SYF - Synchrony

[Spekulatius]

SYF has shown less growth in transactions or receivables than their competitors. I don’t know if this is by design, or they are just not as competitive. Share buybacks are a poor surrogate for organic growth and that is why the share price is lagging IMO. I also noted that their loan losses are slightly up, despite the economy on the roll, what happens when the economy weakens?

http://investors.synchronyfinancial.com/~/media/Files/S/Synchrony-Financial-IR-V3/documents/syf-1q18-investor-presentation.pdf

[tol1]

The growth in receivables is not lower than the one vs peers; not sure what peers you are looking at (there is only 3 key peers anyway). It is even higher than Visa's, despite the fact that Visa does not take credit risk as such. The whole thesis about SYF atm is that even if the economy weakened, the downside is limited. Their business model is risk assessment / management, so it is up to them to take on certain credit profiles.

[NBL0303]

SYF has shown less growth in transactions or receivables than their competitors.

 

Which competitors are you referring too?

 

Also, their growth in receivables this year will be significant when the officially onboard the Paypal book, which I believe will be 3Q.

[tol1]

Agree - PYPL book coming in. Loan receivables growth is not the point here at all. SYF can determine the growth depending on the credit risk.

[Spekulatius]

SYF has shown less growth in transactions or receivables than their competitors.

 

Which competitors are you referring too?

 

Also, their growth in receivables this year will be significant when the officially onboard the Paypal book, which I believe will be 3Q.

Competitors per Q1 presentation are COF, DFS, AXP

[Phaceliacapital]

SYF has shown less growth in transactions or receivables than their competitors.

 

Which competitors are you referring too?

 

Also, their growth in receivables this year will be significant when the officially onboard the Paypal book, which I believe will be 3Q.

Competitors per Q1 presentation are COF, DFS, AXP

 

What about ADS?

[tol1]

SYF has shown less growth in transactions or receivables than their competitors.

 

Which competitors are you referring too?

 

Also, their growth in receivables this year will be significant when the officially onboard the Paypal book, which I believe will be 3Q.

Competitors per Q1 presentation are COF, DFS, AXP

 

1 quarter does not say a lot. Also, rather healthy receivables growth than high one. More interested to hear views on NCO rate estimates and further buybacks.

 

[vince]

Anybody have an idea why SYF is down 5 percent?

[thepupil]

Bloomberg) -- Walmart Inc. is considering moving its branded credit-card business to Capital One Financial Corp. from Synchrony Financial as it seeks to expand its mobile payments offering, according to people familiar with the matter.

The world’s largest retailer has narrowed the competition for its credit-card partnership to bids from the two lenders, said the people, who asked not to be identified because no decision has been announced. The negotiations are still ongoing, but the retailer is seeking a partner that can support its aspirations for Walmart Pay, the people said. Synchrony dropped in New York trading.

Co-brand and private label credit cards are a lucrative business for banks and retailers seeking to monetize a cardholder’s loyalty to a certain brand or store. The Walmart card is the largest program in the U.S. up for renegotiation between this year and next year, according to analysts at Susquehanna Financial Group.

“There’s a lot of appetite among banks in this area,” said Jamie Friedman, an analyst at Susquehanna. The lenders attach “scarcity value” to strong retailers such as Walmart, which is known for having a deep understanding of customers’ buying habits, he said.

Spokesmen for Walmart and the two lenders declined to comment.

Share Drop

Synchrony’s partnership with Walmart accounted for more than 10 percent of the interest and fees the bank earned on its loans last year, the company said in an annual regulatory filing. The lender has said its five largest programs -- a group that includes Gap Inc., J.C. Penney Co., Lowe’s Cos., Sam’s Club and Walmart -- made up the majority of such revenue.

Synchrony shares dropped as much as 6.3 percent on the news and were down 5.3 percent at 3:39 p.m. in New York, the biggest decline since February.

“Most certainly a loss of the Walmart portfolio would amount to a pretty significant loss for Synchrony,” Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods Inc., said in a note to clients. “However, at this point it’s uncertain which direction the deal is going to go as negotiations are still taking place.”

The credit-card partnership is another way Walmart could compete against Amazon.com Inc., which has deals with JPMorgan Chase & Co. and Synchrony for its co-brand and private-label credit cards. Walmart isn’t likely to offer rich cash-back rewards on its card -- that would go against the company’s ethos of offering low prices to everyone -- but it could use the card to drive more loyalty to certain businesses such as grocery, the people said.

Read more: How Walmart Pay could surpass Apple

Synchrony, which also counts PayPal Holdings Inc. as a partner, has been investing in its mobile capabilities. Last year, the company acquired GPShopper, which helps retailers develop mobile apps. In 2016, it introduced "SyPi," a feature retailers could add to their apps to offer financing for mobile purchases.

“A lot of what we’re trying to do right now -- and this is in both the big retailers down to the smaller retailers -- is helping them accelerate their mobile capabilities,” Synchrony’s Chief Executive Officer Margaret Keane said at an investor conference in May.

While Capital One is a leader in banking technology, Walmart is aware of the risks associated with moving a credit-card portfolio between issuers, one of the people said. Citigroup Inc. and Costco Wholesale Corp. faced a deluge of customer complaints after the lender struggled to take over a portfolio of about 11 million accounts from American Express Co. in 2016.

Capital One Chief Executive Officer Richard Fairbank has been outspoken about the intensifying competition in co-brand partnerships, saying prices in the space can become “pretty breathtaking” at an investor conference in May. Capital One has partnerships with Cabela’s Inc., Saks Inc. and Neiman Marcus Group.

“While we want to be in this business, we’re not going to be in it at any price,” Fairbank told investors at a recent conference. “So that is why a lot of times we go to the auctions and in fact walk away empty-handed.”(Updates with analyst comments starting in the fourth paragraph.)

[vince]

thx, very much appreciated

[HJ]

Quite the story.  It quotes mobile payment as a rationale to consider the move.  Here's the related story:

 

https://www.bloomberg.com/news/articles/2017-11-07/walmart-pay-threatens-to-surpass-apple-in-u-s-mobile-payments

 

If this is the angle, then there's also Zelle vs. card networks vs. Paypal / Venmo to talk about.  Synchrony's acquisition of the Paypal portfolio may have some unanticipated side effects...

 

[tol1]

Quite the story.  It quotes mobile payment as a rationale to consider the move.  Here's the related story:

 

https://www.bloomberg.com/news/articles/2017-11-07/walmart-pay-threatens-to-surpass-apple-in-u-s-mobile-payments

 

If this is the angle, then there's also Zelle vs. card networks vs. Paypal / Venmo to talk about.  Synchrony's acquisition of the Paypal portfolio may have some unanticipated side effects...

 

Still not finalized who gets the business and loan receivables. Only right that WMT ask for bids. Overall, I just hope SYF are not bidding based on a poor ROA. The downside I see is WMT's low penetration SYF wouldn't be able to utilize going fwd.

 

[HJ]

Of course the decision is not yet made.  But this article certainly exposes a potential weakness of Synchrony.  Mobile banking / mobile payment has gotten a lot of attention in the retail banking world.  Jamie Dimon calls it "table stake".  If Walmart wants to be forward looking in "mobile commerce", it certainly makes a lot of sense for them to be aligned with a bank that is already aggressive in mobile banking rather than a just a specialty lender.  Presumably they want their app to be backward integrated with Zelle as well, as a payment method.  One of the things that made credit card lending a good business is the fact that it serves a critical payment function beyond just unsecured lending.  An unsecured loan to a particular cohort of borrowers may have a default rate of x%, but when tied to a credit card, especially if it were an actively used credit card for general payment purposes, the default rate is significantly lower than x%, and 1-2% ROA is all that these banking businesses are playing for.

 

The question is whether Walmart really wants to do this at this moment, or whether they want to leave it alone for there to be a more obvious winner in mobile payments before being involved.  The issue with waiting is that these contracts go for 10 years in duration, which is a long time to wait for.  I sort of dismissed this line of thinking off handedly when I first read the article.  But the more I stew on it, the more I felt this is a real possibility.

[cmlber]

Of course the decision is not yet made.  But this article certainly exposes a potential weakness of Synchrony.  Mobile banking / mobile payment has gotten a lot of attention in the retail banking world. 

 

The mobile banking / mobile payments angle sounds like a journalist trying to find something to write about to me.  What "mobile" solutions do credit card users need that they don't currently have?  Maybe I'm not a savvy credit card user, but I've never found my provider lacking "technology."

 

We'll see soon, but seems to me like a negotiating tactic.  SYF clearly didn't leak this story, no reason to.  And COF likely didn't since it can only hurt their negotiations for their one competitor to know WMT is seriously considering their bid, encouraging a competitive response.  So that leaves WMT, and why would WMT leak the story?  As leverage so that SYF thinks they are seriously considering a switch. 

 

 

[tol1]

Of course the decision is not yet made.  But this article certainly exposes a potential weakness of Synchrony.  Mobile banking / mobile payment has gotten a lot of attention in the retail banking world. 

 

The mobile banking / mobile payments angle sounds like a journalist trying to find something to write about to me.  What "mobile" solutions do credit card users need that they don't currently have?  Maybe I'm not a savvy credit card user, but I've never found my provider lacking "technology."

 

We'll see soon, but seems to me like a negotiating tactic.  SYF clearly didn't leak this story, no reason to.  And COF likely didn't since it can only hurt their negotiations for their one competitor to know WMT is seriously considering their bid, encouraging a competitive response.  So that leaves WMT, and why would WMT leak the story?  As leverage so that SYF thinks they are seriously considering a switch.

 

One of the mobile aspects is instant credit financing via finger print. I do not think a switch on WMT level is that easy (see Costco precedent) - SYF may retain them, but at a lower ROA. Hard to have an edge on the odds of SYF retaining vs losing out.

 

Contract lengths are sub-10 years, more around 5 by now according to my research.

[KCLarkin]

https://seekingalpha.com/news/3374400-capital-one-said-won-walmart-card-deal

 

[tol1]

Took SYF ages for the 8k. Only slight positive news here is the no expected EPS dilution due to cost savings and accelerated buyback (if option of selling the portfolio were to be chosen) - reads to me as trying to come out with a fast signalling, but investors perceive the news otherwise obviously.

[vince]

Hope this doesnt reduce their leverage with other retailers.  They will certainly look at their agreements more closely, human nature will see to that

[HJ]

"One thing working in Capital One’s favor, according to people familiar with the negotiations, was Walmart’s desire to move upmarket and further into digital payments and e-commerce. Facing intense competition from Amazon.com  Inc., Walmart has been investing in self-checkout and mobile payments, pushing customers toward its own digital wallet, Walmart Pay"

 

"Walmart and Capital One share a common goal of transforming the way they serve customers through digitally-led innovations. This new relationship combines Walmart’s size, scale and leadership in omni-channel retailing with Capital One’s long-standing position as a technology leader within the retail financial services market. Leveraging their respective technology platforms and individual capabilities, Walmart and Capital One intend to offer highly innovative, digitally-enabled credit card products that deliver great value to customers and an exceptional cardholder experience."

 

Time will tell what the economics of this deal is.  Both SYF and COF are down on the day, so market is saying Walmart got the win.  While that's certainly the case, I do think mobile / payment is absolutely part of the decision making.  Back when Costco was breaking up with Amex, Visa was mentioned as part of the Citi bid.  If you think through what made credit card ecosystem such a profitable one vs. generic unsecured consumer lending, payment function is the answer.  The forward looking retailers should all look hard at this deal and think about what their future strategy on this front should be.

[tol1]

"One thing working in Capital One’s favor, according to people familiar with the negotiations, was Walmart’s desire to move upmarket and further into digital payments and e-commerce. Facing intense competition from Amazon.com  Inc., Walmart has been investing in self-checkout and mobile payments, pushing customers toward its own digital wallet, Walmart Pay"

 

"Walmart and Capital One share a common goal of transforming the way they serve customers through digitally-led innovations. This new relationship combines Walmart’s size, scale and leadership in omni-channel retailing with Capital One’s long-standing position as a technology leader within the retail financial services market. Leveraging their respective technology platforms and individual capabilities, Walmart and Capital One intend to offer highly innovative, digitally-enabled credit card products that deliver great value to customers and an exceptional cardholder experience."

 

Time will tell what the economics of this deal is.  Both SYF and COF are down on the day, so market is saying Walmart got the win.  While that's certainly the case, I do think mobile / payment is absolutely part of the decision making.  Back when Costco was breaking up with Amex, Visa was mentioned as part of the Citi bid.  If you think through what made credit card ecosystem such a profitable one vs. generic unsecured consumer lending, payment function is the answer.  The forward looking retailers should all look hard at this deal and think about what their future strategy on this front should be.

 

I just do not think technology as such was the decisive factor and think the backbone of private label credit is still the shared economics - it is a win-win ecosystem. In other words, consumers get rewards and credit, whereas merchants have higher sales and do not pay an interchange fee. Without knowing what SYF are sharing at tomorrow's result regarding the WMT tender, the brief statement today reads to me as if SYF did not want to get the business at any cost (better: return). The whole takeaway for me is as simple as it sounds: customer concentration can be sticky over the LT, but can also eventually break at some point. I would like to see SYF buying selected portfolios at attractive returns as Paypal's to fill the loan receivable gap.

 

Does anyone have a view on the economics of selling the WMT portfolio vs retaining it?

 

[HJ]

 

I just do not think technology as such was the decisive factor and think the backbone of private label credit is still the shared economics - it is a win-win ecosystem. In other words, consumers get rewards and credit, whereas merchants have higher sales and do not pay an interchange fee. Without knowing what SYF are sharing at tomorrow's result regarding the WMT tender, the brief statement today reads to me as if SYF did not want to get the business at any cost (better: return).

 

There is a reason Square is aggressively growing in small business lending, thinking it has a competitive advantage.  Why?  Because they capture data about the small business borrower's cash flow at its source - payment.  If consumer at large are going to adopt making payment in Zelle or Venmo, their payment behavior / history will no longer be captured by consumer credit bureaus or impact FICO scores.  Walmart at one point wanted to open retail banking branches in its stores, thinking that's what they need to do to be more relevant to their customers.  They gave up because they didn't want to be regulated as a bank.  Capital One is not allowed to capture certain data on credit card transactions, due to privacy regulations, but Walmart is, because those data belong to them.  It takes a bit of imagination, but imagine what they can do if their respective data can be put together.  Payment is such a critical, enabling function across commerce that if the payment world changes, which services like Venmo, paypal points towards that, and Amazon wants to build Amazon pay, the forward thinking enterprises need to think about getting ahead of it, or imagine derivative services that leverage off it.  American Express built a formidable franchise back from the 50's and 60's, not because it's the best consumer credit underwriter, but because it invented traveler's checks. 

 

“However important card partnerships were in the past, I think we should all understand: They’re more important in the emerging digital world,” Fairbank told analysts in a conference call. “Just because of the centrality of how payments play in the digital e-commerce environment.”

 

 

 

[tol1]

 

I just do not think technology as such was the decisive factor and think the backbone of private label credit is still the shared economics - it is a win-win ecosystem. In other words, consumers get rewards and credit, whereas merchants have higher sales and do not pay an interchange fee. Without knowing what SYF are sharing at tomorrow's result regarding the WMT tender, the brief statement today reads to me as if SYF did not want to get the business at any cost (better: return).

 

There is a reason Square is aggressively growing in small business lending, thinking it has a competitive advantage.  Why?  Because they capture data about the small business borrower's cash flow at its source - payment.  If consumer at large are going to adopt making payment in Zelle or Venmo, their payment behavior / history will no longer be captured by consumer credit bureaus or impact FICO scores.  Walmart at one point wanted to open retail banking branches in its stores, thinking that's what they need to do to be more relevant to their customers.  They gave up because they didn't want to be regulated as a bank.  Capital One is not allowed to capture certain data on credit card transactions, due to privacy regulations, but Walmart is, because those data belong to them.  It takes a bit of imagination, but imagine what they can do if their respective data can be put together.  Payment is such a critical, enabling function across commerce that if the payment world changes, which services like Venmo, paypal points towards that, and Amazon wants to build Amazon pay, the forward thinking enterprises need to think about getting ahead of it, or imagine derivative services that leverage off it.  American Express built a formidable franchise back from the 50's and 60's, not because it's the best consumer credit underwriter, but because it invented traveler's checks.

 

Pretty sure SYF have already been collecting SKU data etc. from its' customers. My understanding is that they get more data than the networks and issuers in the classic Visa/Mastercard value chain. Would not make a difference as WMT's business is lost. WMT has a low PLCC penetration and that is the key loss for SYF this week.

 

[cmlber]

Interesting to note the capital supporting the portfolio is $1.5 billion, but through reserve releases and gain on sale of portfolio they expect to free $2.5 billion in capital for distribution.  Using that as a comp for the business as a whole, the implication is that the liquidation value of the portfolio is conservatively 1.66x tangible book value since that's for a portfolio at expiration and their average portfolio is likely to last more than 0 years...

 

[tol1]

Interesting to note the capital supporting the portfolio is $1.5 billion, but through reserve releases and gain on sale of portfolio they expect to free $2.5 billion in capital for distribution.  Using that as a comp for the business as a whole, the implication is that the liquidation value of the portfolio is conservatively 1.66x tangible book value since that's for a portfolio at expiration and their average portfolio is likely to last more than 0 years...

 

Doesn't the 1.66x BV reflect the low return contract with WMT? I was surprised to see the $2.5bn headline number as I would expect an auction of some sort. Also, the EPS accretive (relative to the renewal terms) effect of retaining the portfolio is not clear to me as they laid it out.

 

[HJ]

Interesting to note the capital supporting the portfolio is $1.5 billion, but through reserve releases and gain on sale of portfolio they expect to free $2.5 billion in capital for distribution.  Using that as a comp for the business as a whole, the implication is that the liquidation value of the portfolio is conservatively 1.66x tangible book value since that's for a portfolio at expiration and their average portfolio is likely to last more than 0 years...

 

Doesn't the 1.66x BV reflect the low return contract with WMT? I was surprised to see the $2.5bn headline number as I would have expected an auction. Also, the EPS accretive (relative to the renewal terms) effect of retaining the portfolio is not clear to me as they laid it out.

 

They are saying they expect the portfolio of $10 billion will be sold at a premium of, say 105% of par, plus the reserve release of, say 5%, on the $10 billion, that gives you the $1 billion extra.  The $1.5 billion capital that's attributed to the $10 billion portfolio can also now be used for buy back.