Welcome to the Synchrony Financial First Quarter 2019 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations.

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 today. I'll begin on slide 3. The momentum we generated over the last several quarters continued in the first quarter of 2019. We maintained our strong performance across several key areas of the business, which helped drive earnings of $1.1 billion, or $1.56 per share. Included in our results is the reserve release related to the Walmart portfolio being moved to loans held-for-sale, which positively impacted results by $0.56. Brian will discuss this in more detail later in the call. Loan receivables grew 3%. On a core basis, which excludes the Walmart portfolio, loan receivables grew 17%. We generated solid net interest income and purchase volume growth of 10% and average active accounts were up 8%. We also recently renewed and extended key relationships and added some exciting new partnerships. In our Payment Solutions sales platform, we recently extended our exclusive consumer financing program with P.C. Richard & Son, a leading family-owned and operated appliance and electronics company. P.C. Richard & Son is a valued partner and this extension will build on our long-term partnership in which we have provided credit card and promotional financing options for their customers. The partnership will continue to leverage our marketing analytics and mobile technologies to further enhance the customer experience. We are partnering on marketing and loyalty programs and a branded mobile app for purchasing and payments, in which customers can shop, receive special offers and promotions and service their credit card. We are excited to continue to build on this long and successful partnership. We also announced a multi-year extension with Rheem to continue providing a financing program for the purchase of HVAC and water heating products and services. Rheem offers a wide range of residential and commercial products including air conditioners,…

Thanks, Margaret. I'll start on slide six of the presentation. This morning we reported first quarter earnings of $1.1 billion or $1.56 per diluted share. This included the reserve release related to the Walmart portfolio being moved to loans held-for-sale during the quarter. The release totaled $522 million or $395 million after tax and provide an EPS benefit of $0.56 to the quarter. We generated strong year-over-year growth in a number of areas. Excluding the Walmart portfolio, loan receivables were up 17%. Interest and fees on loan receivables were up 12% over last year, reflecting the addition of the PayPal Credit program last year. We also continued to deliver solid organic growth. Overall, we're pleased with the growth we generated across the business, as well as the risk-adjusted returns on this growth. Purchase volume growth was 10% and average active accounts increased 8% over last year. The positive trends continued in average balances, with growth in average balance per average active account up 5% compared to last year. RSAs increased $234 million or 33% from last year. Lower core reserve build growth, as well as improved program performance drove the increase. RSAs as a percentage of average receivables was 4.3% for the quarter, in line with our expectations. We continue to expect RSAs as a percentage of average receivables to be in the 4.0% to 4.2% range for 2019, which I will cover in more detail later. The provision for loan losses decreased $503 million or 37% from last year, mainly driven by the reserve release related to the Walmart portfolio. I will cover the asset quality metrics in more detail later in the presentation. Other expenses increased $55 million or 6% versus last year, driven primarily by expenses related to the addition of the PayPal Credit program and business…

Thanks, Brian. I'll provide a quick wrap-up and then will open the call for Q&A. We generated strong results this quarter as our focus on organic growth, program renewals, strategic partnerships, forward-thinking technology investments and actionable data analytics continue to be key factors in our success. We are pleased with the significant number of renewals and extensions we have generated over the last several quarters. We are making investments that create value for our partners and a better more seamless experience for our cardholders. And we're maintaining our focus on delivering value for our shareholders. To that end, we returned $1.1 billion in capital through 966 million of share repurchases and a $0.21 per share quarterly dividend. Additionally, we remain focused on deploying capital through continued organic growth and program acquisitions. I'll now turn the call back to Greg to open up the Q&A.

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session, so that we can accommodate as many of you as possible. [Operator Instructions] Operator, please start the Q&A session.

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Sanjay Sakhrani with KBW. Q – Sanjay Sakhrani: Thanks. Good morning. I was hoping to just drill down on the RSA trend a little bit, which is a little bit higher than our expectations. And obviously Brian, you guys kept the guidance range unchanged. I was just hoping you could give us a sense of the sequencing of that RSA because it's been a little uneven in the past. And just to be clear, the reserve release for Walmart doesn't flow through the RSA, right? And then secondly, just on the disclosure change between oil and gas to the Payment Solutions segment, could you just talk about what drove that? Thanks. A – Brian Doubles: Yes. Sure Sanjay. So let me take your middle question first and just confirm what you said that the Walmart reserve release did not run through the RSA. So that was not a driver in terms of the quarter and what we recorded. The largest driver of that year-over-year increase in the RSA was really the lower core reserve build. We also saw a better overall performance in many of our programs, so that also pushed the rate up compared to the prior year. So program mix was a driver. And then, as you think about the balance of the year, now that our expectation is that core reserve build goes back into what we would consider a normal growth-driven reserve build in that $100 million to $150 million range, so that will bring that RSA percentage back down. We still expect the RSA to hit a seasonal high point in the third quarter, so no real change to that expectation. And then when you look at the balance of the year, we still expect it to be in the 4.0% to 4.2% range, so no change to what we communicated back in January. And then just on the movement on the oil and gas portfolios from retail credit to Payment Solutions. So really the idea there was now that the auto network, we're seeing really good growth there. Those cards can be used for gas now, but there is some real synergies in putting those programs together just strategically. And so that was really the rationale for the move. It did depress the purchase volume numbers in Payment Solutions a little bit year-over-year, so we reported 4% growth in purchase volume in Payment Solutions. If you adjust that for oil and gas purchase, volume would have been up 8%, so very much in line with receivables. Q – Sanjay Sakhrani: Thanks.

And thank you. We have our next question from Mark DeVries with Barclays. Q – Terry Ma: Hey good morning, this is Terry Ma in for Mark. I just wanted to get some color on how the PayPal growth has been trending. You mentioned receivables growth has been up 28% ex Walmart so just hoping you could disaggregate this so we could get a sense of how growth would trend toward the back half of the year? A – Margaret Keane: Yes. So I would say that the PayPal program is performing as we had expected it to perform. We said we've had great partnership with them. We are very integrated. We're really working on growing the program. But we had growth across some of our portfolios not just PayPal. So I'd say the core of the business is actually performing really well. I don't know Brian if you'd add anything to that. A – Brian Doubles: The only thing I would add is you're seeing outsized growth in the first half year related to PayPal just because we didn't have it the first half last year. That will be comping against similar periods with PayPal in the second half of the year and that's why we expect the growth rate to come down into that 5% to 7% range. But as Margaret said, we're still seeing really good growth on PayPal. Q – Terry Ma: Okay got it. Thanks. And just as a follow-up. How much OpEx takeout can we expect related to Walmart over the next few quarters? A – Brian Doubles: Yes I would say we're on track with what we communicated back when we made the announcement on Walmart. So we got very detailed plans. We're executing those across the business. If you just look at expenses more broadly, they were up 6% compared to the prior year. But that was really entirely driven by the PayPal Credit portfolio and the fact that we brought that on. If you exclude PayPal the program -- and exclude PayPal, the expenses were flat year-over-year. So that really is reflective of the fact that we're able to do some restructuring on certain areas of the business ahead of the Walmart portfolio sale later this year. So I think we feel pretty good about the cost takeout. The majority of the costs related to Walmart will come out after the portfolio moves later this year. Obviously, we're very focused on continuing to support that program. We're focused on ensuring a smooth transition. So the majority of those costs stay in place until the portfolio moves. So you really see the full benefit of the cost takeout in 2020. Q – Terry Ma: Okay, got it. Thank you.

And we have our next question from Rick Shane with JPMorgan. Q – Rick Shane: Hey guys, thanks for taking my questions this morning. I just wanted to dive in a little bit deeper on the PayPal portfolio versus the existing portfolio. Is there anything different that we should be thinking about behaviorally in terms of seasonality spending pay downs as we move through the year? And is there any different mix between fixed and floating rate loans versus the existing portfolio we should consider in terms of asset sensitivity?

Yeah, Rick I wouldn't build anything in specific to PayPal. I mean we've -- just go through account what we have said in the past on PayPal. Obviously it runs at a slightly higher delinquency net charge-off profile. We did build in some APR increases to address that. And net-net you get back to a very similar return to that program relative to the rest of the portfolio. Seasonality and things like that look pretty similar. So there's nothing I would highlight specific to PayPal you should think about differently.

Great. That’s it for me. Thank you guys.

Thanks, Rick.

And our next question comes from Chris Brendler with Buckingham.

Hi, thanks. Good morning and thanks for taking my question. I had a question on PayPal as well. Can you give us a sense; I really appreciate the additional disclosure on the impact of Walmart and PayPal on your credit metrics. But just qualitatively or maybe even more quantitatively, how's the PayPal portfolio performed since you acquired it in July? And then are you also trying to say that PayPal is still servicing those loans? So do you expect that servicing to transfer near term? And would that have a beneficial impact on the credit metrics in that portfolio once you transfer to your own servicing platform? Thanks.

Yeah. So, first I'd say it's performing exactly like we thought it would perform and so both in terms of growth, in terms of delinquency, in terms of overall performance. So again we feel pretty happy about how the overall portfolio is performing. They are servicing the accounts now until we convert to our system, which will happen in June. And once that conversion happens it will be on our system. I don't anticipate a big shift in the performance of the portfolio because they're following our direction in terms of how to do it today and they're pretty good at what they do anyway. So I don't really see anything there. I think, obviously, we probably could get a little bit of cost leverage out of the cost part of this just because of our scale.

Okay, great. One quick follow-up on Pets Best. Can you -- is that going to be a material impact to CareCredit revenue? I assume it's not a lending operation and insurance part is very interesting to me and just wanted to know how big it is in terms of…

Yeah. It's not going to have -- it won't have a big impact on the…

In the short term.

…in the short term.

Great. Thanks, guys.

Thank you.

Thank you.

We have our next question from Matthew O'Neill with Autonomous Research. Matthew O’Neill: Yes, hi. Thanks for taking my questions. I was hoping you could give an update or some more details around the PayPal, sort of, APR repricing maybe the extent to which the newer APRs are finding their way into the overall book, and maybe what size the co-brand is versus the original Bill Me Later program.

Yeah. So, we rolled those APR changes out earlier and they're going to bleed in over, I would say the balance of this year but into probably the first half of next year before we really feel the benefit of those. So right now if you look at the yield on the overall company, it was down a little over 20 basis points year-over-year. If you exclude PayPal, which does run at a lower yield than the overall business, yields would have actually been up slightly year-over-year. So that APR lift hasn't worked its way through the yield yet. You'll really see that towards the end of this year and into 2020. Matthew O’Neill: Thanks. That was helpful.

And what was the second part of your question, Matt? Matthew O’Neill: That was it on PayPal. I did have an unrelated follow-up, however, on CECL. If you guys had any updated views on that as far as the discussion with the regulators. And maybe from a holistic perspective, are you guys looking at, or are the regulators looking at it inclusive of RSA and the implicit risk sharing? Or is it very focused on you guys alone?

Yeah. That is great question. So we haven't put a range out there. Obviously, CECL will result in an increase to the level of the reserves just given we move from that incurred model to a lifetime coverage. We are currently running in parallel. We are working through some of the big areas of implementation like the life of a revolving product the payment allocation methodologies and things like that. There's some discussion out there that reserves are going to double for all credit card portfolio that is not our expectation. So, I would expect we'll probably put out a range most likely in the third quarter after we've run in parallel for a period of time. And then as you correctly highlighted the big open question on all this is how do the regulators view our capital going forward. In theory, the more reserves you set aside, you should need less capital for unexpected losses. But we're working through that with the regulators right now. In terms of the RSAs, we actually -- we factor in the RSAs in all of our stress tests they're built into our models. So, we do get credit for that buffering effect that the RSAs have in a stress scenario. So, we do factor that in. It is part of our stress testing models and our capital plans.

Great. Thank you very much. Appreciate it.

Great. Thanks.

And thank you. Our next question comes from Dominick Gabriele with Oppenheimer.

Hi, thanks so much for taking my questions. Can you just touch on the balances -- the balancing act between trying to drive deposit as a percent of your total funding and with the rates paid for those additional balances? And kind of what we've seen are some of the competitors have actually cut deposit rates on some of their products. So, what does that mean if you think about your funding costs going forward into 2019? Thank you.

Yes. So, I would say a couple of things. First, when we look at our deposit beta it's actually been a little bit better than we expected through the rate cycle so far. So, our beta has been around 50%. That includes the period last year where we were pre-funding PayPal. During that time period, we were very competitive on rates. Just given some of the trends we are seeing so far this year as well as the fact that we don't have to pre-fund a large portfolio, we're actually hoping we won't need to be as competitive on rate this year. We've actually seen really strong deposit growth so far this year and we haven't moved our rates at all. So, look I think we expect to pay slightly higher betas than the norm. But with all that said it doesn't change our view that deposits are still our most attractive source of funds for the business.

Absolutely. And then if I can ask one more. Can you talk about CareCredit and you've had some nice steady growth there in receivables year-over-year. And then how Walgreens and some of these new partnerships could potentially continue to accelerate that growth in CareCredit? Thanks so much.

Yes sure. So, we see CareCredit as a big opportunity for us. Obviously, health care payments and general continue to go up for consumers and CareCredit really gives you the opportunity to segment those costs. And so what we've really been building out is a couple of things. One, continuing to grow the core by winning new partnerships; two, expanding the utility of the card so things like Walgreens is an example of that where we allow customers to buy outside of the -- the office they bought in but use that card in a Walgreens. And we are seeing really nice traction there. And then the third area we're really looking at is expanding into other verticals that we are not in today. So, last year alone we expanded into 25 different health care verticals. The one thing I would say is we never really want to be in a position where we are making some kind of credit decision related to health care life and death situations or anything like that. This is really all about those procedures that are elective procedures where consumers want to segregate that part of their expense. And so I would say we expect to continue to see really nice growth in CareCredit and we are looking at ways to really accelerate that growth in the verticals we are in today and verticals we're looking to expand into. So, pretty excited.

Thanks so much. I really appreciate it.

And we have our next question from David Scharf with JMP Securities.

Hi good morning. Thanks for taking my question. Maybe a different angle on trying to get a sense for organic portfolio growth outside of PayPal. Just wondering on a no-name basis, when we look at the top five retail programs outside of PayPal, are any of those experiencing year-over-year declines in ending receivables?

No. I don't believe any of them are. I think it's important to note that even if a retailer's sales are off, in most cases our credit card program is two times -- two to three times what the retailer sales are because our customer base that have the cards are the most loyal customers. And as retailers look to bring sales back into the store, obviously the card becomes a really big driver of that performance. So we have not seen deterioration in that way.

Yes. The only thing I would add is look you can always have -- quarter-to-quarter, you can have some movement in any of these partnerships. But to Margaret's point, if you look over the long term whether its one year or two years, we are taking -- we're gaining penetration in all of our big programs and we feel pretty good about our position.

I think the other piece that's important to note is the digital aspect. As we continue to build out the digital capabilities with our partners and that becomes an even bigger part of the channel, we are able to offset maybe some of the in-store traffic falloff with the omni-channel approach. And we know that if a customer buys mobilely and in store, they're the best customer. They tend to come back over and over. So we continue to use that data analytics to help our partners really grow those sales and continue to expand our digital capability.

Got it. And you -- that response actually prefaced my follow-up which was whether or not there are any sort of wallet share type of metrics that you're able to share with us in terms of through the...

I can kind of give you overall -- yes I can give you overall like mobile growth. So we said this quarter, we grew 37% on application growth versus the same quarter of last year. 48% of our applications are now occurring digitally, which is continues to grow and be a big part. So one of the things we see is customers before they even go to shop or actually applying through their mobile app or online to get the cards, obviously the value props are really important in this too in terms of how we work with our partners to get those value props in place. And in Retail Card, we had -- 37% of the sales were online sales. So again, this is a channel that continues to grow. We continue to grow really nicely in the digital sales. So again, we're pretty happy about the performance and expect that to continue to grow.

Great. Thank you.

Thank you. Our last question comes from John Hecht with Jefferies. Please go ahead, John.

Sorry guys. Thanks guys. One side of question on PayPal. Is the amount of deferred interest for the net portfolio any different than the rest of the portfolio?

It works similarly to the rest of the portfolio, John.

Okay. And then most of my questions have been asked and answered, but I guess the final one I'd have or secondary one I'd have Brian is, when do you think you'll be able to talk publicly about the capital plans? I mean what -- when do you think that the regulators will be able to approve your plan and you'll get to the Board of Directors process and so forth?

Yes. So like I said, we reviewed and the Board approved our plan. We submitted that to the regulators late March. So that's very much in line with what we did last year. So if you look at the last two years, we announced something around mid-May, so that would be our hope. Obviously, we don't control that entire process. But at least on our side, what we've done is try to follow a very similar process with both the Board and our regulators. So we're hopeful that we have a similar result this year in terms of timing.

Appreciate that. Thanks.

Thanks, John.

Thanks everyone for joining us 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. We thank you for participating. You may now disconnect.