range, after we saw the strong deposit growth. That obviously is continuing.

And then we were able to improve the yield on the liquidity portfolio and also really optimize the amount of liquidity that we're holding. So all those things, all else being equal, should continue to follow through and we think those will flow through to the fourth quarter. That's why we guided to the -- we took the guidance up from 15.75% for the year to 15.9% in the fourth quarter, which should put you around, somewhere around 15.9% for the year. Overall, we've -- I think we've performed very well on margins relative to what we thought back in January.

Perfect, that sounds great. And just as a follow up, similarly just on the operating expenses, you had some extra expenses now with the FDIC, and yet, your efficiency ratio is still coming in better. It feels like that should continue, unless there's other stuff that you want to call out as we go over the next couple of quarters.

We've been very pleased as well with the efficiency ratio all year really. We're 31% year to date, so we're well below the 34% that we indicated back in January. We're obviously benefiting from having very strong revenue growth of 12% year to date from the prior year.

As you might expect, and as we've talked about in the past, the efficiency ratio will come up in the fourth quarter. We always spend more on marketing around holiday. We also tend to have more volume-related expenses. But due to the strong start of the year and the fourth-quarter trend, even as we see it, we expect the efficiency ratio will be somewhere around 32% for the full year. So significantly better than what we thought back in January.

Thanks very much.

Yes.

Thank you. Our next question comes from Sanjay Sakhrani with KBW.

Thank you, good morning. Maybe just to hit on the yield again, Brian, if you don't mind. I think Moshe mentioned the year-over-year increase in the third -- or decrease -- sorry, increase year over year in the yield was better. So it seems like even stripping out seasonality, there's some other component to it. Is it late fees maybe and should be expect that to continue as the delinquency rates remain relatively elevated?

I think you always get a little bit more revolve in the book when you see a slight uptick in delinquencies. So we're seeing that. I think receivable yields were up 13 basis points year over year, so this is really the first quarter where we're seeing that revolve rate and the benefits from the revolve rate poke through the downward pressure we had, just given the really strong growth in payment solutions.

So that's a trend we were talking about all year that payment solutions was growing faster than the rest of the portfolio, roughly 15% growth rates relative to 9% to 10% in CareCredit and retail card, and that was applying some downward pressure on the margins. But now we've seen that higher revolve rate poke through and gave us about a 13-basis-point yield improvement year over year.

Okay. And is there anything more that can happen with the liquidity portfolio? Because it seems like you can still optimize it some on the yield side going forward?

Yes, there's probably a little bit there, Sanjay. It's not going to be dramatic. I think we've done a really nice job this year using the excess liquidity from the strong deposit growth to pay down the bank term loan. I think we feel good about what we've done year to date. We're getting more yield on the cash and securities that we're holding. But I would say anything there -- anything additional is going to be pretty modest going forward.

Thank you.

Thank you. Our next question comes from Bill Carcache with Nomura.

Thank you, good morning. I have a question on slide 8 on specifically, the allowance for loan losses as a percentage of period-end receivables. So clearly, the very strong loan growth that we've been seeing has been driving reserve building. But in addition to that growth-driven building, we've had the normalization effect also driving building. And so when we go from the low of 5.12% allowance gradually rising to 5.8%, that credit normalization effect has also driven some building.

And so as we extend out the thinking of credit continuing to normalize over the next several quarters for modeling purposes, is it reasonable to expect that we move into a six-handle and gradually as we get it over the next several quarters into 2017, that the number continues to rise? Or does that flatten out at some point where normalization is achieved? Just trying to get a sense for how to think about that.

Sure Bill. Let me just break down the reserve build in the quarter. So I would say generally, the reserves came in very much in line with our expectations. If you remember, we gave you range of 5.7% to 5.8%. And last quarter we were right at 5.7% and this quarter we came in at 5.82%, so better-than-expected growth drove a big chunk of that reserve build in the quarter. I think just in the quarter in the last 90 days, we had a $2.4 billion in receivables.

The recovery assumption that I mentioned earlier, that drove about $36 million of the build in the quarter, which is about 5 basis points of coverage. So if you adjust for that, the coverage would've been around 5.77%, so right in the middle of that range that we provided.

If you think about -- and maybe it's helpful just to break down the reserve build in the quarter a little bit. And this is not, just to be clear, this is not how we calculate the reserve, but it gives you a way to think about the different pieces. So, if you take that $2.4 billion of receivables growth in the quarter and you just take that at the old coverage rate of 5.7%, that gives you a build of about $135 million of the 221. And then you've got the coverage rate increase by 12 basis points, which is about $86 million.

If you break that down into two pieces, you've got the $36 million for the recovery pricing that I mentioned, and then you've got about $50 million, or about 7 basis points is really for the normalization effect that we're seeing in the book over the next 12 months. So hopefully that gives you some pieces and a way to think about it going forward.

Okay. That's very helpful. Thank you.

And then as a follow up, I was hoping you could share your thoughts on what maybe just broadly speaking has been some very favorable commentary from a capital perspective on -- given the Fed's decision to eliminate qualitative failures for financials that are not considered GSIBs, and also other changes, including no RWA growth or partial buyback termination during the really adverse scenario. That would seem to certainly be a significant source of potential upside for any non-GSIBs with significant excess capital, including yourselves. Was hoping that maybe you could share a little bit on how you guys are thinking about that?

Yes, sure, Bill. Just a quick reminder that again, we're not a CCAR bank, but obviously, we're trying to follow this very similar rules that are in place for financial institutions of our size. But given that, the new proposals that are out there are, I think, clearly positive developments. I think there's some momentum to put in place more reasonable expectations for banks of our size. So we're obviously pleased to see that.

I think it's still a little early to tell how significant the impact may be. Most of the more meaningful proposals, I think, will be adopted after the 2017 cycle, so we'll have to see what gets finalized.

But clearly, the removal of the quantitative task for smaller financial institutions, I think that's helpful. The treatment of dividends, clearly the RWA assumption, those are all helpful. But it's really hard to assess an impact until some of these things get finalized. But I think directionally, headed the right way for us.

Thank you.

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley.

Hi, good morning.

Good morning.

Just two questions, one on the recoveries. Just want to make sure I understand what's driving the decision to raise the reserve around that? And then secondly, I just had a question on your data analytics activity. How much do you feel like you need to invest from here? How much have you invested so far and how much do you think you need to investor from here to really get to where you want to be on data analytics? And talk a little bit about the revenues that you can generate off the back of that. Thanks.

Sure, Betsy. Maybe I'll just cover the recoveries quickly, and then Margaret will do the data analytics. The recovery assumption, as I just mentioned, that drove about $36 million of the reserve build, which is about 5 BPs of coverage.

So in August, we saw a decline in the pricing we were getting on our recoveries, so obviously we built that in as an assumption in the reserve model. And we believe that pricing reflects some impact for these new regulations that are being proposed for third-party collectors. The proposals will likely make it a little more difficult, a little more expensive to collect, and we believe that that's influencing the pricing in the market.

So, as those rules get finalized and collectors get a better sense of the impact here, we may see additional impact on the pricing. But as of right now, we've booked our best estimate based on what we're seeing in the market today.

Okay. Thanks.

Yes, so, on data analytics, Betsy, I'd say two things. One, as we continue to work with more channels, we know that we have to really gets even more sophisticated in real-time in our analytics. We don't really disclose how much we spend, but when I can tell you is we've been working very hard this year to build out a fairly sophisticated platform.

We're really looking at building out data legs and a CRM capability that goes well beyond just data for growing, but also from a productivity perspective, and really enhancing the whole wing-to-wing experience for our customer from the time they apply for credit all the way through to servicing. And we have a pretty big cross-functional team working on a number of initiatives around data analytics.

I believe and I think as our partners continue to look at ways to create more loyalty with their customers, this is going to be an important element of what we can bring to our partners, combining that with the digital experience that our customers are starting to go through and really that area of growing exponentially. So it's an important area, I think it's -- with mobile and data analytics together, I think these are two big growth levers for us as we look to really help our partners grow with their customers.

And it's growth in the form of productivity enhancement for you but also winning new business?

It's both. It's really using data just be much more smarter on how your over -- you're running the entire business, from origination all the way through to servicing, and really looking at ways to make that customer experience even more seamless and frictionless using data. And then, hopefully, using the data in a way that allows us to get the next purchase, to get a bigger basket, to drive that loyalty back in to enhance the experience with our retailers as they go from channel to channel.

Okay, awesome. Thank you.

Thank you. Our next question is from Ryan Nash with Goldman Sachs.

Hi, good morning, guys.

Good morning, Ryan.

Maybe I will start with the RSA to loans. I think, obviously, they came in better, and Brian, you reiterated the guidance of 420 to 430. Just what I'm looking, clearly we're down, call it 412 year to date, and we're down t least 25 BPs each quarter. So just want to understand that if you were to end up on the low-end of the range, it would imply flat year over year relative to last year.

So I just want to understand, what is it specific to the fourth quarter this year, given the fact that reserve building? In your comments, you said that we shouldn't expect the same seasonal decline. I'm just trying to understand the puts and takes of how we would get either, not only in the range but also just to the bottom of the range on RSA?

Yes, sure, Ryan. I think the one thing that gets missed when you model RSA is, one, I think obviously, seasonality is a piece of that, but I also think that people tend to view it as an offset to credit in isolation. And I think it obviously includes much more than that. And so if you look at, year over year, let me just talk about the quarter for a second.

We had, obviously, very good growth. We had better margins, fairly big improvement year over year, much better efficiency ratio, and at least in terms of the margins and efficiency ratio, we think that carries through to the fourth quarter, but for the seasonal elements that I mentioned earlier. So all of those positive dynamics in the business push the RSA higher, right?

And then those improvements in the quarter and our expectation going forward, there's going to be an offset there for the incremental provisions. And so I think you've got to carry some of the real positives through in the fourth quarter, and then obviously, those push the RSA higher offset by what we're expecting on provision.

Got it, and maybe if I could go in a different direction than most have gone. Maybe if we could talk about loan growth; that's obvious coming in I think much higher than your guidance from earlier in the year. Can you just talk about how much is coming from new customers and how much is coming from increased penetration rates?

And maybe in retail card, can you give us a sense of maybe where you are in penetration across the range of merchants And how much improvement penetration are you making and where do you think you could get to over time?

Yes, sure, Ryan, there's a lot in there, so just remind me if I miss something. But look I think generally we've been very pleased with the growth that we had all year. We've got receivables growth of 11%. We guided early in the year to 7% to 9%, so we're obviously tracking well ahead of the guidance we put out there in January.

And I think when you look at the underlying growth drivers, they're are all pretty strong. When you look at purchased line per average active account was up, average balances per active account were up.

We really measure, as opposed to new accounts, what's really a more important measure for us is active accounts. Because with private label and our Dual Card, you're really trying to move that more towards a top-of-wallet card and get that usage and get that repeat purchases. And so if you look at the last two or three years and just compare that to the average active account growth in the last few quarters, we're up 7%. That growth has accelerated, which is a really positive dynamic for us.

So I think there's really good evidence, good indicators that the consumers are spending more, they 're seeing real value on our cards. The things we've done around the value propositions at Amazon and Walmart, we just announce another one at Guitar Center, those are all really paying off.

And then if you look at some of the additional things that we track and talk to you about, online and mobile were up 26% in the quarter, and that compares to about 15% for the industry. The reuse that we're getting in CareCredit was up year over year; it was 52% versus 50% a year ago.

And we're bringing on new partners. We're bringing on new partners. I would say the majority of those are startup programs though, so those aren't really influencing the growth that we've had so far year to date.

And so, to the second part of your question, most of the growth is really organic growth. It's driving that increased penetration. That's something that obviously, we track by program; it's how we measure our teams. It's all we focus on, and that's the only way to really grow 11% in a retail environment that's growing 2% to 3%, and that's been pretty consistent. Our growth rates has been pretty consistent over the past five years. So I think we feel really good about overall, the fundamentals that we're seeing in growth. Did I miss any part of your question?

No, I think you hit on most things. Thanks for taking my question.

Thanks, Ryan.

Thank you. Our next question comes from Eric Wasserstrom with Guggenheim.

Thanks very much. I know there's been a lot of discussion on the NIM, but I just want to go back to one item. And maybe I didn't fully understand, but as I look at the yield on cards, it had about a 60-basis-point delta sequentially. And I'm wondering if there's any pricing activity associated with that change?

No we haven't really made any pricing changes. It really is the factors that I indicated; we got a little more revolve. But if you go back and look at prior periods, there's always a seasonal increase from the second quarter to the third quarter, it was maybe a little bit more outsized this time, but that's really the driver. And then we are getting a slight impact from -- or slight benefit from the increase in the prime rates. You're seeing a little bit of that in the quarter, as well.

Got it. Yes, it was more of the magnitude that I was curious about. Then maybe just looking at purchase volumes, they did decline just a bit sequentially in retail and in CareCredit, any trend to underscore there?

I don't think so. There's not always a perfect corollary between purchase volume and receivables. You saw that as well in the first quarter when the purchase volume far outpaced receivables. I think as we indicated then, this quarter we're comping against a full quarter of BP, and we're also comping against the Amazon launch of 5% off, so those were both factors when you look at purchase volume.

I think more importantly, receivables grew 11%. Given what we're seeing and the mix of revolvers in the book, which is great for us; that really drives the majority of our earnings and you're seeing that come through in the interest and fees.

Thanks very much.

Thank you. Our next question is from Mark DeVries with Barclays.

Thanks. Brian, you just indicated you're seeing really good response, particularly at Amazon and Walmart. But I was hoping you could be a little bit more specific without identifying one in particular, as to what kind of improvement you're seeing in tender share at this point from the enhanced rewards.

Look, I obviously can't be specific on either program, but I would say in both cases, they're performing better than our expectations. I would probably say modestly better than our expectations only because we really know how to model these. We did 5% off at Lowe's, I think more than five years ago, and so we've got really good data on -- and analytics around value propositions, particularly really attractive ones like 5% off, the 5, 3, 1 at Sam's.

And we know what to expect in terms of transactors, revolvers, what we expect to see from tender shift, what kind of spend we expect on the card, what kind of payment behaviors. And so we had a pretty good view on what we thought both of those would -- how both of those would perform, and I would say we're ahead of our expectations on both.

Okay. Great. For the online retailers that you have, how many of them have the option like they've got at Amazon where the private-label card becomes top of wallet by default? And for those that don't do that yet, is there an opportunity to move them to that and really drive better tender share?

Yes, that definitely is -- all of the have the option to do it, even the retails that not are fully online. To have that at checkout its really golden, and it really comes down to the philosophy within the retailer and in terms of some want to have the customer have a choice. And others, it's really just around getting the prioritization of getting that particular element into their system's queue to get it in place.

So, it's something that we've put together what we call our on our digital/mobile/online playbook for retailers, and this is something that we talk a lot about. So it's a big opportunity for us as we move forward and continue to work.

What I would say is on the mobile world in general and online world in general, there's a lot higher engagement across all our partners right now in this particular area as they 're all really coming to terms with the fact they have to be best in class. So we're spending a tremendous amount of time and effort really working with our partners across all three platforms to really make that happen.

Okay. Thanks.

Thank you. Our next question comes from David Scharf with JMP Securities.

Good morning. Thanks for taking my questions.

First, I wonder if we can just get back to the recovery side as it's impacting the allowance forecast in collections. Can you expand a little more specifically on just how the proposed collection regs that are being revised impact your efforts? And whether that's likely to result, based on new collection practices, into little more early-stage DQ that doesn't quite roll in or are some of the change practices likely to impact more your late-stage carrying efforts? But for just a little more specificity on at the call center and other efforts; just what's going to have to be modified?

Yes, sure. Right now, these are proposals and they're proposals for new regulations around third-party collectors. Obviously, we sell a portion of our charge-offs to third parties, and we believe that the pricing that we're seeing in the market right now is somewhat influenced by these new proposals. So the proposals include things like more documentation, more work for the third parties to substantiate the data at each stage of the collection process, reduced contact, other call restrictions, things like that, additional disclosures.

And so a lot of the things aren't finalized at this point, but I think people are anticipating that at a minimum, it's going to be a little more difficult, a little more expensive, based on these new proposals. And they're building that into their pricing. And so as we started to see that right around in the August time frame, we built that into the reserve model, and that's driving the, what I would call relatively modest impact of 5 basis points on the coverage.

Got it. And along those lines, I know the two largest debt buyers, both public after a couple years of commenting about elevated pricing and not much supply growth in the US just the last couple of quarters seem to have been indicating that pricing has been leveling off and so forth. Are you finding that the pricing as a percentage of principal balance that you're able to sell charge-offs for are declining? Or are they pretty much holding firm with historically more elevated pricing we saw earlier in the year?

Yes, we did see a decline in the pricing. We think part of that is driven by this dynamic that I just described on some of these. The anticipation of some of these new regulations that are coming in, we don't get, obviously, complete transparency into the pricing. So this is what we believe is at least partly influencing what we're seeing in the market.

Got it. Very helpful. Thank you.

Thank you. Our next question comes from James Friedman with Susquehanna.

Hi, thanks. I had just two quick questions. Margaret, in the past you had made some comments about the digital channels. I was wondering if you could help us to quantify those at all or even quantitatively like how much is that a driver of the growth of the Company?

And then Brian, I was wondering if you could elaborate, and you talked about this a bit, but the loyalty payments of $145 million. If you look at that in the absolute, it's highest that we've seen, and then as a percentage of the purchase volume, it was also high. So anything that you could share on the trajectory of that would be helpful. So one on digital and two on loyalty.

Thanks.

Sure, so I would say that the bulk of sales are still done predominately in store. But what I would say is that it's definitely shifting, and each quarter we see incremental growth on online and digital. As we stated, our online sales were up 26% over last year, and that continues to grow every single quarter. About a third of our applications occur digitally.

We have received about 12 million mobile applications since we've launched in 2012, and that's grown at about 80% year over year. So that's a big growth channel for us that I think you're going to continue to see expanding. And yes, we're seeing faster growth in the industry.

So I think the important part of digital and online is really our ability to continue to integrate with our partners. And so one of the things we're really working hard on now, obviously, we've done Apple Pay and Samsung Pay and those things, we have digital cards on our own. What we're seeing now is more and more retailers are creating their own apps, and we're really trying to work to be in that app so that it's a really seamless and frictionless process for the customer as they're shopping around on a mobile app of a particular retailer. So I think you're going to see us focusing even more on that as the retailers come to us and ask us to really engage at a much higher level.

That's my point earlier. I think there's been a little bit of a, I think, a shift in terms of how retailer are even thinking about mobile and putting a lot more emphasis and effort there. And that's where we are very highly engaged right now across all three platforms really.

Thank you.

Then on your loyalty question, so, that's a trend that we've continued to see all year. We've obviously introduced many new value propositions over the past year. We introduced the Sam's Club 531, Amazon Prime 5%. We've got new programs at Chevron and BP, new value proposition at Walmart, the 321. So all of those are obviously influencing both the interchange and the loyalty lines that you see.

Generally, more loyalty is a good thing. It means we are growing our receivables, we're generating finance charge revenue. The lines also run back through the RSA, so there's an offset there.

And if you're looking at just the relationship between loyalty and interchange, the one thing I would just point out is this is very different than general-purpose card. Given we have significant value propositions like Amazon where we don't charge interchange, but we still offer a very attractive value proposition, we'd expect to see loyalty increase as a percentage of interchange going forward.

That's -- we really don't look at those lines in isolation. We really measure them in the context of the overall deal structure. So look, if we have the opportunity to launch a better value proposition that's going to drive more usage on the card, generate strong receivables growth, that's a good thing for us, it's a good thing for our partners, and it really comes down to that shared economic model.

Thanks for taking my questions.

Thank you. Our next question comes from Arren Cyganovich with D.A. Davidson.

Thanks, with respect to the efficiency improvements that you've seen, maybe you could talk a little bit about the potential for that to continue to go down or you use some of those savings to reinvest into the digital and maybe online checking, those kinds of things. Where can that operating efficiency actually go to over time?

Yes, this has been a very strong year-to-date performance. I think it's not just to temper expectations a bit, it is probably not a realistic expectation that we're going to grow revenues 12% and expenses 2%. So we're very pleased with how we performed year to date.

We'll obviously, we can give you an outlook for 2017 when we do the call in January, but I think the important thing is we're very focused on driving operating leverage. This is a scalable business. Now that the infrastructure costs are in the run rate, we would expect to continue to generate positive operating leverage over the long run.

We're always working to get more efficient across the business. We always start the year with a bunch of productivity initiatives, cutting out waste in the business, getting more efficient, moving more online, off of paper, and we use those savings that we generate there primarily to invest in long-term growth ideas, so things like mobile, data analytics, CRM. But even taking those investments into account, we'd still -- our goal would be to continue to generate operating leverage going forward.

Great. That's helpful. And then just back to the allowance, you'd mentioned the seasonality that you typically see in the fourth quarter causes the allowance from the losses relative to the receivables to fall little bit. It looks like it's been around 18 to 19 basis points in recent years. Can you give a little bit further -- pinpoint in terms of how much that reduction will be less during the fourth quarter this year?

It's hard to get specific. It will be -- we still expect a reduction, so more than 0 but less than 19.

Fair enough.

It's about -- we're talking about basis points, it's a big estimate that we make at the end of the year, given the seasonal growth. So I can't get more specific. We do expect it to come down, but just not quite as much as it has in the last two years.

You have to remember, in the last two years, we were in an improving environment, so whatever we were recording in the fourth quarter was at least partially offset by improved performance. And now it will be more reflective of growth and the normalization trends that we're seeing in the portfolio.

Got it. Okay. Thank you.

Vanessa, we have time for one more question.

Thank you. Our last question comes from John Hecht with Jefferies.

Thanks very much, guys.

Margaret, you've given a lot of information about the online trends of the business. I'm wondering if you could just, if you go down to the customer level. Can you guys highlight any, whether it's spend trends, borrow trends, or credit trends, is there any difference between an online customer and a store-based customer?

No, the online spend and the trends are the same. I'd say the one area that we continue to ensure we're focused on is really ensuring the authentication of the customer. So I think that's where approval rates might be slightly lower, just because you're dealing with an online channel versus and in-store experience. That's a great area where we're spending a lot of time investing in new technology to really make sure we're best in class there. So that would be the only, I think, fundamental difference.

Actually, that's good color, thanks. Last question, I'm wondering if you could just remind us of your partner maturity profile as we go into 2017?

Yes, I think we'll have that in our investor deck that will come out in a few days. But there's really -- you'll see from that there's really nothing material contractually until the 2019/2020 timeframe.

Great. Thanks, guys.

Yes. Thank you.

Thanks, everyone, for joining us on the conference call this morning and your interest in Synchrony Financial. The investor relations team will be available to answer any further questions you may have. We hope you have a great day.

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