Synchrony Earnings Show Consumer Momentum, Concern Over Late Fee Rules

Synchrony Financial reported its Q1 earnings Wednesday (April 24), showing broad-based growth throughout its lending and credit platforms, continued momentum in consumer spending and some concern over a decrease in revenue from the upcoming Consumer Financial Protection Bureau (CFPB) late fee ruling.

Synchrony CEO Brian Doubles said during the bank’s earnings call that it continues to see broad-based growth in many discretionary and non-discretionary spending categories across the business. He said non-prime borrowers had slowed in building their portfolios, and growth continues to be driven by higher credit rates and higher consumer average transaction values.

“These relative adjustments in consumer spending behavior generally reflect a financially healthy consumer who is continuing to become more selective in their purchases and align their cash flow,” he said, “a trend which has also continued to shape Synchrony’s credit performance.” 

By the numbers, that performance showed net earnings of $1.3 billion, a significant increase from the first quarter of 2023, where earnings were $601 million. The figure includes an $802 million gain from the recent sale of pet insurance provider Pets Best. When this gain is excluded, adjusted net earnings for Q1 were $491 million.

Additionally, these adjusted earnings include an expense of $190 million set aside as a reserve for the acquisition of Ally Lending, which was finalized in March. 

The quality of the banks’ loans was generally positive but showed a few cracks in the façade of the consumer.

The rate of loan defaults increased to 6.31% from 5.63% in the last quarter of 2023, indicating a slight deterioration in March compared to January and February. However, the ratio of loans that were more than 30 days overdue remained consistent at 4.74%, a decrease from 5% in February.

The allowance for potential loan losses also increased to 10.72% from 10.26% at the end of 2023, again influenced by setting aside additional reserves following the Ally acquisition. The total value of loans received grew by 11.6% compared to the same quarter last year, benefiting from the Ally acquisition.

Purchase volumes increased by 2% compared to the same quarter last year. After adjusting for certain items, other expenses decreased by 3.8% compared to the previous quarter and increased by 6.9% year over year. 

The earnings announcement was notable in light of Synchrony’s comments that it would no longer providing detailed 2024 guidance for financial metrics given the uncertainty of the CFPB late fee rule.

The CFPB lowered late fees to $8 in early March, but on April 17, the House Financial Services Committee (HSFC) voted to approve a joint resolution from Rep. Andy Barr, R-Ky., that would block the rule from taking effect. 

Doubles explained that the impact of the upcoming CFPB rule change on late fees — if it is enacted — will start to be noticeable somewhat in the second quarter, but more so in the third quarter and will continue from there.

He clarified that the effect of the rule, which will kick in about 60 days after notification, will be progressively felt — about 50% in the first year and 75% within two years. Other fees and policy changes might take effect more immediately.

Doubles highlighted that while some changes will require adjustments, such as updates to statements, these modifications also affect different parts of the profit and loss statement. Overall, he anticipates a gradual increase in the immediate impacts, which will help reach a financial balance quicker than if only relying on periodic rate summaries.

Other notable individual loan and spending sector results from the Synchrony earnings include:

Home & Auto: Purchase volume fell by 3% despite strong growth in Home Specialty and Auto Network and benefits from the Ally acquisition. The decline was attributed to lower consumer traffic, fewer large-ticket purchases and reduced gas prices. Loan receivables at the period’s end rose by 10%, influenced by the Ally Lending acquisition and lower payment rates. Interest and fees on loans increased by 13%, mainly due to higher average loan balances and higher benchmark interest rates. Active accounts saw a modest rise of 2%.

Digital: Digital transactions grew by 3%, driven by enhanced customer engagement and an increase in active accounts. Loan receivables grew by 11% due to continued purchase growth and lower payment rates. Interest and fees on loans rose by 15%, reflecting higher loan balances, lower payment rates, higher interest rates and the maturation of new programs. Active accounts increased by 4%.

Diversified & Value: Purchase volume increased by 4%, supported by spending both within and outside partner networks. Loan receivables and interest on loans both rose by 10% and 13% respectively, driven by higher loan balances, lower payment rates and increased benchmark rates. There was a slight 1% increase in active accounts.

Health & Wellness: This segment saw an 8% rise in purchase volume, led by sectors such as Pet, Dental and Cosmetic services. Loan receivables jumped by 20%, reflecting higher purchase volumes and lower payment rates, also influenced by the Ally acquisition. Interest and fees on loans went up by 18%, and active accounts surged by 11%.

Lifestyle: Purchase volume decreased by 4%, due to lower transaction values. However, loan receivables increased by 11%, driven by strong purchase volumes from previous periods and lower payment rates. Interest and fees on loans grew by 14%, primarily due to higher average loan balances, lower payment rates and increased benchmark rates. Active accounts showed a minimal increase of 1%.

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