Synchrony Financial (SYF) 2017 Q2 法說會逐字稿

Welcome to the Synchrony Financial Second Quarter 2017 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. And I will now turn the call over to 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 up.

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

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

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

Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third party. 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 question.

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 an overview of the quarter, and then Brian will give details on our financial results.

I'll begin on Slide 3. Second quarter net earnings totaled $496 million or $0.61 per diluted share. Consistent execution of our strategy yielded solid performance across our sales platforms. Organic growth remains a priority and helped to drive double-digit loan receivables and net interest income growth. Additionally, purchase volume was up 6% and average active accounts were up 5% over the second quarter of last year. These metrics are highlighted on Slide 4 of today's presentation.

Our focus on continuing to drive incremental value to our partners and cardholders is helping us to generate growth across the business. Particularly, the investments we've been making to expand our digital capabilities are having an impact on our performance. For Retail Card, our online and mobile purchase volume grew 18%, exceeding U.S. growth trends, which have been around 14% to 15%, and our digital sales penetration was 23% in the second quarter.

Moving to credit quality. Net charge-offs came in at 5.42% this quarter compared to 4.51% last year. Provision for loan losses was up 30%, driven by credit normalization and growth. The reserve build this quarter was $325 million, in line with our expectation. Brian will provide more details on credit later in the call. The efficiency ratio was 30.1% for the quarter versus 31.9% last year, as we continue to generate positive operating leverage.

An important funding objective for us is expanding our deposit base, and we continued to execute strong deposit growth this quarter. Overall, deposits increased $6 billion or 14% to $53 billion. Deposits now comprise 72% of our funding sources. Competitive rates and customer service should help us to continue to grow deposits. Though I will note that over the longer term, we expect for that growth trend to be more in line with our receivables growth.

Regarding capital and liquidity. Our Common Equity Tier 1 ratio was 17.4%, and liquid assets totaled $15 billion or 17% of total assets at quarter-end. During the quarter, we announced a new capital plan that meaningfully increases our capital return to shareholders. Under the new plan, we have increased our dividend to $0.15 per share and can repurchase up to $1.64 billion of our common stock.

Looking at the business highlights this quarter. We signed a new partnership with zulily, an e-commerce retailer, to launch their first private-label credit card program. The launch of the zulily credit card is expected in late 2017 or early 2018 and will provide millions of customers an additional payment option with added value to cardholders. Additionally, QVC's cardholders will have expanded card utility as they will be able to use their card to make purchases on zulily.

We continue to seek new partnerships to augment growth, and we're excited to have launched our new program with Nissan and Infiniti during the quarter. The new co-branded cards enable qualified cardholders to earn points toward the purchase or lease of new or certified pre-owned vehicles. Points can also be used for the purchase of automotive services and accessories or be redeemed in the form of a statement credit.

During the quarter, we were happy to renew existing relationships with MEGA Group USA, City Furniture and National Veterinary Associates.

Turning to Slide 5. I'll spend a few moments on our sales platform performance. We continue to deliver growth across all 3 of our sales platforms in the second quarter. In Retail Card, we grew loan receivables 10% over last year, reflecting broad-based growth across our partner programs. Purchase volume grew 7%, and average active accounts growth were 3%. Interest and fees on loans increased 12%, primarily driven by the loan receivables growth. As I noted earlier, we had an active quarter with the signing of a new partnership with zulily and the launch of our Nissan Infiniti program. We have developed strong, long-term relationships that solidify our position in the space, helping us to drive strong organic growth and provide the foundation for the addition of new profitable partnership.

We continue to build out our mobile capabilities and leverage our recent acquisition of GPShopper, who has helped us to develop our Synchrony plug-in, or SyPi capability. SyPi is a native credit feature that plugs into a retailer's mobile app. It allows retailers' credit cardholders to easily shop, redeem rewards and securely manage and make payments through their accounts with their smartphones. While still in the early stages, 12 of our retailers' apps are utilizing the technology, and we have seen a notable increase in usage by cardholders. Bill payments have increased significantly. To date, approximately $160 million in payments have been processed through the app. In total, we have had over 8 million visits to the plug-in since we launched it.

Payment Solutions also delivered a solid quarter. Broad-based growth across the sales platform, with particular strength in home furnishings and automotive products, resulted in loan receivables growth of 11%. Purchase volume grew 6%, excluding the impact from the loss of sales due to the hhgregg bankruptcy. Average active accounts were up 11%, and interest and fees on loans increased 14%, primarily driven by the loan receivables growth.

We are pleased to have renewed programs with MEGA Group USA and City Furniture during the quarter. And we continue to enhance our Synchrony Car Care program, adding additional utility to nearly 3 million cardholders to access to more than 185,000 fuel stations nationwide. And we continue to extend card reuse in Payment Solutions, which represented 27% of purchase volume in the second quarter.

CareCredit also delivered a strong quarter. Receivables growth of 11% was led by our dental and veterinary specialties. Purchase volume grew 11%, and average active accounts were up 10%. Interest and fees on loans increased 12%, primarily driven by the loan receivables growth.

We recently renewed our relationship with National Veterinary Associates, the largest owner of free-standing veterinary hospitals in the U.S. We also announced a new multi-year agreement with Athletico Physical Therapy. This relationship provides patients of Athletico's over 370 physical and occupational therapy facilities across the country full access to CareCredit's health, wellness and personal care credit card.

We continue to strengthen our position in core elective and dental specialties with over 200,000 provider location and over 75% penetration in several key specialties. CareCredit is moving into additional areas, including pain management, orthopedics, primary care, medical diagnostics and durable medical equipment with nearly 5,000 practices added over the past 12 months. The provider locator has become an important resource for cardholders, and we are now seeing over 800,000 hits per month. The network expansion and increased utility of the card has helped drive reuse, which represented 53% of purchase volume in the second quarter. Each platform delivered strong results and continue 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'll start on Slide 6 of the presentation. In the second quarter, Synchrony earned $496 million of net income, which translates to $0.61 per diluted share. We continued to deliver strong growth with loan receivables up 11% and interest and fees on loan receivables up 12% over last year.

Overall, we're pleased with the growth we generated across the business. Purchase volume grew 6% over last year. We had another strong quarter on average active accounts growth, which increased 5% year-over-year, driven by the strong value propositions and promotional offers on our cards that continue to resonate with consumers. The positive trends continued in average balances and spend, with growth in average balance per average active account up 6% compared to last year. The interest and fee income growth was driven primarily by the growth in receivables.

While we had strong top line growth and positive operating leverage in the quarter, which we share with our retailers, RSAs were up only $5 million from last year. This is due to higher incremental provision expense and loyalty program expense that I will touch on shortly. RSAs, as a percentage of average receivables, was 3.6% for the quarter, down from 4% last year. Given this, we now think RSAs will run closer to 4% for 2017.

The provision for loan losses increased 30% over last year, driven by credit normalization and growth. The reserve build in the quarter was $325 million, which was in line with the expectations we laid out in the first quarter earnings call. I will cover the asset quality metrics in more detail when we review Slide 8 later.

Other income was $26 million lower than the prior year due mainly to higher loyalty expense, which increased $71 million compared to the prior year. $37 million of the increase in loyalty expense was largely driven by growth. The remaining $34 million of the increase related to higher redemption rate we experienced over the last few months in one of our programs. This updated estimate relates to rewards that were earned in 2016 through the first quarter of 2017.

Adjusting for that, the growth in loyalty program expense was more in line with our historical run rate. Going forward, we expect loyalty program expense as a percent of interchange revenue to trend near 100% with some quarterly fluctuation. And as I noted previously, we share loyalty program expense with the retailers through the RSA, and this did lower the RSA level in the second quarter as well as our expectation for the year. Partially offsetting the impact of higher loyalty expense on other income was an $18 million pretax gain from a small transaction relating to the sale of merchant-acquiring relationships to a third party during the quarter.

Other expenses increased $72 million or 9% versus last year. We continue to expect expenses going forward to be largely driven by growth, including strategic investments in our sales platforms and our direct deposit program as well as enhancements to our digital and mobile capabilities.

Lastly, the efficiency ratio was 30.1%, nearly 180 basis point improvement over the 31.9% ratio last year. The business continues to generate a significant degree of positive operating leverage.

I'll move to Slide 7 and cover our net interest income and margin trends. Net interest income was up 13%, driven by the continued strong loan receivables growth. The net interest margin was 16.2%, up 26 basis points over last year. Compared to last year, there are a few key drivers worth pointing out: first, we benefited from a slightly higher mix of receivables versus liquidity on average compared to last year as we continue to optimize the amount of liquidity we're holding and have deployed excess liquidity to support our strong receivables growth; the yield on receivables was up 15 basis points compared to prior year; revolve rate improved compared to the prior year and we received a modest benefit from the increases in the prime rate over the past year; lastly, funding costs improved by 2 basis points, driven by a slightly more favorable funding mix.

Our deposit base increased by $6 billion and was 72% of our funding sources versus 71% a year ago. The cost of our deposit base is lower than our other funding sources, so the margin benefited from the shift in the funding mix to lower-cost deposit. So overall, we continue to be pleased with our net interest margin performance. And given these trends, we continue to expect the margin for the full year to be between 16% and 16.25%.

Next, I'll cover our key credit trends on Slide 8. As we've noted previously, we continue to anticipate credit will normalize from the levels we experienced over the past couple of years. We expect this normalization to occur over time, driven by a number of factors, including the portfolio and channel mix, account maturation and seasoning, and consumer and payment behaviors. In terms of specific dynamics in the quarter, I'll start with the delinquency trend. 30+ delinquencies were 4.25% compared to 3.79% last year, and 90+ delinquencies were 1.9% versus 1.67% last year.

Moving on to net charge-offs. The net charge-off rate was 5.42% compared to 4.51% last year. The largest contributing factor to the increase in NCOs continues to be normalization. The second quarter last year also included approximately 15 basis points of benefit from higher recoveries, which did not repeat. Given what we've seen so far, we expect NCOs to be in the low 5% range for 2017 with normalization being the key driver. This is consistent with what we noted last quarter. It's important to note that while our NCO rate was 5.33% last quarter and 5.42% this quarter, we do see a fairly significant seasonal impact that typically results in a lower NCO level in the third quarter. The allowance for loan losses as a percent of receivables was 6.63%, and the reserve build from the first quarter was $325 million, in line with our expectation.

Looking forward, based on what we're seeing across the portfolio and assuming economic conditions are stable, our expectation continues to be a loss rate in the low to mid-5% range for 2018 with losses trending somewhat higher into the first half of 2018 then starting to level off in the second half of the year. This is consistent with what we noted last quarter.

Regarding loan loss reserve builds going forward. Given credit normalization and strong growth, we continue to believe the reserve build for the third quarter will likely be in a similar range on a dollar basis to what we saw in the first and second quarter this year. As we move into 2018, we expect the reserve build will transition to be more growth-driven, given our expectation that losses begin to level off in the second half of '18. In summary, while credit will continue to normalize from here and impact our near-term operating result, we continue to see very good opportunities for continued growth at attractive risk-adjusted returns.

Moving to Slide 9, I'll cover our expenses for the quarter. Overall, expenses came in at $911 million, up 9% over last year. Expenses continue to be mainly driven by growth and strategic investments. As I noted earlier, the efficiency ratio was 30.1%, nearly 180 basis point improvement over last year as we continue to drive operating leverage in the core business.

Moving to Slide 10, I'll cover our funding sources, capital and liquidity position as well as our capital plan we announced in May. 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've grown our deposits by $6 billion, primarily through our direct deposit program. This puts deposits at 72% of our funding, slightly higher than the 71% level we were operating at last year. 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 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.

We had 2 very successful debt transactions during the quarter, a $750 million, 5-year, fixed-rate senior note issuance and $822 million in ABS issuance. We saw strong demand on both transactions.

In terms of our funding plan going forward, we will continue to grow our direct deposits and expect total deposits to be 70% to 75% of our funding mix in 2017. Funding through securitizations was 17% of our funding, consistent with our target of 15% to 20%. Our third-party debt now totals 11% of our funding sources, within our 10% to 15% target. So overall, we feel very good about our mix of funding and our access to a diverse set of funding sources.

Turning to capital and liquidity. We ended the quarter at 17.4% CET1 under the transition rules and 17.2% CET1 under the fully phased-in Basel III rules. This compares to 18% on a fully phased-in basis last year, reflecting the impact of capital deployment through our previous capital plan and growth.

Total liquidity was $21.9 billion, which is equal to 24% of our total assets. This is down from 25.5% last year, reflecting the deployment of some of our liquidity. We expect to be subject to the modified LCR approach, and these liquidity levels put us well above the required LCR level.

During the quarter, we completed the capital plan we announced last July. We paid a common stock dividend of $0.13 per share and repurchased $238 million of common stock, fulfilling the $952 million in share repurchases our board authorized through the 4 quarters ending June 30, 2017.

In May, we were pleased to announce our new capital plan through June 30, 2018. Our board approved an increase in the quarterly common stock dividend of $0.15 per share and a share repurchase program of up to $1.64 billion, which we began to execute in May, repurchasing $200 million during the quarter, in addition to the $238 million repurchased to complete the prior program, for a total of $438 million of repurchases in the second quarter. This represented 15.7 million shares repurchased during the quarter, slightly more than double what we had been averaging in the prior 3 quarters. We will continue to execute the new share repurchase plan, 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 built a very strong balance sheet with diversified funding sources and strong capital 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.

Before I conclude, I wanted to recap our current view on 2017. Given the strong receivables growth and higher revolve rates we've seen so far this year, we continue to believe the margin for the full year will be in the 16% to 16.25% range. This demonstrates one of the natural offsets in the business. Some of the same factors driving credit normalization also result in higher receivables yield, so we're seeing a partial offset on the revenue line. We expect NCOs to be in the low 5% range for the full year of 2017. Normalization will continue to be the largest factor.

Regarding loan loss reserve builds going forward. Given credit normalization and strong growth, we continue to believe the reserve build for the third quarter will likely be in a similar range on a dollar basis to what we saw in the first and second quarter this year. As we move into 2018, we expect the reserve builds will transition to be more growth-driven, given our expectation that losses will begin to level off in the second half of '18. We now think RSAs will run closer to 4%, given the impact of reserve builds and somewhat higher loyalty program expenses due to higher redemption expectations, which are also shared with retailers through the RSA.

And while we continue to generate positive operating leverage that is favorably impacting the efficiency ratio, we expect the efficiency ratio to run closer to 31.5% for the full year. We expect to continue to drive operating leverage in the core business. However, this will be partially offset by an increase in spending on strategic investments as well as holiday marketing campaigns that run in the second half.

In summary, the business continues to generate strong growth with attractive long-term returns. Assuming economic conditions and the health of the consumer are consistent going forward, our expectation's that reserve builds will moderate into 2018, which, combined with the continued growth of the business and the impact from the substantial increase in our share repurchase program, will help us generate EPS growth in 2018.

Before I turn the call over to Margaret, I want to let you know that we will begin filing an 8-K showing our managed data for delinquencies, net charge-offs and end of period as well as average loan balances on a monthly basis. For the last month of each quarter, we will provide the monthly data in conjunction with the filing of our quarterly financial results. We will be filing the first 8-K with this data after the market closes today, which will provide you historical monthly information dating back to January of 2015. You can see the monthly trend. And in August, we will start filing the 8-K in conjunction with our monthly Master Trust filing. I know many of you will find this helpful.

And with that, I'll turn it back over to Margaret.

Thanks, Brian. I'll provide a quick wrap-up, and then we'll open the call for Q&A.

We continue to execute well on our strategic priorities, driving strong organic growth across each of our sales platforms, renewing several existing programs while also signing a new private label credit card program and launching a new co-brand program. We continue to drive solid deposit growth in support of our business development. We are also pleased to have announced a meaningful increase in our capital return to shareholders through our new dividend and share repurchase program. We remain focused on returning capital to shareholders, not only through dividends and share repurchases, but also through the continued growth of our business with a focus on maintaining strong returns and a solid balance sheet as we do so.

I'll 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. (Operator Instructions) If you have additional questions, the Investor Relations team will be available after the call.

Operator, please start the Q&A session.

(Operator Instructions) And we have our first question from Bill Carcache with Nomura.

I wanted to ask if you guys could give a little bit more color on what's behind that change that we saw in loyalty rewards expense exceeding interchange this quarter, and I had a couple of related follow-ups on that. But perhaps, maybe we could start there.

Yes. Sure, Bill. This is Brian. Look, it is really isolated to one of our programs, where we made a couple of changes to make it easier for our customers to redeem their rewards. We believe this is a positive for the consumer, to drive more loyalty to the retailer, more visits, more purchases. It's going to drive incremental sales over the long run. It is, again, isolated to the one program we highlighted. About $34 million of that related to 2016 rewards in the first quarter of 2017. So when you factor in that change, our redemption rate for the total company now is running above 95%. So even if we were to get to 100% redemption across-the-board, when you factor in the RSA offset, the future impact would be pretty small.

Got it, okay. So the -- I guess the redemption rate assumption is 95%. Even if that went to 100%, that's not -- that wouldn't have a material impact?

It would not have a material impact, yes. The impact would be pretty small, just given there's an RSA offset as the partners share in those costs. So the best way to think about this going forward, if you adjust for that $34 million in the quarter, loyalty as a percent of interchange was around 100%. And that's probably a good way to think about it going forward.

Okay, great. And we've kind of spent a lot of time talking about the relationship between RSAs and credit and hadn't necessarily been thinking about RSAs in relation to the rewards expenses as much. But it sounds like that is a permanent relationship. It's like the loyalty resets permanently higher. I guess the question is, is it reasonable to expect that the RSAs will also reset permanently lower?

Yes. That's -- again, the RSAs, I know people like to focus on the RSAs as an offset to credit. We've been pretty clear that the RSAs are really based on the entire P&L. So it includes revenue, it includes loyalty expense, it includes credit. In all but a couple of cases, it includes the reserve build, it includes expenses. And so it really is a complete sharing of the entire profitability of the program. And so the RSA that we saw, the adjustment to our estimate in the quarter absolutely ran through the RSA, and there was an offset there.

We have our next question from Moshe Orenbuch with Crédit Suisse.

I guess first, Brian, you had mentioned that your expectations for credit losses are pretty much consistent with what you had said 3 months ago. You had shown us some vintage charts that showed that the second half of '16 was performing better. And can you kind of update that and tell us how that's trending and...

Yes, Moshe. We've only gone here a couple of months past when we published those back in April. So I'd say the vintages are performing very much in line with our expectations. We're still seeing the benefit from the underwriting changes that we made in the second half of '16 flow through. So we still see the second half of '16 vintage is better than the first half of '16. And that's, at least, in part, what's giving us some comfort that losses will start to level off in the back half of '18. The underwriting changes that we made in the second half of '16 and that we've continued to make in the first half of '17, those are largely going to benefit the 2018 loss rate. And so I'd say, based on an update of those vintage curves, everything we're seeing is pretty much in line with what we showed you in April.

Great. And just to kind of follow up on a similar theme. A couple of other private-label players, Citi and ADS have reported recently, and seem to be -- I guess maybe get your sense as to whether your results are kind of leading or lagging, because Citi had kind of taken up its expectation for credit losses now as opposed to you guys which had kind of have done that a few months back, and ADS had talked about some issues with respect to recovery as something that you had also addressed. So maybe just given that everybody's kind of looking at all of the peers, maybe could you put in context the kind of the timing of your disclosures? I mean, do you feel like you've been ahead of those factors?

Yes. I think this is happening. I think the general trends are all very similar as you look across issuers. I think credit normalization trends are consistent, but I do think you're seeing a little bit of variation in terms of which quarter, in particular, some are starting to see or change their view on the go-forward projection. So I think based on -- and you can actually -- if you go back over the past couple of years and you look at where issuers saw really strong growth, that will differ as well by issuers by a quarter or 2. For us, we saw really strong growth in 2015 through the first half of '16. And right now in 2017, we're working our way through the peak kind of loss rates for those vintages. Second half of '16 will be maturing in the second half of '18, and so that's where we'll start to see the benefit from the underwriting changes we've made. So it's hard to comment. Generally, I think the trends across all the issuers are very consistent. But I think everybody's seeing this materialize in maybe a different quarter.

Our next question is from Sanjay Sakhrani with KBW.

I guess first question, back on credit quality and maybe following along Moshe's question. As far as recoveries are concerned, what's the game plan going forward here? Because ADS has talked about bringing all that stuff in-house. Could you maybe just talk about where you're at with the recovery game plan?

Yes, sure. I'd say recovery pricing is generally pretty stable this quarter. This is an area that we continue to watch pretty closely. I mentioned last quarter that we run regular analysis on these sales, and we compare the results of the debt sales to other methods of collecting on the account. So we're always making those trade-offs, and we're always trying to optimize different strategies. If we start to see the pricing deteriorate further, we may pull back on some of these sales and collect on the accounts through other means. But we haven't made a dramatic shift in our strategy and haven't reached that decision point yet. But it's something we evaluate every month internally.

I guess following on that, maybe one other question. Just do you have the capacity to do all of the collections in-house? Or would that be another step-up in costs to build that out? And then just secondly on RSAs. They are obviously tracking below your guidance for the year. And as we sort of calculate what the ROA needs to be to get to the RSA levels that you're guiding to, I mean that would probably represent a pretty decent step-up in ROAs for the second half of the year. Is that the way to think about it? I mean, it's like a 30 basis point pickup in the ROA if I calculate it, I think. Or is there something else that we should consider when we're thinking about the RSA level that you're guiding to for the year?

Yes, sure. So let me do the recovery one first. So on recoveries, we would have to -- we would go through a transition period. Day 1, we wouldn't bring it all in-house. We would be thoughtful around how we manage that transition. Obviously, there's a short-term implication. There's a long-term implication. You would see a step-up in cost as we move some of that in-house or to other collection strategies. But if we felt like that was -- we're getting a good return on our investment over the long term, that's something we would certainly consider. But we would have to build out some additional infrastructure and add -- have some costs related to that. On the RSAs, I think the -- if you think about where we started the year, we were 3.7% last quarter. We're 3.6% this quarter. You really have to remember that the second half of the year, we hit a seasonal high. We particularly hit a seasonal high in the third quarter. That typically coincides with the seasonal low point on net charge-off. So just that dynamic alone, as you move from the second into the third and then into the fourth quarter, RSA percentage has come up, and we think that puts us back right around 4% for the full year.

Our next question comes from Ryan Nash with Goldman Sachs.

Maybe just a little bit more clarity on the credit outlook. So if my math were correct, gross charge-offs were up roughly 70 bps in the first quarter and maybe a little bit below that in the second quarter. As we look out to the back half of the year, should we expect that pace to continue and then some variability on the recoveries? And when would you expect us to see the gross charge-offs begin to decelerate? And maybe any color you could give us in terms of the 4Q build?

Yes. Sure, Ryan. Look, I think, generally, the trends, like I said, are in line with our expectations. The one thing that you have to factor in -- let's just talk about seasonality for a bit. We do see a fairly significant seasonal drop in NCOs in the third quarter. So you have to make sure that you're modeling that right. That's certainly included in our guidance. And then just while we're on the topic of seasonality, it's probably just worth a reminder that we also see a seasonal increase in delinquencies in the second half of the year. So you just got to make sure that you're taking that all into account. But we feel pretty good about 2017. Like I said, this is the transition year. This is where we're kind of hitting the peak of the '15 and first half of '16 vintages. The underwriting changes that we've made are largely going to benefit 2018, and so that's really where we're focused. The reserve build in the quarter gives you a fairly good indication that is in line with our expectation, and now we've picked up the first half of 2018. So that should give you some comfort that things are trending more or less in line with what we expected.

Got it. I guess just as a quick follow-up. I guess just on a year-over-year basis, how should we expect it to trend? And then second, just for the NIM. You're obviously running towards the high end of guidance. And historically speaking, we do see a pickup in the back half of the year as we see lower revenue suppression and uptick in late fees. So can you maybe just clarify what are some of the offsetting factors that would cause you to not be above the 16.25% on NIM?

Yes, sure. Look, I -- other than giving you the full year, and you've got the first 2 quarters to work with, I think that should help you model the third quarter and the fourth quarter pretty closely. I think the thing I just reiterated, you got to factor in the seasonal decrease in the third quarter. It comes back up in the fourth. In terms of the margin, look, we're very pleased with how we started the year. We're up 26 basis points over last year in the quarter. Receivable yield was up 15 basis points. We saw stronger revolve rate. We got a benefit from the increase in the prime rate. We did have a partial offset from interest and fee reversals, which you'd expect to see in line with credit normalization. And then we've done, I think, a nice job optimizing the liquidity that we're holding on the balance sheet. As you think about the second half of the year, we do typically get a seasonal lift in yields in the second half of the year. However, there's going to be a couple of offsets, we think. First, I think we'll probably see slightly higher deposit betas than we've seen so far in the rate cycle. Nothing dramatic, but probably just a little bit higher than what we've seen so far in the first 100 basis points, maybe a little more competition on rates in the second half. And then I think we're also likely to get a little less benefit from higher revolve rate in the second half, just given some of the changes we've made on underwriting. So I think there'll be some puts and takes, but that probably puts us back between the 16%, 16.25% range for the full year.

And our next question comes from Betsy Graseck with Morgan Stanley.

On -- just following up on the last point. You mentioned slightly higher -- I'm sorry, due to the revolve rate. You said you expect, given your changes, that you would have a slightly lower revolve rate. Could you just explain what changes you made to drive to that outcome?

Well, look, we've seen -- the revolve rate tends to ebb and flow in line with credit normalization. So we've seen a fairly substantial benefit on revolve rates starting in the second half of last year. We continued to see that through the first half, and I think that will just moderate a bit heading into the second half of this year.

Okay. And then on the outlook for RSA. I know you had a couple of conversations on this already, but question is, coming into this quarter, you indicated the reserve that you were looking for hit that, that was great, and expecting that reserve build again in 3Q. I understand that the credit improves in 3Q. But should we expect that there's a like-for-like improvement in RSA even with what is going to be still a little bit higher reserve build in the third quarter? Or is there some cushion in the RSA outlook that you're giving us?

No. Look, the RSA outlook, we started the year, remember, around 4.5%. We took it down last quarter to 4.1% to 4.2%, and now we're saying around 4%. Part of that is a combination of what we're seeing on credit, plus the additional loyalty costs that we had in the quarter. Those are really the 2 drivers. And then how you get from 3.6%, 3.7% range to 4% for the full year is really seasonality. Go back over the last 3 years and you look at the increase from the second quarter to the third quarter and then into the fourth, you always see an increase in the RSA. Some of that is driven by lower net charge-offs. Some of it is program-specific. But that increase will be there in the third quarter, and we think combination of those things puts us back around 4% for the full year.

Okay. And then lastly, on the capital return and the dividend hike that you announced earlier this quarter, could you just give us a sense as to whether your -- the timing of your decisions on capital return have now changed going forward? Should we expect that you're going to be making these kind of decisions in the -- shortly after second quarter is over time frame? Or will you go back to releasing at the same time as the rest of the industry, even though you're not CCAR-required?

Yes. I mean, we were about a month early, I think. We got through our process with our board and with our regulators, and we were very pleased to be able to announce a capital plan when we did. We're able to take advantage of some of that in the quarter. We repurchased these -- about $200 million of the allotment in the quarter. So we're -- look, where we have a little bit of flexibility, we're trying to be opportunistic around that. We'll continue to do that. But I don't think we're going to be much ahead of, timing-wise, what we announced this quarter. I think we're still following a very similar process. We are using the same scenarios that get published early in the year. We run our models. We review it with, obviously, the management team, the Risk Committee and the board and our regulators. And so this year, that put us right around the May time frame. That's probably not a bad way to think about it going forward. But it could lag a month, and we could be closer to where the peers are next year.

And our next question comes from Jamie Friedman with Susquehanna.

Brian, I'll let you take a breather. Margaret, I was going to ask you a couple of questions, if I could. With your comments...

Brian really appreciates that.

I was going to ask you about the SyPi that you had mentioned at the outset. What -- so where should we be seeing that show up the most significantly? You mentioned a number of retailers that you have that have adopted. I think you gave another volume-based metric. But what -- where in the financials do you think that, that will show up most significantly? And then I have one quick follow-up.

Sure. You'll see that in growth, and particularly, kind of our mobile growth. So the way the SyPi works, it's an app that easily integrates to the retailer's app. So we -- that's why we call it plug-in. So it's very easy for the retail to execute upon because most of the work is on our side. And it integrates right in. So it's a very seamless, smooth process for the customer as they're going through their process of credit and using their credit card and paying and all those types of things, getting their rewards. So you'll see it in growth. And our engagement from a mobile perspective just continues to grow, and that's really where you will see that.

Okay. And is it fair to say that the sort of technology may be influencing the loyalty observation that you're making more company-wide? If you -- easier to use your rewards, people will.

Not necessarily. As Brian said, that was one program, in particular, where we needed change. But I would say that, in general, the way we think about loyalty is a real positive for us. So the more the customers are aware of the rewards, our analytics show that if we get them to go back in and use the reward, they tend to have a bigger basket and shop more. So for us, this circular process of issuing rewards, making it easier for the customer, having them go back into our partners to shop is a real plus. And as Brian said, the rewards are offset in the RSA. So it's really a win-win for both of us, right? We're helping to generate sales for the customer. There's higher engagement of that customer with our retailer, and in the retail environment we're in, anything we can do to make that customer more sticky is a real positive.

Okay. If I could just add one more. On the digital side, you gave that disclosure, 18% increase, I thought you said online. I was just -- I get this question a lot. Is that because you happen to have one extremely prominent e-commerce retailer? Or is that more of an observation about wallet penetration throughout your retail base?

It's more wallet penetration across our retail base. I would just generally say, I know everyone looks at the one retailer, but we have a lot of retailers who have online mobile capability. And that's just an area, as is with everything else, is growing, so things like having SyPi to help integrate to the apps. As I said, we have 12 retailers already involved in that. We're going to continue to roll out more. I think this year, you're going to continue to see this be a big part of how customers shop.

Our next question comes from Rick Shane with JPMorgan.

Actually, Jamie's question was a pretty good segue. I know you're not going to comment too specifically. But can you help us think about any seasonal impacts that we might see in the third quarter results related to Amazon Prime Day? Obviously, it's a pretty significant event. I just want to make sure we understand how it runs through the numbers.

Sure. So we're not -- we can't really comment on one particular retailer. What I will tell you is that we initiated Amazon 5% off back in second quarter of 2015. We are very pleased with the overall program to date. It continues to be a positive growth story for us. And you could read through, Amazon had a great day. So we're very pleased with the partnership.

And you'll see it in the third quarter.

Any specific metrics that might be impacted by it we should be thinking about?

No, Rick. I think...

No, and we can't pick one partner.

Look, it's -- you'll see whatever impact is there in the growth numbers for the company. But I would highlight that we're pretty diversified across all of our retail partners, and it's rare that you would see even an item as significant as Amazon Prime Day have a dramatic impact on our overall results.

We have some big partners in there.

And our next question comes from David Scharf with JMP Securities.

Just a couple of follow-up on credit. One, I know you don't provide loss data by product. But just curious, Payment Solutions continues to be the fastest-growing product. It's over 20% of balances now, and those are obviously all promotional balances. Brian, as you look at overall normalization in your commentary about second half 2016 performing better than first half, have there been any meaningful changes in the magnitude of promotions over the last 12, 18 months that may be impacting the pace of normalization? Just trying to get a sense for whether or not those promotional balances are consisting of the typical interest-free period or whether there were any changes that may have contributed to the pace of normalization.

Yes, I know. I wouldn't attribute it to promotional balances. We have seen strong growth in Payment Solutions, but I would say the trends in Payment Solutions are similar to what we're seeing across the total company in terms of normalization. The one thing I have pointed out in the past is we do underwrite differently by platform. So we're actually slightly more conservative in how we underwrite in Payment Solutions, just given -- if you look at the margins there and the top line yield, we're working with a little bit less there than we are in CareCredit and Retail Card. So we underwrite a little more conservatively in Payment Solutions. Given the margins in CareCredit, we're able to underwrite a little more, little bit deeper. CareCredit and Retail Card is fairly close to the average. So portfolio mix is absolutely a driver, but I would not attribute it to promotional balances.

Got it. That's helpful. And then lastly, just another quick question on the recovery side. In terms of the mix -- I'm sure the degree of debt sales has risen in the last couple of years, given pricing trends, and those are reversing now has been discussed, how much of your recoveries are actually accomplished through the third channel, which is outsourced contingency collection? So much is focused the debt sales side. But are you seeing -- A, do you use outsourced collection agencies? And B, are there any changes to the contingency fees, the pricing in that channel?

Yes. We do use third parties as well. We try and optimize across all of the recovery strategies and the various channels. And like I said earlier, we're looking at that on a monthly basis. We run champion challenger to see where we're getting the best results, and we modify and adjust the strategies as we go. I would say the majority of the impact that we've seen has largely been attributable to the market pricing on the debt sales and lesser impact in other strategies.

And our next question comes from Mark DeVries with Barclays.

Brian, I believe you indicated we should expect to see a seasonal drop in charge-offs in 3Q, and we certainly saw that significant drop in '14 and '15. But last year, when delinquencies were actually rising, which tends to mute seasonal improvements, you had a much, much smaller seasonal improvement in the third quarter. Was there anything to call out in that, that also, outside of the rising delinquencies, it might have dampened the seasonal improvement that are not present this year and would suggest another kind of large drop in 3Q?

Yes. That's a good question, Mark. The one thing I would highlight, in the second quarter of '16, we spiked out about 15 basis points of incremental recoveries that we had in the second quarter of '16, which obviously didn't repeat either in the third quarter of '16 or repeat this quarter, obviously. So that's the one thing I would point to. So maybe take the second quarter '16 charge-offs up by 15 basis points, and then you'd see more of a seasonal decline as you move from the second quarter to the third quarter.

Okay, great. That's helpful. And then second question, I mean, it sounds like you guys have done some pretty meaningful tightening to give you some comfort in the guidance around losses leveling off in the back half of last year, but we haven't really seen that reflected in any of the growth, your loan growth so far. When, if at all, might we expect to see growth moderate as a result of some of the underwriting moves?

Yes. Look, I think you're seeing it, I would say, to some degree in the purchase volume, that we have obviously tightened. We made incremental changes here in the first half. We do expect that to have a modest impact on growth. If you look at purchase volume, we were right around 7% when you adjust for hhgregg this quarter versus a run rate that was probably closer to 9% or a little above 9%. So I think that's where you're seeing it. You're not seeing it quite yet in the receivables build because there's an offset on incremental revolve, which is more of a consumer behavioral element that continues to drive good receivables growth. So we think there -- look, there's still really good opportunities to continue to grow, but I think we're not seeing the same opportunities to grow that we saw in 2015 and at least in the first half of '16. So I think there'll be a modest impact going forward. But generally, as we look across the programs and the platforms, we're still seeing good growth opportunities at attractive returns, just maybe not what we're seeing a couple of years ago.

Our next question comes from Henry Coffey with Wedbush Securities.

Again, the monthly data is going to be extremely helpful for -- so thanks for that step forward. If we -- when you talked about rising net charge-offs, there seem to be either a geographical or a channel component to it, that there were certain spots of either the store mix or the country that were struggling more than others. Now that you've had another quarter of looking at that, can you really comment on 2 related things, one, that? And two, how is the dual-purpose card holding up on the credit side?

Yes, sure. I -- we've highlighted for a number of quarters now that portfolio mix component as part of normalization. For us, as you talked about, our underwriting is very customized, and we underwrite differently, whether it's by platform, by program. We target different loss rates, depending on the overall profitability of those programs. So just depending on the growth rates in those different areas, mix can certainly be a driver. And that's mix by program, it can be mix by channel. It's really multi-variant. It's not as simple as just one program, one product, one retailer. It's a combination of factors. And I would say what we're seeing in that regard is largely in line with our expectations. I wouldn't attribute as much to a geographical slice or geographical split that's driving those. It really is more portfolio mix on our side. And then did you have a second question?

Yes. Just unrelated, but in terms of margin. I think when everybody heard about asset sensitivity, they were looking for a fairly large boost, though now we're seeing fairly small boosts. What's the real dynamic there? Is it just timing? Or is it more of a funding competitive issue?

Yes. Look, for us, yields and margins are ahead of our expectations so far this year. If you remember, when we started the year back in January, we guided to a net interest margin of 15.75% to 16%. We took that up 90 days in. We now think we'll be between 16%, 16.25% for the year. So we continue to be slightly asset-sensitive. It's right around 1%, under 100 basis points shock, and that's been very consistent over the last 3 years. That 1% kind of range hasn't really moved much. I do think as we get into the second half here that we may see a little more competition on deposit rates. We've seen -- just in the last 4 to 6 weeks, we've seen some competitors move. We've been very fortunate so far with the first 100 basis points, I think, on our CDs and savings. I think we haven't moved more than 10 or 15 basis points across all those products. So we've had a nice little lag here. The margins have improved as a result of it. But look, I do think things will get a little more competitive, and we're ready to respond to that if we have to.

And our next question comes from Arren Cyganovich with D.A. Davidson.

I was wondering if you could talk a little bit about the 2019 renewal with your retailers. Have you started those discussions, and if so, how they've been progressing?

Yes. We really can't comment on what we've started or not started. But what I would say is where -- we have to win every day. So part of the process we go through is really making sure we're delivering for the customers and the resellers now. In many cases, usually, something will come up where the retailer wants to either change a value prop or expand in a certain way, which will allow us the opportunity to open up the dialogue. So we're constantly in those discussions, and we feel pretty positive about the relationships that are coming up, the relationships we've had for a very, very long time. And we're hoping and confident that we'll be able to renew those relationships.

Fair enough. And then just a -- from a modeling perspective, with the $34 million higher redemption rate that caused the loyalty, was that more of a onetime? Or is that something that's going to be consistent going forward?

Yes. That's really more of a onetime item that related to 2016 rewards in the first quarter of '17. And then in terms of a run rate going forward, if you adjust that, the $34 million, and put loyalty as a percent of interchange right around 100%, that's not a bad way to think about it going forward.

Our last question comes from John Hecht with Jefferies.

Margaret, you talked about the pipeline in the last question. Wondering maybe can you give us any -- just commentary on any changes in the competitive -- I guess in the competitive dynamics to the marketplace.

Yes, sure. I think competitors have been pretty stable as we've gone through this year. I'd say most -- there's not many big deals out there. We tend to compete more in the $1 billion and below. And in that space, there's plenty of opportunity. We continue to look at existing programs from competitors as well as startups. I think I've mentioned in the past, we have dedicated resources in all 3 platforms. So we're feeling pretty good about the pipeline that we have in place and how we're winning and playing in the marketplace. We're not going to win every deal. We try to really work on the deals that we think meet our returns and are going to be accretive to our overall portfolio, and that's kind of how we've approach it and will continue to approach it. But I don't think anyone's being particularly crazy out there in terms of competition.

Okay. And then last question is -- Brian, you talked about deposit betas in the second half. Maybe just give a little bit more color on that in terms of your outlook and then where are you going out in deposit duration, just to give us a sense of pricing changes.

Yes. Sure, John. Look, I think the -- our expectation is that any move in deposit pricing is going to be pretty modest. I just think it's been almost nonexistent so far with the first 100 basis points. It's going to be slightly above that. We've seen some competitors, particularly on high-yield savings, with more attractive offers out there, whether it's a onetime bonus or the slightly better rate than they've been offering. And I think we're going to have to step up our pricing a little bit more in the second half than we did in the first half. And I'm talking about basis points here, not a wholesale change from what we've been saying.

And then duration, where are you guys trying to issue deposits at this point.

We've always tried to kind of match the duration of our assets with our liabilities. That's part of our funding strategy. We've been very successful in growing the high-yield savings book. I'd say anywhere where we can grow the longer [tenure] CDs right now in this environment, we're looking to do that. There are just, obviously, given where rates are, there's not a lot of demand for a 5-year CD where they're priced today, so. We're trying to take advantage of that where we can. There's just not as much demand there as we'd like to see.

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

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.