Synchrony Financial (SYF) 2018 Q1 法說會逐字稿

Welcome to the Synchrony Financial First Quarter 2018 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 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, 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 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.

I'll begin on Slide 3. Overall, we started the year on a solid note with net earnings of $640 million or $0.83 per diluted share. Loan receivables grew within our expected range, and we generated strong net interest income growth. Purchase volume growth slowed in line with expectations, given our underwriting refinements. And average active account growth was driven by the attractive value propositions and promotional offers on our cards. The net interest margin and efficiency ratio performed as expected, as did our credit quality metrics. Brian will provide more detail on these ratios shortly.

Supporting our funding objectives, we continued to generate strong deposit growth, which was up 10% during the quarter. This is an important area for us this year as we continue to implement our pre-funding plan in preparation for onboarding the PayPal Credit portfolio, which we expect to happen in the third quarter of 2018. The pre-funding will consist of both deposit and wholesale funding.

Our capital position remains strong, and we continue to execute our capital plans, paying a $0.15 dividend during the quarter and repurchasing $410 million of common stock.

We also added some exciting new deals, renewed key relationships and further expanded our CareCredit network.

In our Retail Card sales platform, we recently signed a new exclusive partnership with Crate and Barrel. The program is designed to expand customers' financing options and reward customer loyalty. In addition to our private label credit card, we will be launching a Dual Card that can be used anywhere that MasterCard is accepted. We are excited about this new program and the innovative financing and rich rewards cardholders will have access to when we launch later this year.

We also added new partnerships with JTV, a leading retailer of jewelry and gemstones in the United States; and with Mahindra, where we will provide the company's fast-growing U.S. dealer network with promotional financing options for new and used powersport vehicles and accessories. Both of these programs will be part of our Payment Solutions sales platform.

We also renewed several other partnerships, including Nationwide Marketing Group, Briggs & Stratton and American Signature Furniture. And in CareCredit, we established a new strategic relationship with AVMA, the American Veterinary Medical Association.

In addition, we expanded our valuable CareCredit network into the growing day and medical spa market, helping spa providers drive growth by offering an additional payment option for consumers. Through a partnership with American Med Spa Association and Spa Industry Association, providers can now make treatments and services more accessible while expanding their reach to CareCredit's 11 million cardholders. And CareCredit cardholders will now enjoy expanded utility of their card in this in-demand wellness segment.

An important objective is to extend the utility of our cards, which will move them to the top of cardholders' wallets and migrate cardholders towards more repeat purchase behavior. We have made substantial progress in improving the utility, and therefore, the usage of our cards as evidenced by our reuse rates. For Payment Solutions, the reuse rate in the first quarter was 29%; and for CareCredit, it was 53% of total purchase volume.

Equally important is ease of use of our cards and ensuring that cardholders have access to their cards' rewards and account information across whatever channel they choose to utilize. We have made investments to develop tools to ensure our cardholders can easily utilize their cards and access account information, including rewards, across our partners' digital channels.

SyPi, our mobile plug-in application, is an example of an investment we made to expand our mobile engagement capabilities and where we are receiving very positive response from our retail partners. SyPi is currently being used in 19 of our retail partners' apps, leading to a significant growth in usage by cardholders.

We are also employing technologies, such as [Sydney], our artificial intelligent-enhanced virtual assistant, which not only makes obtaining information easier for our cardholders but also improves back office efficiency.

Our digital sales penetration for our Retail Card consumers has been growing. Digital sales penetration was 28% in the first quarter. Over 40% of applications are happening online, with the mobile channel alone growing 37% over the same quarter of last year.

During the quarter, we also announced another strategic investment. This time, in Payfone, a leader in identity authentication for digital channels. The investment is one of several we've recently made in the mobile and authentication space, an obviously important area, given our business model and the increasing move to digital sales channels.

We continue to seek these opportunities, which have proven to be very beneficial strategic decisions in the past with our investments in innovative companies, including LoopPay, which evolved into Samsung Pay; and GPShopper, a business we have since acquired, which has delivered several cutting-edge technologies, including SyPi.

Given our interest in these innovative companies and seeing the value they can bring to our business and our partners, we have developed a team solely dedicated to the task of finding these opportunities. And they will be continuing to seek innovative, value-added solutions that can augment our core business with the latest technology. These will not be large-scale investments. However, they will be important to the evolution of our business.

Another area I will highlight is our innovative approach and flexibility in navigating challenges with certain programs. Recently, the hhgregg bankruptcy provided an opportunity for us to accelerate the launch of another successful network card called Synchrony HOME.

This card is accepted by retailers at nearly 18,000 locations in verticals such as home furnishings, flooring and electronics. Launching the network ensures continued card utility, helping us maintain a revenue stream and manage credit performance. So far, cardholder response has been positive, and we're encouraged by the early results.

In that same vein, we have decided to give Toys"R"Us cardholders the opportunity to convert their cards to a Synchrony MasterCard. To help make this card attractive, we have added a 2% cash back value proposition on all purchases.

These are examples of actions that we can take to preserve card utility and relationships with our existing cardholders, even when presented with challenges or issues with programs.

This was obviously a very productive quarter for us, and we are pleased to continue to generate growth organically while also launching new programs, extending the utility of our cards and making strategic investments to improve the position of our business as we compete in an ever-evolving marketplace.

Before I turn the call over to Brian, I will give you a quick view on how each of our sales platforms performed during the quarter, which is on Slide 5 of the presentation.

In Retail Card, we grew loan receivables 5% over last year, reflecting broad-based growth across our partner programs. Interest and fees on loans increased 7%, primarily driven by the loan receivables growth. Both purchase volume and average active accounts grew 2%.

As I noted earlier, we had another active quarter in our Retail Card sales platform, with the win of a new partner, Crate and Barrel. We are very excited about this relationship and expanding the program to offer their customers more financing options. We continue to leverage our strong retail card foundation and make investments to both drive organic growth and attract profitable new programs.

Payment Solutions delivered a strong first quarter. Broad-based growth across the sales platform with particular strength in home furnishings and automotive products resulted in loan receivables growth of 8%. Interest and fees on loans also increased 9%, primarily driven by the loan receivables growth. Purchase volume was up 7%, and average active accounts increased 5%. We are pleased to have added the 2 new partners in this platform, JTV and Mahindra, while also renewing several key programs.

CareCredit also delivered another strong quarter. Receivables growth of 8% was led by our dental and veterinary specialties. Interest and fees on loans also increased 8%, primarily driven by the loan receivables growth. Purchase volume was up 8%, and average active accounts increased 7%... And we are excited to be expanding into new verticals, increasing utility of our card and helping business attract clients through expanded payment offerings.

We continue to deliver growth across all 3 of our sales platforms in the first quarter. We are extending and deepening relationships, signing new programs and providing innovative, value-added solutions for our partners and 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.

This morning, we reported first quarter earnings of $640 million, which translates to $0.83 per diluted share. We continue to deliver good growth, with loan receivables up 6% and interest and fees on loans receivables up 8% over last year.

Overall, we're pleased with the growth we generated across the business. The interest and fee income growth was driven primarily by the growth in receivables. Purchase volume grew 3% over last year. The slower growth in recent quarters reflects the underwriting refinements we have noted previously and the hhgregg bankruptcy. I will cover the impact of the underwriting refinements we've made in more detail later in the presentation.

As we move forward, and the impact from these items are included in the prior year run rate, we would expect their impact to moderate in future quarters. Average active account growth was 2% over last 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, with growth in average balance per average active account up 4% compared to last year.

RSAs increased $36 million or 5%. While we share the strong top line growth and positive operating leverage generated in the quarter, this was offset by higher incremental provision expense. RSAs as a percentage of average receivables was 3.7% for the quarter, the same level as last year and in line with our expectations.

The provision for loan losses increased only 4% over last year, a significantly lower increase than we have been experiencing over the past 2 years. And the reserve build in the quarter was $164 million, lower than the $200 million to $225 million range we had expected and substantially lower than the $332 million reserve build in the first quarter of last year. Both reflect the moderating trends in credit normalization and slightly lower loan receivables growth as well as the impact from our underwriting refinements. I will cover the asset quality metrics in more detail later in the presentation.

Other income was $18 million lower than the prior year. While interchange was up $13 million driven by continued growth in out-of-store spending on our Dual Card, this was offset by loyalty expense that increased by $18 million, primarily driven by everyday value propositions. As a reminder, the interchange and loyalty expense run back to the RSAs, so there is a partial offset on each of these items. As we noted previously, we expect loyalty program expense as a percent of interchange revenue to trend around 100% with some quarterly fluctuation.

Other expenses increased $80 million or 9% versus last year, driven primarily by growth, marketing and technology investments. 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, enhancements to our digital and mobile capabilities and investments to automate and streamline our back office.

The efficiency ratio was 30.9% for the quarter compared to 30.3% last year and in line with our expectations. The slight increase was driven by timing of strategic investments as well as upfront build cost related to the onboarding of PayPal.

Lastly, we did continue our pre-funding in the first quarter ahead of the expected closing of the PayPal Credit portfolio in the third quarter this year. The increase in liquidity of 15% over last year as well as the increase in liquidity to assets ratio to over 19% versus 18% last year reflect the growth in pre-funding through both deposits and wholesale funding. This impacted metrics in the first quarter, such as the net interest margin, which I will cover next on Slide 7.

Net interest income was up 7%, driven by loan receivables growth. And net interest margin was 16.05% compared to last year's margin of 16.18%. The margin was largely in line with our expectations. The margin was impacted by a slightly lower mix of receivables versus liquidity on average compared to last year, driven primarily by pre-funding the PayPal Credit portfolio acquisition.

An increase in total interest-bearing liabilities cost of 26 basis points to 2.1% also impacted the margin. Part of the increase in the rate reflects the pre-funding strategy as well as higher benchmark rates. This was largely offset by an increase in the yield on receivables, up 18 basis points from last year, mainly due to the increase in prime rates, partially offset by growth in promotional balances.

Regarding our margin outlook for 2018, it is unchanged at 15.75% to 16%, including the impact of the PayPal Credit portfolio acquisition. For next quarter, as we continue to build the pre-funding ahead of the portfolio acquisition, you could see the margin decline into the 15.25% to 15.5% range, virtually all driven by the impact of building liquidity ahead of the transaction. This mainly impacts the denominator, earning assets, without much of an offset on net interest income. We expect the core margin to continue in the 16.25% range. And once the portfolio is on board, the margin will return to those levels as the liquidity is replaced by the PayPal Credit portfolio.

Next, I'll cover our key credit trends on Slide 8. In terms of specific dynamics in the quarter, I'll start with the delinquency trends. 30-plus delinquencies were 4.52% compared to 4.25% last year. And 90-plus delinquencies were 2.28% versus 2.06% last year. The rate of increase in both the 30-plus and 90-plus delinquency rates slowed for the second quarter in a row, reflecting a more modest impact from normalization and the impact of our underwriting refinements.

Moving on to net charge-offs. The net charge-off rate was 6.14% compared to 5.33% last year and in line with our expectations. The largest contributing factor to the increase in NCOs continues to be normalization.

The allowance for loan losses as a percent of receivables was 7.37%, and the reserve build from the fourth quarter was $164 million. As I noted earlier, the reserve build was lower than the $200 million to $225 million range we expected due to the moderating impact from credit normalization and somewhat slower receivables growth as well as the impact from our underwriting refinements. We expect the reserve build next quarter to be similar to this quarter in the $175 million range.

As we look forward to the remainder of 2018, I'd like to describe the impact related to the underwriting refinements on our more recent vintages and our purchase volume growth. First, the most recent vintages continue to trend in line with our expectations.

As you remember, we started to make refinements to our underwriting in the second half of 2016, and we continue to see the positive impact of those changes. Additionally, we have continued to make incremental underwriting changes throughout the year, and the vintage curve data suggests that the 2017 vintage is performing better than 2016 and more in line with our 2015 vintage.

Not surprisingly, these underwriting refinements have also resulted in changes to our purchase volume mix by FICO Score. If you look at purchase volume by FICO stratification, we continue to grow at a fairly strong pace in accounts with a FICO Score greater than 721, which increased 8% over the same quarter last year, while purchase volume for the below 660 FICO range actually declined 15%, reflecting the actions we have been taking. These trends help inform our view of loss expectations in 2018 and beyond.

In summary, while credit continues to normalize from here, we expect the pace of the change and the impact on our results to continue to moderate as we move through 2018, assuming stable economic conditions. We continue to see 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 $988 million, up 9% over last year. Expenses continue to be primarily driven by growth, marketing and technology investments.

As I noted earlier, the efficiency ratio is 30.9% for the quarter versus 30.3% last year and in line with our expectations. The slight increase was driven by timing of strategic investments as well as upfront build costs related to the onboarding of PayPal. Our efficiency ratio outlook for the year remains around 31%.

Moving to Slide 10. I'll cover our funding sources, capital and liquidity position as well as continued execution of the capital plan we announced last 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 nearly $5 billion, primarily through our direct deposit program. This puts deposits at 73% of our funding, slightly higher than the 72% 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 continue to expect to grow deposits in line with our receivables growth. Overall, we're pleased with our ability to attract and retain our deposit customers.

As part of our pre-funding plan for the PayPal Credit portfolio, we did issue $500 million of unsecured debt in the first quarter. We will continue to execute our pre-funding plan as we prepare to onboard the PayPal portfolio in the third quarter of 2018. The pre-funding will consist of both deposit and wholesale funding. So overall, we continue to execute our funding strategy and feel very good about our access to a diverse set of funding sources.

Turning to capital and liquidity. We ended the quarter at 16.8% CET1 under the fully phased-in Basel III rules. This compares to 17.7% on a fully phased-in basis last year, a 90 basis point reduction, reflecting the impact of capital deployment through our capital plan and growth.

Total liquidity, including undrawn credit facilities, was $24.6 billion, which equated to 25.7% of our total assets. This is up from 24.4% last year, partly reflecting the pre-funding ahead of the PayPal Credit portfolio acquisition, which we are holding in liquidity until the portfolio is onboarded. 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 continued to execute on the capital plan we announced last May. We paid a common stock dividend of $0.15 per share and repurchased $410 million of common stock during the first quarter. We have $210 million remaining in share repurchases of the $1.64 billion our board authorized through the 4 quarters ending June 30.

I'd also like to provide an update on our 2018 capital plan. Our plan was reviewed and approved by our Board of Directors in late March, and we submitted the plan to our regulators in early April. This is in line with the time line in previous years, and we hope to be in a position to announce our capital plans later this quarter. While I cannot be specific as to our capital plans at this point, we would expect to continue deploying capital through both dividends and share buybacks in addition to supporting our growth and the acquisition of the PayPal Credit portfolio during the third quarter.

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.

Before I conclude, I wanted to recap our current view for the year. First, regarding our margin outlook for 2018, it is unchanged at 15.75% to 16%, including the impact of the PayPal Credit portfolio acquisition. For next quarter, as we continue to build the pre-funding ahead of the portfolio acquisition, you could see the margin decline into the 15.25% to 15.5% range, largely driven by the impact of building liquidity ahead of the transaction. This mainly impacts the denominator, earning assets, without much of an offset on net interest income. And we expect the core margin to continue in the 16.25% range. And once the portfolio is onboard, the margin would return to those levels as the liquidity is replaced with the PayPal Credit portfolio.

We continue to expect NCOs to be in the 5.5% to 5.8% range for the full year of 2018, including the impact of PayPal. We expect credit normalization to continue to moderate. It is also important to remember that seasonality results in a higher net charge-off rate in the first half of the year compared to the second half, with the third quarter being the low point in the NCO rate.

Regarding loan loss reserve builds going forward. We expect the reserve builds to continue to transition to be more growth-driven as we move through 2018. We believe the reserve build in the second quarter will be similar to this quarter, in the $175 million range.

The onboarding of the PayPal Credit portfolio will result in much higher reserve builds in the second half of this year after the portfolio is onboarded due to the accounting requirements around portfolio acquisitions. We will provide more specifics around this after the portfolio is acquired, which we continue to expect will be in the third quarter.

Turning to expenses. We continue to generate positive operating leverage and continue to expect the efficiency ratio to be around 31% 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 and marketing investments to drive growth as well as the upfront build cost related to the onboarding of PayPal.

In summary, the business continues to generate good growth with attractive long-term returns. Assuming economic conditions and the health of the consumer are consistent going forward, our expectation is that core reserve builds will continue to moderate throughout the year, which, combined with continued growth of the business and the impact from continued capital actions, will help us generate EPS growth in 2018. And while the PayPal Credit portfolio acquisition creates a degree of EPS dilution this year, this will turn EPS-accretive in 2019 and help provide a nice tailwind to EPS as we move forward.

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.

Guided by our strategic priorities, our results this quarter, including the many renewals and program wins, demonstrate our commitment to our partners and cardholders and the value they derive from our products and services. We started the year with solid results, fully in line with our expectations. And we'll continue to focus on generating momentum as the year proceeds, working every day to earn the business of our partners and attract new programs.

Returning capital to the shareholders remains a key priority, and we are pleased to continue to return significant capital to shareholders through our dividend and share repurchase program. We are also deploying capital through organic growth and program acquisitions. The previously announced acquisition of PayPal's U.S. Consumer Credit Receivables portfolio is an example of this as are the strategic investments we are making in our business to help it grow.

At the end of the day, we remain focused on risk-adjusted returns on making strategic business decisions that help us grow our business and deliver value for our partners, cardholders and shareholders.

I'll now turn the call back to Greg to open up to Q&A.

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session. (Operator Instructions) Operator, please start the Q&A session.

(Operator Instructions) And we have our first question from Moshe Orenbuch with Crédit Suisse.

Really helpful detail in terms of the credit steps that you've taken and its impact on the overall portfolio. When you think about what you've done and this -- your ability to generate kind of 8% growth in the above 720, I guess, is the reduction in the sub-660, is that something that's ongoing? Or are there are steps that you're taking to figure out how the bring that back so it's not going to be as big a drag at some point?

Yes, sure, Moshe. So what I would say is that what we're seeing right now in the purchase volume, both last quarter and this quarter, is really the cumulative impact of the changes that we started to make back in the second half of '16. So I think you're going to see a continued reduction in purchase volume on accounts below 660 FICO. I think it probably lasts maybe through the balance of this year. And then I think as we get into 2019, just given that we'll be comping against those periods where we have lower sales in that segment, I think the purchase volume will kind of moderate -- or the impact on the purchase volume will moderate as we get into '19. And you won't feel as much of an impact on the overall stats. Does that make sense?

Got it. Yes, it does, it does. And just on a related matter, maybe. Given that I think that the level of overall credit in the PayPal portfolio is slightly below yours, how does that inform your thoughts about how you're going to manage the portfolio from both existing credit and the growth standpoint?

Yes, no. That's a great question. I mean, look, first, I'd say that we don't just look at the loss rate when we're evaluating one of our programs. We look at the overall return that we're earning on the program. We look at the resiliency of those earnings in various scenarios, including stress scenarios. And what I can tell you is that we're very comfortable with the risk profile of the PayPal Credit portfolio. I think it's well underwritten. We really like the risk-adjusted returns. With that said, while we don't see -- I don't see any significant underwriting changes that we're planning to make at this point, we're obviously going to work with PayPal very closely. I think one of the benefits is they've got a ton of data on their customers. We're going to marry that up with some of our tools. And I think jointly, we'll be in a position to make really good underwriting decisions going forward. But I wouldn't expect to see any significant changes. Again, we're -- overall, we're very comfortable with the risk profile of that portfolio.

Our next question comes from Ryan Nash with Goldman Sachs.

Brian, in regard to the reserve build whether this quarter or into 2Q, can you maybe separate for us what was driven by growth, given the fact that the portfolio has -- the growth rate has halved over the last year or so, and versus what's driven by normalization? And I take the point that you're going to be giving us specific guidance related to PayPal after the deal closes, however, can you just provide us with some view of how we should at least think about the build in the back half of the year, how much will come in the back half of the year versus maybe how much will come in 2019?

Yes, sure, Ryan. So if you think about the reserve build of $164 million, obviously, that came in below our expectations, which is good news. It was driven primarily by a combination of moderating impact from credit normalization. Receivables growth drove a small portion of that, it came in slightly below our expectations. But if you remember, we guided to 5% to 7% receivables growth, we came in at 6%. So I would say on the receivables growth side, we're tracking pretty much in line with expectations. So really, what you're seeing when you think about the reserve build is the impact from the underwriting refinements that we made. So things are trending in the right direction, very much in line with our expectations. So as you think about the second quarter, just based on the trends that we're seeing, we think the reserve build next quarter will come in, in a similar range, something around $175 million. And again, significantly lower than the trends we were seeing in 2017. So that gets you through the first half of '18. Then as you think about PayPal coming on, the thing that you've got to remember with PayPal is it comes on with no reserves. We're obviously going to book our standard 14 to 15 months of forward losses. Those reserves will get built over 9 to 12 months. And think about a fairly significant portion of that reserve build coming in the second half. So you'll see more of that reserve build in the third quarter, in the fourth quarter, and then it starts to taper off as you get into the kind of the first half of '19. Other than that, we've got to bring the book on. We'll give you a little more color next quarter when we have a really good sense at that point of what the portfolio looks like.

Got it. I appreciate the color. And then while I know it's still early, just given your comments around the recent vintage performance and based on the trends that you've been seeing, I guess, are you guys still expecting credit in the core portfolio to begin to level off in the second half? And maybe an early view on what do you think this could potentially mean for 2019 charge-offs on the legacy portfolio, ex PayPal.

Yes. Ryan, I think it's a little early to start calling 2019 net charge-offs. What I can tell you is that the first quarter was very much in line with our expectations. We're not changing our view for the full year. We continue to expect net charge-offs to be in that 5.5% to 5.8% range for the full year. Everything is pretty consistent with what we communicated back in January. When we look at the vintages, they're performing in line with our expectations. The '17 vintage looks better than '16 and more in line with '15. We're obviously, as we talked about earlier, remixing the portfolio a little bit, a little bit less than below 660, a little more in above 720. And you're seeing that come through in both the reserve build and delinquencies, which have moderated in the past 2 quarters. And I think those are probably the 2 best indicators that tell you things are on track.

And our next question comes from Don Fandetti with Wells Fargo.

Brian, clearly, credit seems to be improving on a year-over-year basis. But as you talk to investors, I think one of the big concerns right now is sort of renewals and how to think about that and could that sort of cap the multiple. And obviously, can't comment on that, but can you give us some, any sort of commentary around these big renewals that you have in 2019? Do you think you'd be closer to providing some kind of color as we go through 2018? Or will this just sort of hit us one day and we'll get a press release?

It's Margaret. So what I would say is we're -- we are well entrenched with our partners and working every day to do these renewals. Obviously, we know it's important to communicate as soon as we can. What I can tell you is we can't really tell you sooner than when we know. But what I can tell you is the entire organization is focused on renewals. We work with our partners every single day to make sure we're meeting their needs and having the right conversations at the right levels to ensure we're working hard to get those renewals under our belt.

Okay. And Brian, a clarification on the delinquency. From a year-over-year basis, it improved in Q1. Do you see that -- do you see further improvement there? Or do we sort of have what we are going to see on the year-over-year delinquency change?

No. I think you're seeing a trend in line with our expectations. If you go back to the third quarter last year, the year-over-year increase was 54 basis points, it came down to 35 last quarter, it came down to 27 this quarter. So that's trending in the right direction. Look, I wouldn't read too much into any one quarter, but we would expect the delinquency trend to continue to moderate in advance of net charge-offs moderating. So I think we're certainly trending in that direction.

And our next question comes from Bill Carcache with Nomura.

I had a question on capital, in particular, as it relates to regulatory reform. I know that there's a lot unknown still, but just broadly speaking, some non-GSIBs have indicated that the potential to return capital more freely without having to go through the annual process is really the biggest benefit that they see potentially deriving, more so than any potential expense savings. You guys are now at 16.8% for CET1. Can you help us frame the potential that you guys would -- could do a -- would be willing and/or able to do kind of a stepped-up increase in your buyback to get that 16.8% down closer to peer levels versus the more gradual path that you guys have talked about historically? Of course, all subject to regulatory reform.

Yes, sure. It's a great question. Obviously, there's a lot of moving pieces in all the proposals that are out there, even the more recent ones. But I would say, based on what we're seeing right now, I think the positives probably outweigh the negatives for us, particularly if they soften some of the requirements for banks below $250 billion in assets. So I do think that should benefit us. So there's definitely some reason, we think, to be optimistic. But we've really got to wait and see what gets passed. As you highlighted, we are sitting on a significant amount of excess capital today. We have indicated that our goal is to bring our ratios more in line with the peer set. When we look at our business, the returns, the resiliency of the earnings profile in a stress environment, we compare very well to our peers. So we do feel like that as an achievable target over time. However, it's a little premature for us to really speculate on the pace or the magnitude of any future payouts. The good news is that with the combination of good organic growth, PayPal is a great use of capital, deploying capital at attractive returns, strong dividend, buyback, we've got a lot of options available to us to bring the capital ratios more in line. But any more specific commentary is a little premature.

No, that's helpful. If I may on the same topic and follow up with a question around liquidity. And perhaps, could you talk a little bit about the amount of liquidity that you guys now hold, perhaps how that could change if you were able to run with the amount that you need, rather than the amount that, I guess, you're currently required to run at for regulatory purposes? And if regulatory reform will to allow you to maintain less liquidity, maybe just frame for us what that could mean for your NIM.

Yes. I would think about any impact there, Bill, being pretty modest. If you look at how we operated last year and take liquid assets as a percent of the total, that's probably the range to expect going forward. Now you're going to see that percentage tick up. You saw it in the first quarter. You're going to see an even greater increase in the second quarter for the pre-funding for PayPal. But once that normalizes out and we bring that portfolio on, I would think about liquid assets as a percent of total being pretty much in line with how we ran in 2017.

Our next question comes from Betsy Graseck with Morgan Stanley.

Two more PayPal questions. One just to make sure I understood. I heard you say that, look, post-PayPal, you wouldn't expect to run the institution any differently on a credit perspective. So I just want to make sure I understand. Does that mean that you're taking in PayPal, a little bit lower risk, that stays that way, your portfolio stays your way, and the blended average is a bit lower than where it is today? Or do you expect -- do you anticipate over time, you would be moving the PayPal portfolio towards your current risk characteristics?

Yes. I think, Betsy, the way to think about it is we're very comfortable with the loss rate, and the overall return profile is very attractive on PayPal. And if you remember, we don't underwrite all of our programs the same way. We have a very customized approach. So we operate the programs today with different loss rates, and that depends on a lot of factors. It depends on the margin on those programs, the overall return profile, the resiliency of those earnings. And when we look at PayPal, we're very comfortable with the overall profile. So the way I would think about it in terms of the total company is we've indicated we don't expect it to have an impact on the net charge-off rate this year. I do think it'll provide a little upward bias in the loss rate as we move into 2019, but it should be pretty modest. And overall, when we look at the entire company, inclusive of PayPal, we're very comfortable with the risk profile.

Got it. Okay. And then on RSAs, how does the PayPal portfolio impact the RSAs, either in percentage terms or seasonality? Is there any change to that we should be anticipating?

Yes. So if you go back to our outlook, we provided a ratio for RSAs at 4.2% to 4.4%, excluding PayPal, and unchanged including PayPal at 4.2% to 4.4%. So it's not significant enough to move that ratio at all for us for the total company.

Right. And even when you flip into a full year impact, like 1Q, 2Q, there's no impact there?

Yes, I wouldn't expect it to have a meaningful change to the RSA rate for the total company.

Okay. And no impact on the seasonality?

No, it shouldn't have much of an impact on seasonality. In terms of seasonality, you do have to factor in the third quarter, we hit a high point in the RSA, but we don't see anything with PayPal that would necessarily change that dynamic. That's really more of a seasonality-driven event, where you've got some higher margins, lower charge-offs in the third quarter that drives increased sharing with the partners.

And our next question comes from Chris Brendler with Buckingham Research.

Could you discuss potentially the investments you're making in marketing and whether or not we'll see some of the drag from underwriting start to turn as you head towards the latter part of the year? And particularly, looking at the growth rates in CareCredit, where I think you face a pretty competitive set, it feels like the slowdown there, which just may just be underwriting-related, but any color on that growth outlook would be very helpful.

You want to start...

Let me -- I'll start on the marketing expenses. I think the increase just in the quarter was largely driven by an increase in marketing on our deposits related to the pre-funding for PayPal. We also had some timing in our strategic investments as well as we made some specific growth investments related to some of our Retail Card programs. Obviously, some of those are shared with the partners, which is why you saw the RSA come down slightly year-over-year. What was your second question?

I think on CareCredit. Look, on CareCredit, I think we've mentioned this in the past, it's really a great business. And we've really focused our resources on the sell side to increase utility of the card, which we're definitely seeing in the core business. And then actually, we've expanded verticals that we're going after. So we're taking the model we've built in dentist and vet and taking it to other verticals, which is working out to be a very positive thing as well as the fact that we expanded utility of the card in places like Rite Aid. So all of that has come together to allow us to continue to really grow in that particular platform.

And then do I just take the slight yield degradation in that CareCredit business to be sort of an indicator of a mix shift up-market? Or is there other factors going on?

It's really driven by some merchant or provider mix, where we earn a slightly lower merchant discounts, some of our larger providers, and so there's a little bit of mix impact year-over-year. But generally, I'd say the core yield, the core margins are very stable in CareCredit.

And our next question comes from Sanjay Sakhrani with KBW.

Just one clarification on the credit stats. I was wondering if you're seeing any behavior among your delinquent borrowers as it relates to tax reform. As these consumers have gotten more discretionary income, have you seen some increase in, like, payments of delinquent loans?

Yes. We really haven't seen anything yet, Sanjay. Obviously, we remain optimistic that we may see something this year. As you know, we didn't build anything into our forecast for that. But look, we do expect, if customers have additional discretionary dollars, that they're either going to spend those dollars or maybe delever a bit as we saw with lower gas prices. But it's still very early. So we just haven't seen anything that we would directly attribute to the tax savings. I think when we look at the trends when we look at our delinquencies, we would tie it more to the underwriting changes that we've made than we would to anything specific on consumer or tax savings.

Okay, great. And then a follow-up on the RSAs. I was hoping, Brian, maybe you could help me with this. Because when you look at RSAs to receivables, that was lower than our expectations. And when you look at that metric year-over-year, the ROA went higher, but the RSA as a percent of receivables didn't. So how should we think about the RSA levels as it relates to profitability? Or how should we think about modeling it?

Yes, sure, Sanjay. We know that this is one of the more challenging aspects of our business for you all to model, which is why we gave you pretty clear guidance on what to expect it. What I can tell you is the first quarter came in line with our expectations. I think it's probably helpful if you go back to 2017, where we ended the year at 3.9% of average receivables. If you remember, that was well below our original view of 4.4% to 4.5% for the year. And that reduction was driven primarily by the partner sharing and the higher reserve build. So just with that as a backdrop, as you think about 2018, we think we move back into that 4.2% to a 4.4% range, largely driven by our expectations that the reserve builds are going to continue to moderate as we move throughout the year. And you've seen some of that happen in the first quarter. So as those reserve builds start to moderate, the RSAs move back closer to that historical range that you would have seen in 2015 and 2016. So I think that's the best way to think about it. If you -- if I had to highlight one other thing, I would highlight seasonality. Just to reiterate, the RSAs always hit a high point in the third quarter when we see higher margins over net charge-offs, so you need to take that into account. But so far, we're tracking very much in line with our expectations, and we think we end up somewhere in that 4.2% to 4.4% range for the year.

Just one clarification. So like, usually from first quarter to second quarter, it's reasonably the same, maybe slightly higher. I mean, should we assume that's the case, first and second quarter, then?

Look, I think history is not a perfect predictor here. I think first quarter, we ended on the RSAs where we did, to some degree, because net charge-offs were higher. So it's going to depend, and you should see that moderate a bit in terms of the net charge-off rate as we get into the second quarter, and it'll hit a low point in the third. So it might tick up a bit in the second. It'll absolutely be elevated in the third quarter, I think that's the one thing that you can trust, and then come back down in the fourth.

Our next question comes from Rick Shane with JPMorgan.

Margaret, you outlined some strategies in terms of loss mitigation around retailers going through bankruptcy. I'd love to hear your sort of comparison of what you would expect related to a retailer going through a liquidation in terms of charge-off profile versus what you are able to achieve through the mitigation strategy, sort of a champion/challenger analysis.

Yes. So first, what I would say is that most of our experience through liquidation is we usually liquidate these books profitably. I think we had an opportunity, as we continue to expand our capabilities, to think a little differently with the hhgregg portfolio by creating this HOME vertical, which has been really -- a real win for us in terms of those cards getting utilized as well as what we're doing on Toys"R"Us. Obviously, one of the things we do when a company is going through a liquidation is we immediately send out communications to the consumers that their debt is still due to us. And for the most part, we see customers pay their debt off. Obviously, you might see a little uptick, but it quickly comes down as we start communicating with those customers. I think in this case, the fact that we're providing utility both in the hhgregg case and the Toys"R"Us case with a fairly good value proposition, we're expecting a really good performance. I don't know, Brian, if you'd add anything.

Yes. I think one of the things, Rick, that's really important here is maintaining some utility on the card, whether it's through a new program like we do with hhgregg or moving a portion of those customers to a Synchrony-branded MasterCard as we intend to do with the Toys"R"Us portfolio. I think if you can offer them a good product with an attractive credit line value prop, then they'll continue to use the card. And your prospects of minimizing the increasing in net charge-offs are significantly greater. So we feel pretty good about our strategies in both cases.

Got it. And look, I understand the utility case. If we were to index the expected charge-offs on a pool of loans to 100 and you were to go through -- you were to look at a retailer that was going through bankruptcy or through liquidation, where do you think that index would go versus expectations? Would it go to 150? And what do you think the mitigation strategies can dampen that to? It's obviously not going to be the baseline. Does it put you in the middle? How should we think about this?

Yes. I mean, it wouldn't go to 150, Rick. Typically, what you see is when there's an announcement on the retailer, you see a tick-up in delinquencies and net charge-offs. Very manageable, we book a little bit of reserves for that. And then it evens out over time. I mean, the thing that is important to remember here is that consumers, particularly today, are very aware of their credit score. Having come through the financial crisis, I would say consumers are more acutely aware of their credit score and the implications of a ding on their credit score than they've ever been. And I think consumers know they're obligated on the debt. We are very proactive in terms of our communication with the customers to make sure they know that they're still obligated, where to make a payment, how things work. And we generally see, like I said, a modest tick-up initially out of the gate, and then that levels off. And as Margaret said, we liquidate very profitably in all cases.

And our next question comes from Mark DeVries with Barclays.

A question around kind of the underlying loan growth trends. Are you still, at this point, making underwriting tweaks that's contributing to the moderating growth? And should we expect, once that's done and you've kind of anniversaried the end of that, seeing maybe loan growth reaccelerate?

Yes, sure, Mark. So look, I would say receivables growth at 6% was right in line with our expectations and very much in line with what we communicated back in January. And when you look at the full year and you think about our growth, it's always been a combination of organic growth as well as portfolio acquisitions. And so it will be 13% to 15% receivables growth this year, which is very strong. The question you raised is a good one. We are -- from our perspective, the underwriting refinements the impact of those will moderate as we move into 2019. That's our expectation. With that said, you're never really done. We're always taking in new information. We're looking at payment behavior trends. And so we're constantly making modest refinements. What you're seeing in the results this quarter and you saw last quarter is really the cumulative effect of the changes that we started to make back in the second half of '16. To your point, as you start to lap some of those quarters, the comps will get a little bit easier. We probably move maybe closer to the historical growth rate for the business. But overall, we feel very good when we look at the underlying growth. We look at the changes that we made, they're clearly having the desired impact. Still seeing really good growth in that 720-plus FICO segment. And so this is intentional, it was deliberate, and it's having the desired result. And I think it starts to even out or should even out as we get into 2019.

Okay. Got it. And then are there any receivables coming over with Crate and Barrel? If so, can you give us a sense of when and how meaningful that might be?

Yes. We will acquire a small portfolio, but it won't have a material impact on our results.

Our last question comes from John Hecht with Jefferies.

I guess you addressed the renewals earlier, but I'm wondering whether it's Crate and Barrel or -- which is a recent victory, or any of the other renewals, is there anything you could tell us about changes with respect to partner prioritizations or the overall economics of the recent renewals and new partnerships that should suggest there's any -- been any change in how the overall structures work? Or has it been pretty consistent with where we were a couple of years ago?

It's pretty consistent. I think what we always do, as Brian even mentioned earlier, is we always look at the returns in the sense of the overall portfolio. So -- and we look at the risk/reward in each of those relationships, how much risk are we taking versus the retailers are taking on. So we look at the blended return to make sure that we're making that good risk/reward trade-off as we bring whether renewals back on or new deals. So I'd say the environment, while continues to be competitive, I think, is pretty rational. So we're feeling good about what we're winning and the portfolios that we're bringing on and the renewals that we're doing.

Okay. And the second question is just wondering whether it's commentary on Amazon or just the overall online/e-commerce trends. Is there update you can give us there with respect to penetration rates and so forth?

Yes. So on Retail Card, our overall penetration rate was 28% for this quarter, which was up about 1.6% from first quarter 2017. The national average is about 15%, so we feel like the continued investments that we're making in our digital capabilities are really ensuring that we're staying ahead of the competitive framework. I think online and kind of that whole frictionless payment experience is something that we're extraordinarily focused on. The investment we made in Payfone, which is going to help us more quickly authenticate customers as they apply for credit through their mobile application, I think, is going to be another real positive for us. So we continue to see mobile and online as a critical element of what we're trying to build out and ensure we're best-in-class for our partners. Our partnership with Amazon is a great partnership and one that continues to grow, so we feel really good about where we're positioned there as well. So overall, we're feeling good where we are on the online space and mobile space and our capabilities that we're building out.

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.

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