SYF - Synchrony

[cmlber]

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.

 

No, all they own on expiration of the deal is a relationship with X million customers who have a Walmart card which will stop working soon because they have no rights to give Walmart rewards anymore.  They relationships have value because they can send them a notice in the mail saying something like "Hey, great news!  Your Walmart card is no longer a Walmart card, but it can be used ANYWHERE and you get 2% cash back!  Here's your new card, it's already active." and they'll retain a good portion of the portfolio as general purpose cardholders at very low (the cost of that letter in the mail) customer acquisition cost.

 

[bizaro86]

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.

 

No, all they own on expiration of the deal is a relationship with X million customers who have a Walmart card which will stop working soon because they have no rights to give Walmart rewards anymore.  They relationships have value because they can send them a notice in the mail saying something like "Hey, great news!  Your Walmart card is no longer a Walmart card, but it can be used ANYWHERE and you get 2% cash back!  Here's your new card, it's already active." and they'll retain a good portion of the portfolio as general purpose cardholders at very low (the cost of that letter in the mail) customer acquisition cost.

 

If you give out the same amount in cashback as they were formerly getting in Wal-Mart rewards, it seems that basically everyone would stay...

 

My primary credit card is one I received through a similar situation. MBNA lost the rights to give Starwood hotel points (starpoints) in Canada to Amex ~10 years ago. I had a starpoints mastercard, and they sent out 2% cashback no annual fee world elite cards with tons of benefits to try and keep the cards active. I haven't seen as good a deal on a cash-back card since.

[tol1]

Still do not understand how the economics of retaining the WMT portfolio vs selling it can be the same (on EPS). Could anyone explain that please?

[Spekulatius]

Still do not understand how the economics of retaining the WMT portfolio vs selling it can be the same (on EPS). Could anyone explain that please?

 

I think the economics are the same after a share buyback from released capital that is not needed any more to support the WMT business. Still, this amounts to a partial liquidation and I think management is spinning this a bit.

 

Not looking to change the thread intend, but has anybody looked at COF here? Looks like a pretty hard driven outfit and us cheaper by some metrics than SYF.

[tol1]

Still do not understand how the economics of retaining the WMT portfolio vs selling it can be the same (on EPS). Could anyone explain that please?

 

I think the economics are the same after a share buyback from released capital that is not needed any more to support the WMT business. Still, this amounts to a partial liquidation and I think management is spinning this a bit.

 

Not looking to change the thread intend, but has anybody looked at COF here? Looks like a pretty hard driven outfit and us cheaper by some metrics than SYF.

 

That option including the buyback relates to the sale of the portfolio. I wonder how retaining the portfolio is EPS-neutral - the RSA gets eliminated and royalties will be earned for 3 year.s

[vince]

After reading the call transcript it looks like Syf would like to keep walmart cards rather than sell.  Their toys r us experience is going better than thought and they believe they can grow their general purpose card business

[HJ]

Not looking to change the thread intend, but has anybody looked at COF here? Looks like a pretty hard driven outfit and us cheaper by some metrics than SYF.

 

I like the story.  Fintech 1990 style, when credit card was a growth business and subprime consumer finance, auto, credit card or mortgages was the Fintech of its day.  The credit card monolines were First USA, which got bought by Bank One and subsequently JPM, MBNA, which got bought by BofA, Providian, almost went under, but absorbed into Washington Mutual.  The auto finance monolines where Olympic Financial went bankrupt, Western Financial, which got bought by Wachovia and now sits in Wells Fargo. 

 

COF, from its start as the credit card division of Signet Financial somehow made it through the growth spurt, and stayed independent through a couple of pretty bad consumer credit cycles.  It's now one of the biggest auto lender, and one of the biggest banks in the US.  The founder CEO who's responsible for this is still around running the show.  Financial metrics is what it is.  Last several years had some misses, not great.  They had to write off a big taxi medallion loan portfolio, and energy loans before that.  It's not a growth company anymore, how can it be when you are close to being the biggest bank outside of the SIFI's.  But Fairbanks is as forward looking as it gets for a bank CEO.  He took all stock comps during the crisis for a while, and Capital One, $40+ billion market cap is really his creation.  As close as you'll get for an owner CEO within the context of big banks.

[tol1]

After reading the call transcript it looks like Syf would like to keep walmart cards rather than sell.  Their toys r us experience is going better than thought and they believe they can grow their general purpose card business

 

That is what the company have indicated in between the lines to investors. To me it is not clear how retaining it can be at least neutral to EPS. I cannot bridge it at all.

[cmlber]

After reading the call transcript it looks like Syf would like to keep walmart cards rather than sell.  Their toys r us experience is going better than thought and they believe they can grow their general purpose card business

 

That is what the company have indicated in between the lines to investors. To me it is not clear how retaining it can be at least neutral to EPS. I cannot bridge it at all.

 

I think you can make a reasonable case for it being EPS neutral, but the multiple on that EPS contribution should be much lower.  Whereas the Walmart portfolio was likely to grow, the converted GPCC business is likely to shrink over time unless they put heavy marketing spending behind it, in which case it's not EPS neutral.  My wife had a Toys r Us card with them and we got a notice in the mail that said "Congratulations!  Your R Us Mastercard has been replaced with the Synchrony MasterCard, which entitles you to an exciting new rewards program.  As a Synchrony Mastercard cardholder, you'll earn 2% cash back on all purchases."  We kept it and continue to use the card, I suspect a majority of cardholders did the same because (a) 2% cash back on everything is very competitive, (b) it's a pain to get a new card, © replacing it with a new card probably lowers your credit score.  I assume they can offer such good rewards because the customer acquisition cost was effectively $0 and there are no RSAs so the rewards can be better.

 

On the sale option if you do the math on the portfolio, 15.8% NIM - 4% RSA - 5.6% provisions for losses = 6.2% x $10Bn receivables = $620MM revenue - $325MM of costs tied to the program = $295MM of pre-tax income x 23% tax rate = $227MM income over $2.5Bn of capital = roughly the same multiple the stock trades at, hence why they think it's neutral to have the earnings or sell the portfolio and buyback stock.  But again, the sale option assumes $0.5Bn of gain on sale of portfolio which is essentially the present value of the $0 CAC on the existing cardholders (i.e., the ability to send people with the card the Toys R Us letter we got in the mail).

[Spekulatius]

A 2% cash back card doesn’t really make any profit on transactions, if the balance is paid off every month.  the interchange fees are in thr 2.5% range, so thr cash back eats most of the margins. It may make a profit, if customers keep a high interest rate balances on those cards.

[tol1]

After reading the call transcript it looks like Syf would like to keep walmart cards rather than sell.  Their toys r us experience is going better than thought and they believe they can grow their general purpose card business

 

That is what the company have indicated in between the lines to investors. To me it is not clear how retaining it can be at least neutral to EPS. I cannot bridge it at all.

 

I think you can make a reasonable case for it being EPS neutral, but the multiple on that EPS contribution should be much lower.  Whereas the Walmart portfolio was likely to grow, the converted GPCC business is likely to shrink over time unless they put heavy marketing spending behind it, in which case it's not EPS neutral.  My wife had a Toys r Us card with them and we got a notice in the mail that said "Congratulations!  Your R Us Mastercard has been replaced with the Synchrony MasterCard, which entitles you to an exciting new rewards program.  As a Synchrony Mastercard cardholder, you'll earn 2% cash back on all purchases."  We kept it and continue to use the card, I suspect a majority of cardholders did the same because (a) 2% cash back on everything is very competitive, (b) it's a pain to get a new card, © replacing it with a new card probably lowers your credit score.  I assume they can offer such good rewards because the customer acquisition cost was effectively $0 and there are no RSAs so the rewards can be better.

 

On the sale option if you do the math on the portfolio, 15.8% NIM - 4% RSA - 5.6% provisions for losses = 6.2% x $10Bn receivables = $620MM revenue - $325MM of costs tied to the program = $295MM of pre-tax income x 23% tax rate = $227MM income over $2.5Bn of capital = roughly the same multiple the stock trades at, hence why they think it's neutral to have the earnings or sell the portfolio and buyback stock.  But again, the sale option assumes $0.5Bn of gain on sale of portfolio which is essentially the present value of the $0 CAC on the existing cardholders (i.e., the ability to send people with the card the Toys R Us letter we got in the mail).

 

Interesting - I had a slightly different approach. Putting NIM and RSA as a percentage may not quiet work IMO as latter is based on avg loan receivables vs former on interest earning assets. Question is how strong the loan yield is SYF can charge and the overall loan receivables. If we took the latest NIM, we would assume no margin impact from WMT. At least historically, the loan yield was around 22%. 

 

On top of that, the question is if the avg customer balance will change from now on, because the rewards are different going fwd.

 

Overall, I wonder how other large customers will react. Clearly, Capital One have been willing to take on business for a lower return. The moat of a LT large customer is not as strong as I thought. The stock has been down ca. 15% since the rumours about WMT came up. That is a significant de-rating to a previously cheap stock.

 

 

[Spekulatius]

So they lost the AMZN and the WMT card and will probably the BJ Wholesale card as well. Looks like a no- moat melting ice cube to me. Tangible book is $16.5 - liquidation value would’ve above this because card balances are worth more than par. However, is this really cheap?

[tol1]

So they lost the AMZN and the WMT card and will probably the BJ Wholesale card as well. Looks like a no- moat melting ice cube to me. Tangible book is $16.5 - liquidation value would’ve above this because card balances are worth more than par. However, is this really cheap?

 

They did not lose AMZN, they have always been sharing the business with JP as far as I know.

 

[vince]

I own both but always felt that SYF's clients were more susceptible to being poached.  Not saying that this is proof but this plus mgmt, in response to questions seemed to agree that diversification is a priority.  I may be misreading this a bit but does seem like competitive pressure is picking up a bit and that was mgmt's way of admitting that without spooking the market.  However, still cheap imo, especially if they use fcf AND excess capital to aggressively buy back the stock

[ABM]

Seems like it is reflecting change in value per share.

 

This assumes contribution margin on remaining assets are the same and they cut ~13%-17% of the pre-WMT loss fixed cost overhead.  Also assumes they can reduce share count by 11%-13% using proceeds. 

 

They guided to lower chargeoffs which tells me this is a higher yielding business so it is possible stub will be at lower contribution margins. If true, then the fixed cost deleverage from the loss of business will be even higher and they need to cut more overhead to maintain steady ROAs.  I note the $350M in cost savings is in line with my estimate  of overhead cuts required if profitability is the same across loan book. 

 

2 questions

How are you guys thinking about NIM evolution as it looks capped on teh asset side but rising on the liability side (50 bps contraction past 12 months)?

 

Do you think they can reinvest at existing ROAs or do they come down over time?

 

 

 

[tol1]

Seems like it is reflecting change in value per share.

 

This assumes contribution margin on remaining assets are the same and they cut ~13%-17% of the pre-WMT loss fixed cost overhead.  Also assumes they can reduce share count by 11%-13% using proceeds. 

 

They guided to lower chargeoffs which tells me this is a higher yielding business so it is possible stub will be at lower contribution margins. If true, then the fixed cost deleverage from the loss of business will be even higher and they need to cut more overhead to maintain steady ROAs.  I note the $350M in cost savings is in line with my estimate  of overhead cuts required if profitability is the same across loan book. 

 

2 questions

How are you guys thinking about NIM evolution as it looks capped on teh asset side but rising on the liability side (50 bps contraction past 12 months)?

 

Do you think they can reinvest at existing ROAs or do they come down over time?

 

On Q1: NIM has contracted since 2012 from almost 20% and I think company guided to c.16% incl. the PayPal portfolio. I do see NIM slightly contracting as you rightly say. Loan yield has been stable and interest expense picks up.

 

On Q2: Trend has been the same as NIM since 2012, ie contracting. Think mgt guides around 2.5%+. Total assets grow HSD and earnings slightly higher on my numbers. I don't expect ROA to come down and that may lead to a loss like WMT.

 

Please can you elaborate on this: "This assumes contribution margin on remaining assets are the same and they cut ~13%-17% of the pre-WMT loss fixed cost overhead.  Also assumes they can reduce share count by 11%-13% using proceeds. They guided to lower chargeoffs which tells me this is a higher yielding business so it is possible stub will be at lower contribution margins."

 

[ABM]

Seems like it is reflecting change in value per share.

 

This assumes contribution margin on remaining assets are the same and they cut ~13%-17% of the pre-WMT loss fixed cost overhead.  Also assumes they can reduce share count by 11%-13% using proceeds. 

 

They guided to lower chargeoffs which tells me this is a higher yielding business so it is possible stub will be at lower contribution margins. If true, then the fixed cost deleverage from the loss of business will be even higher and they need to cut more overhead to maintain steady ROAs.  I note the $350M in cost savings is in line with my estimate  of overhead cuts required if profitability is the same across loan book. 

 

2 questions

How are you guys thinking about NIM evolution as it looks capped on teh asset side but rising on the liability side (50 bps contraction past 12 months)?

 

Do you think they can reinvest at existing ROAs or do they come down over time?

 

On Q1: NIM has contracted since 2012 from almost 20% and I think company guided to c.16% incl. the PayPal portfolio. I do see NIM slightly contracting as you rightly say. Loan yield has been stable and interest expense picks up.

 

On Q2: Trend has been the same as NIM since 2012, ie contracting. Think mgt guides around 2.5%+. Total assets grow HSD and earnings slightly higher on my numbers. I don't expect ROA to come down and that may lead to a loss like WMT.

 

Please can you elaborate on this: "This assumes contribution margin on remaining assets are the same and they cut ~13%-17% of the pre-WMT loss fixed cost overhead.  Also assumes they can reduce share count by 11%-13% using proceeds. They guided to lower chargeoffs which tells me this is a higher yielding business so it is possible stub will be at lower contribution margins."

 

Thanks. I see them at 15.4% NIM in MRQ so using this figure. You are using 2.5% ROA on reinvested capital? What is your steady state leverage ratio? I am guessing you have 16%-17% ROE implying 6.75x asset / equity ratio.  I believe regulatory capital ratio is 15% so only a little excess capital remaining. 

 

My comment relates to the fixed costs embedded in the operating model or operating leverage. It reflects costs like G&A which SYF calls "employee costs" and "other costs". I assume the remaining costs are variable but this may be too aggressive. Currently, these costs chew up -2.45% of IE assets and they must decline in line with NIM to maintain steady ROAs. Now if they are selling higher margin business then the fixed cost must be cut further as NIM will decline more than the fall in the IE asset balance. 

[rb]

Not looking to change the thread intend, but has anybody looked at COF here? Looks like a pretty hard driven outfit and us cheaper by some metrics than SYF.

 

I like the story.  Fintech 1990 style, when credit card was a growth business and subprime consumer finance, auto, credit card or mortgages was the Fintech of its day.  The credit card monolines were First USA, which got bought by Bank One and subsequently JPM, MBNA, which got bought by BofA, Providian, almost went under, but absorbed into Washington Mutual.  The auto finance monolines where Olympic Financial went bankrupt, Western Financial, which got bought by Wachovia and now sits in Wells Fargo. 

 

COF, from its start as the credit card division of Signet Financial somehow made it through the growth spurt, and stayed independent through a couple of pretty bad consumer credit cycles.  It's now one of the biggest auto lender, and one of the biggest banks in the US.  The founder CEO who's responsible for this is still around running the show.  Financial metrics is what it is.  Last several years had some misses, not great.  They had to write off a big taxi medallion loan portfolio, and energy loans before that.  It's not a growth company anymore, how can it be when you are close to being the biggest bank outside of the SIFI's.  But Fairbanks is as forward looking as it gets for a bank CEO.  He took all stock comps during the crisis for a while, and Capital One, $40+ billion market cap is really his creation.  As close as you'll get for an owner CEO within the context of big banks.

Yea, I can give you a recent anecdote which is that COF's cards are shit. In Canada COF won the bid to be the credit card for COSTCO after they dropped AMEX. So recently I got one of those. Being COSTCO affiliated I thought that the service would be decent. Then I tried to book a car rental with the card and the transaction got declined. Then I have to be on hold with COF security for 45 minutes.

 

After I eventually go through and I go through what seemed like a million security questions (the stopped short of asking for my blood type) the guy I talk to acknowledges that they blocked the transaction because the rental car price seems high to them. But he says that I am cleared to book the car rental. I also tell him that I will be going on a trip and give him the dates. He tells me that he cannot say whether my card will work or not on my trip.

 

Now here's the kicker. I go to book my car rental and the transaction gets declined AGAIN! I'm guessing their cards work great if you're a redneck that just shops at Wal-Mart, but try to do anything else, no can do.

[Jurgis]

Yea, I can give you a recent anecdote which is that COF's cards are shit. In Canada COF won the bid to be the credit card for COSTCO after they dropped AMEX. So recently I got one of those. Being COSTCO affiliated I thought that the service would be decent. Then I tried to book a car rental with the card and the transaction got declined. Then I have to be on hold with COF security for 45 minutes.

 

After I eventually go through and I go through what seemed like a million security questions (the stopped short of asking for my blood type) the guy I talk to acknowledges that they blocked the transaction because the rental car price seems high to them. But he says that I am cleared to book the car rental. I also tell him that I will be going on a trip and give him the dates. He tells me that he cannot say whether my card will work or not on my trip.

 

Now here's the kicker. I go to book my car rental and the transaction gets declined AGAIN! I'm guessing their cards work great if you're a redneck that just shops at Wal-Mart, but try to do anything else, no can do.

 

I'm gonna take other side on this.

 

COF cards are great. We have COF Quicksilver. 1.5% cash back, no foreign transaction fees. Used in Lithuania this year without any issues, any declines, etc. Used in other countries through years too. I think they don't even require to notify them about upcoming trips now.

 

My relative(s) have it and practically live abroad. No issues/declines at all so far.

 

It's my go-to card for international travel since 2%-cash-back Fido Visa has foreign transaction fees.

 

Maybe they just don't like Canadians? :P ;)

[gfp]

COF is one of the only card companies I've never used, even though they bought big local bank (Hibernia) years ago.  I do think we can all agree that Synchrony - the subject of this thread - is universally regarded as having horrible customer service.  I still use them for certain things (mostly Lowes) - but they are really quite bad at what they do from a retail customer facing perspective.

 

Best service I've had recently has been the Chase Sapphire Reserve / Preferred people.  Not as amazing as it was at first, when they would pick up on the first ring and say, "Good afternoon Mr. Davis, how can I help you today." - which was borderline eerie.  But still very good.  Amex is also still good.

[rb]

Not sure if it's because COF doesn't like Canadians or no but I'm cancelling the shit out of that piece of crap. I'm surprised Costco would inflict something like this on their customers.

 

Thanks GFP, good to know that SYF's cards are crap too. I'll stay away from those as well.

[Jurgis]

Not sure if it's because COF doesn't like Canadians or no but I'm cancelling the shit out of that piece of crap. I'm surprised Costco would inflict something like this on their customers.

 

Thanks GFP, good to know that SYF's cards are crap too. I'll stay away from those as well.

 

Salty much.

 

Well, I'm gonna happily continue to use COF credit cards and tell friends to get them too.  :P

[abitofvalue]

I think i believe SYF when they say that they simply decided the renewal terms were getting too onerous and decided to walk away. Whether this is a good idea or not will of course depend on other situations.

 

AXP walked away from Costco and the overhang lasted a year but then they won Hilton, renewed delta and kept Starwood and suddenly ppl aren't worried that Amex isn't relevant... AXP also noted at the loss that economics for Costco were worse than core AXP and that's proved correct. Still AXP had a real GPCC brand.. which SYF lacks so its not apples to apples but we could still see overly pessimistic assumptions being carried forward.

 

On the Walmart portfolio - The portfolio does seem to have been much lower quality than the rest of SYF.. The yield seems to be in the 22-24% range, in-line with rest of SYF but credit seems meaningfully worse. the numbers i have heard are 10-11% loss rates vs 5-7% at SYF.. that 10% NCO rate would roughly tie with the $1B reserve release they anticipate from getting the portfolio off their books.

 

Net-net think the best thing they could do is announce a Sam's Club renewal if they think they can keep the business.. JCPenney next yr isn't going to excite anyone with a renewal (though a loss would be a disaster for valuation, imo). Also new tie-up's with a couple of fast-growing e-commerce retailers (not sure which dont have a card program)... maybe try to leverage PayPal relationship for this - Venmo credit card, bank card where customers have a SYF bank account but PayPal or Venmo branding / front end. 

 

[tol1]

Good to see Lowe's stays on board and both Baupost and BH have not sold down.

[Killer022]

No new insights on this company ? Looks interesting...