Good morning, and welcome to the Synchrony Financial First Quarter 2022 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. [Operator Instructions]. Please note, this conference is being recorded. And I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations, and you may begin.

Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. 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 uncertainties, 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. On the call this morning are Brian Doubles, Synchrony's President and Chief Executive Officer; and Brian Wenzel, Executive Vice President and Chief Financial Officer. I'll now turn the call over to Brian Doubles.

Thanks, Kathryn, and good morning, everyone. Synchrony delivered strong financial results for the first quarter of 2022, including net earnings of $932 million or $1.77 per diluted share, a return on average assets of 4% and a return on tangible common equity of 34.9%. This financial performance was driven by the core strengths of our business and the continued execution of our key strategic priorities to drive greater value for our partners, providers and customers. We continue to expand and diversify our portfolio during the first quarter with the addition of renewal of more than 15 partners. We also continue to extend our reach and engage more customers, thanks to the powerful combination of our seamless experiences, attractive value propositions and broad suite of flexible financing options. New accounts grew 10% during the first quarter, reaching $5.5 million, and average active accounts increased 6%. Turning to customer spend. We continue to experience broad-based demand across the many industries we serve. Purchase volume increased 17% versus last year, driven by double-digit growth in our diversified value, digital, health and wellness and home and auto platforms. We also continue to see higher engagement across our portfolio as purchase volume per account grew 10% compared to last year. Customer spend reflected strong cross-generational growth. Millennial and Gen Z spend increased 23% year-over-year, and Gen X and baby boomers spend increased 15%. The combination of strong purchase volume and a slight moderation in payment rate drove loan receivables growth of 8% on a core basis. Dual and co-branded cards accounted for 42% of the purchase volume in the first quarter and increased 29% from the prior year. On a loan receivables basis, including the loan receivables held for sale, dual and co-branded cards accounted for 25% of the portfolio and increased 16% from the…

Thanks, Brian, and good morning, everyone. Synchrony's first quarter performance reflected continued strength across our diversified sales platforms and, in particular, the powerful combination of our digitally powered product suite, seamless customer experiences and compelling value propositions, which resonate deeply with the needs of our customers and partners. We generated over $40 billion of purchase volume in the first quarter of 2022, reflecting a 17% increase compared to last year. From a platform perspective, our home and auto, diversified value, digital and health and wellness platforms each continue to experience double-digit year-over-year growth in purchase volume, reflecting strong demand for both our products and attractive partner and provider networks. At the platform level, home and auto purchase volume was 10% higher due to continued strength in home and improvement in auto as more consumers return to the road. In diversified and value, purchase volume increased 25% and driven by strong retailer performance and higher customer engagement. The 20% year-over-year increase in digital purchase volume generally reflected the growth across the platform. We experienced greater customer engagement, including higher active accounts and higher spend per active among our more established programs and continued momentum in our new program launches. The 17% increase in health and wellness purchase volume was driven by broad-based strength led by dental given the benefit of increases in patient volume compared to the prior year. Our lifestyle platform generated purchase volume growth of 4%, reflecting strong retailer sales and growth in music and specialty, partially offset by the ongoing impact of inventory shortages in power and particularly strong growth in the prior year period. Loans grew 8% year-over-year to $83 billion, including loan receivables of $78.9 million and held for sale receivables of $4 billion. At the platform level, year-over-year loan growth rates accelerated from the fourth…

Thanks, Brian. we deeply understand the needs and expectations of our customers and partners, which enables us to deliver financing solutions and experiences that strongly resonate building long-lasting relationships and greater value over time. Synchrony's differentiated business model consistently positions us as the partner of choice. Whether we're powering financing experiences for local merchants, health care providers, our national brands, we're able to meet our customers where, when and however they want to be met. The scalability of our technology platform, the breadth of our product suite and the depth of our lending insights across many industries enables us to consistently deliver sustainable and attractive outcomes for all of our stakeholders. And with that, I'll turn the call back to Kathryn to open the Q&A.

That concludes our prepared remarks. We'll now begin the Q&A session. [Operator Instructions] Operator, please start the Q&A session.

[Operator Instructions] And from Credit Suisse, we have Moshe Orenbuch.

Great. Thanks. And Brian, I wanted to kind of just follow-up on the net interest margin guidance. Obviously, on a year-over-year basis, there's a big change in the mix of earning assets. And you kind of alluded to the fact that, that might be normalizing. So is there a way to relate the 10-ish percent growth in loans to growth in net interest income in dollars? In other words, how much of that expected decline from current levels and the margin is more about asset mix than it is about other factors?

Yes, so I would expect -- and I think the way Brian and I and the leadership team are managing the business is that we would like to see asset growth come through in NII, right? So the biggest wildcard then afterwards would be the interest expense piece. So we would expect that from a dollar basis, it would track at least on the top line revenue. And then again, I highlighted a little bit of the timing relative to some of the funding cost changes that we'll have in place. And you're right, one of the bigger wildcards will be ALR as a percent of average earning assets, which was at a little bit higher mark than we usually run at 85% during the first quarter, usually runs 1 point or 2 lower than that. So -- but again, it should track on a dollar basis, at least on the revenue side, back to asset growth.

Next, we have, Ryan Nash.

So, Brian, the credit outlook, both near and intermediate term seems more upbeat and I was wondering if you could maybe just talk about what you're seeing in the underlying portfolio that led to the better credit outlook. And the outlook from unemployment to remain pretty strong here, just maybe outside of a recession, can you just talk about what you see as the drivers of normalization? And are you seeing any impact from inflation on your customer spending habits?

Yes. Thank you. Thanks, Ryan. So first, when you think about credit, the biggest thing for us as we entered the year was the large portion of our book of customers who had received forbearance and other institutions. And how that -- how those customers would play out of forbearance. Again, we look back to the performance we had for folks that were on forbearance with us -- we obviously understood who do not have forbearance with us and then you look at this population of people. As we looked over the last 4 months, the performance of that was significantly better than our expectation. So we watch that develop. We also watch how our vintage post the refinements we made beginning of last year developed. And we became more confident that we would not see what I would call a faster credit normalization, which reflected in a slower glide back to our mean loss rate out in 2024. So that's really how credits developed. Again, as we sit here in the first couple of weeks in April, we haven't seen anything that would most certainly change that view. I'll go to your last point about inflation and the customer. The customer is really starting at a point of strength. They absolutely have excess liquidity, and we demonstrated that or at least indicated that with higher savings rates. Our credit delinquency and how it sits today, average balances, all are in great shape when they have it, and you have low unemployment. So we look at the customer today. When you look at purchase behavior pattern, we see small evidences of inflation inside of our book, but not really significant. So if you looked at a category like gasoline, our average transaction value on gasoline is up 22% year-over-year. So you clearly see the effect of inflation there. But in some respects, we don't see other parts of inflation. So look at grocery, grocery, for us, average transaction value is flat year-over-year, flat sequentially every month during the quarter, but frequency is up a little bit. So that tells you the consumers being able to manage their spend within that -- inside that category. We see a little bit in apparel, but the rest, we have not seen any dramatic impact from inflation as we move forward. And to address your middle point unemployment, again, we look at unemployment. It's obviously stronger than we had anticipated entering the year. It continues to remain strong. There's more jobs that are outstanding. I think most certainly with continued strength in the unemployment market, we obviously believe that the credit forecast we put out both for this year and for next year will remain intact.

Next, we have Betsy Graseck.

Could you unpack a little bit the loan growth acceleration that you got in digital? And help us understand how much of that is coming from the new cards you have out there, PayPal Verizon, et cetera, the new offerings, the refreshed offerings on PayPal and other drivers of that and contrast it with the home and auto, which may be decelerated a bit?

Yes. Sure, Betsy. I'll start on that. I'd say, look, generally, digital is a platform that we clearly expect to outpace the rest of the business in terms of growth rate. We're definitely seeing that. A big chunk of that is obviously attributed to Venmo and Verizon. Both of those programs continue to perform really well. I still believe those will be top 10 programs for us in the future. We're getting great both qualitative as well as quantitative feedback on both in terms of the experience, the val prop, et cetera. there's really nothing inside the digital numbers this quarter for the PayPal launch. That just happened, but we're really excited about that as well. I think that's going to be a terrific offering. It's really, really 2 parts. First, the valve prop, we think is best-in-class. It's going to be a top-of-wallet card for folks. And then I would say the other thing that we did is we really launched probably our most sophisticated technology stack in terms of how we're integrating inside of the PayPal app. So the experience is really fantastic. So again, I think digital will continue to outpace the rest of the business.

Yes. I think just to add on, Betsy, for the home and auto piece, when you look at that platform, auto is clearly improving. It came off of a low last year. So that's obviously a positive trend. With regard to inside home, there's a little bit of continued softness in the furniture portion of home, which, again, is a little bit more of the inventory backlog clearing out. Again, we bill when furniture is delivered. So we expect that to continue to be a headwind here for the next quarter or 2, hopefully, as the inventory and supply chain is clear out.

I think this is also the benefit of having a really diversified business. We're seeing really strong growth in digital, really strong growth in health and wellness, and that's a little bit immune in terms of impact from supply chain and other things if you think about health and wellness and the backlog that those providers are working through. So again, I think it speaks to the benefit of having a very diversified portfolio.

We have Sanjay Sakhrani.

Obviously, the drumbeat on macro weakness is increasing since we last spoke. And I know Brian Wenzel, you talked about all the statistics that make you comfortable on the state of the consumer. I'm just thinking about the reserve posture. You guys are pretty well above sort of where you were CECL day 1. Maybe you could just talk about how you accounted for the macro environment at the time CECL day 1 was said and then where we are today because at some point, we're going to migrate back down to CECL day 1 if losses remain well below those levels, correct?

So the way I would think about our reserve position today versus CECL adoption, again, our mean loss rate has not changed from that 5.5% target. So at the end of the day, it's really the loss forecast that gets you in that reasonable supportable period and then potentially any overlays. So I think when you look at it today for us, if you're solely to look at the macroeconomic conditions, Sanjay, it would tell you that your coverage ratio will be down versus day 1, right? One of the things that we still have is qualitative overlays, both for some of us relief that we talked about as well as we have some macroeconomic uncertainty as it relates to Ukraine and the higher inflationary environment that kind of -- is keeping the reserve slightly higher than the day 1. Again, I think where we sit today is we will ultimately migrate back to that day 1. Well, certainly, I think the inflationary pressures and the global geopolitical uncertainty clears, and that reserve build here in the coming months would really be more growth-oriented. So again, we -- absent mix, we still view is we're going to migrate back to that day 1 CECL rate. But again, we're trying to account for some of the uncertainties that exist in the marketplace. And we're ready for our next call, Brandon.

We have John Hecht.

We have -- he I guess 1 question -- any discussions with the partner pipeline or any major partnership renewals as we go through this year?

Yes. Look, I would say we've got a very strong pipeline across all 5 of the platforms. if I look at it, today, it tends to skew a little bit more towards start-up programs and opportunities like that as well as, I would say, distribution partnerships and opportunities as well for our products. There isn't as much out there with the exception of maybe 1 or 2 that are large existing programs, but we'll obviously get a look at those as well as they come up in the next year or 2. And then I think for us, we're actively renewing our programs. We don't have anything significant of size coming up in the next few years. But we're always in discussions with our partners about what kind of changes can we make to drive even better performance? Can we do that in the context of a renewal? So our teams are actively working those opportunities where they exist. But generally, I feel like we've got a pretty good pipeline, and we're well positioned. We're also getting a lot of good getting a lot of good traction on the product suite and I think the benefits of having an integrated product suite. So as we're out there competing, I think that's a real differentiator for us, too.

From Wells Fargo, we have Don Fandetti.

On the PayPal cash back card refresh, I guess my question is -- do you expect the same amount of revolve to drop? Or do you expect that to be a little more transactor. And I guess, Brian Doubles, do you feel like the integration here is pretty deep. Does that make the relationship stickier in terms of sort of renewal-type risk longer term?

Yes. So look, I'd start by saying we're really excited about the launch of the new value proposition and the new experience inside of the app. I think it's going to be a game changer. PayPal is excited about it so are we. I would tell you that these opportunities that we have to relaunch a val prop, it does drive a lot of traffic, a lot of new accounts, a lot of spend. And I think with a val prop like this, it will definitely be a top-of-wallet card. We had a good val prop before, but this is incremental. So we're really excited about it. And I would tell you on your integration question, Don, absolutely. I think that our goal is for our integration to be absolutely seamless to the customer. And we started doing this years ago with SyPi. Now we're leveraging our API stacks, and I can tell you when you're inside the PayPal app, the Venmo app, you don't know what was something that was developed by PayPal or something that was developed by Synchrony. It's just completely seamless. You never know. You never have to step outside of the app. You never get kicked to a website. It's 100% integrated and completely seamless. So that's our goal. We don't necessarily focus on how does that impact the renewal down the road, we're really focused on just how do we deliver the absolute best experience we can for a PayPal customer, a Venmo customer, et cetera. So we're very excited to have this launched and look forward to seeing how it does.

We have Mihir Bhatia.

I wanted to just go back to payment rates for a second. You saw a pretty big moderation in March. Maybe you could just talk a little bit about that. I guess, what made the payment rates go from up 140 basis points year-over-year or down 50 basis points. The reason, I guess, I've got March is that's when we started seeing a lot more conversation around inflation, higher gas prices starting to have an impact. So was that a consumer thing? Was it as you expected? Is there something else about the year-over-year comp we should be keeping in mind? Anything there?

Yes. First of all, thank you, Mihir, for the question. So again, there is a little bit of timing related to tax refunds that plays out. So clearly, there was some faster refunds that were paid out in February versus March. If you look at the overall tax refund season, right? Your average refund is ahead of last year, I want to say 13%, the dollars are probably [$14 billion]. So we think that had probably a little bit of a disproportional effect in February. We also think as we watch consumer behavior patterns, we've indicated to you, we have seen portions of the portfolios and cohorts that have decelerated payment rates beginning in the latter part of 2021, and that has continued into 2022. When we look at it, I know we get a lot of questions with regard to credit grades inside of that. Are you seeing any 1 particular place inside the portfolio? If I look at March alone, so just March alone, the deceleration in the payment rate happened across all credit grades. So it was not at the lower end. It actually the largest percentage of deceleration happened in the prime segment. So it's not a subprime issue relative to inflation. And I think when you also look at the -- again, we also talked quite a bit about people under payment statement balances, their minimum payments or the middle. We've obviously seen the folks in the middle decline, but go as equally up into the full pace is down into a minimum pace. So again, it really says this is across the board, and we don't necessarily think it's inflation-driven, but part of, I think, the migration that we anticipated back on payment rate back to the mean that we anticipate the exact time of which we're not 100% sure of, but again, we're starting to see that turn. So thank you, Mihir.

We have Rich Shane.

When we look at the operating expenses and talk about the incremental reinvestments in 2022, I'm curious, should we see that as a run rate? Or should we see the $120 million that you have remaining through the rest of the year sort of onetime or incremental as we think about going -- numbers going forward?

Great. Great. Thanks for the question. It will be onetime expenses. We had the $10 million in the first quarter, they're related to some employee-related reductions. I think as you step into the second quarter, again, we'll detail this out, you'll see some further reductions in some of our physical footprint and structural costs inside the business. You will see some incremental dollars that are put into marketing to really accelerate growth, and that will be onetime in nature. So I would not anticipate it to be an ongoing expense. Again, what we're trying to do is take the onetime gain, really reinvest it back into the business either to reduce structural costs or accelerate growth. So it should be a net 0 for this year and not comp into next year, but hopefully help the growth.

We have Kevin Barker.

I would like to go back to your comments about NIM and the expectations for deposit costs. Deposit costs and you are -- are higher in the previous rate cycle versus today, but your balance sheet is much more deposit funded than it was previously. So it seems like, structurally, you should have a slightly better liability structure in this rate cycle. I was hoping maybe you can just dig a little deeper on your expectations for deposit betas in this cycle versus the previous cycle, and your expectations for overall funding cost, just given the uncertainty around rates and inflation?

Yes. Great question. So when we look back to the kind of previous cycle and previous rate increases, again, we were really growing our deposit book, which we started back in the, call it, the early 2010 to 2015 range. So we are accelerating growth in the bank. And given the fact that we were a newly separated company, there was some higher costs that were embedded in there. I think you are right. We have shifted from probably mid-70s percent deposit composition of the funding stack to at least low 80s, now mid-80s, potentially with -- I think we're 83% this quarter. So that is going to provide a benefit. There's going to be some rotation. I think as you see interest rates rise here, a lot of folks have gone into savings versus CDs. In the short run, that could have some negative impact. Over the long run, getting people lock into CDs in this environment is a better alternative for us. So we can -- we look at that as being over the long term, a good thing if I can get people into term-related savings products. I think when you think about betas, if you look where we are so far to date with the first 25-basis-point movement, less than half of that, if you call it that, has already manifested itself in our high-yield savings rates. Depending upon the tenor, essentially, it's been 100%, but we've really been trying to raise deposits because our growth rate of being targeted at that approximately 10%, we want to get ahead of some of the funding-related matters. So it's going to be a little bit around what competition does in the marketplace. But again, it could be slightly higher than previous cycles. But again, people have been slower to react so far into the environment. And again, I think the higher deposit mix will be very beneficial for us as we think about NIM moving forward.

[Technical Difficulty]

So I guess, on Slide 12, you guys mentioned the annual loss rate won't hit the mean until 2024, unless significant macro changes. Can you sort of just quantify what comprises some of these changes? I just sort of wanted to get a sense on how you're thinking about downside scenarios?

Yes. When you think about our loss rate, the biggest variable that drives loss in the recession or any other environment is unemployment. And what's going to be different, I think, as people think about the macroeconomic backdrop is that you're coming from incredibly low unemployment, and you really have built up savings in the prime and super prime segment. So when you traditionally think about a credit normalization or an increase in your loss expectations, it's driven off of unemployment, number 1. And then, 2, in that prime segment, it really goes into people that struggle that have higher exposure at the fall. So I think as we look at it going forward, because you have such low unemployment, you have more jobs than you have today, up until now, albeit not necessarily offsetting inflation, a rising hourly wage, that buffer some of the unemployment pressure that you would see in the loss rate. And the excess savings that you have would buffer some of the loss content that you'd see in the prime segment. That's what gives us probably greater comfort that there's more of a glide even in a slightly difficult scenario. The scenario where macroeconomics change is you do have a rapid rise in unemployment, and you have a very fast depletion and savings rates in the prime customers could dictate a higher loss rate over that horizon.

[Technical Difficulty]

On the payment rate expectation, I know you flagged the decline that you saw in March, which is encouraging. Can you maybe talk about your confidence in sustainable decline there on the payment rate front? And then on the flip side, I appreciate the color you gave on the delinquencies and at least some of the progression on credit by customer segmentation, are you seeing any stress at all in the lower income bands that's noteworthy here because we're hearing about some payment issues at the lower income at other payment providers out there.

Yes. Let me deal with your latter question with regard to the lower credit. We are not seeing -- as you would refer to our pressure, we see normalization that's happened on payment rate as on entry rate delinquency flows, but not pressure. So I know there are other subprime issuers out there they have pressure. They have been more aggressive, really going out during the, I call it the middle part of the pandemic to open the origination of credit box for them. We obviously didn't do that. So we're not seeing incremental pressure. We're seeing more, what I would say, normalization back to a pre-pandemic level related to the -- related to that lower credit quality. With regard to payment rate, and this is something we monitor closely, we monitor in lots of different ways, credit rate is 1. We look at different aspects inside of it. We look at who's paying, call it, statement balances, [NIM] pays between that. Again, we're following a trend. It appears to be moving in the right direction. The exact slope here, we have to get through the tax return season here, which will be April, and then we'll begin to see now the consumer continues to react. Again, they are spending very healthily across the credit -- across the industry, right? Relative to credit cards. So purchase volume strength will most certainly help bring the payment rate back in line with mean averages. So there's nothing that we see that's stressed. There's nothing that we see that there's indicative of a change in direction relative to the slope of the performance. Next question, Brandon.

Arren Cyganovich, please go ahead.

The loan growth guide is a bit above your kind of long-term expectation. Can you just talk a little bit about -- is that more payment rate? Is it more kind of acceleration in terms of customer activity? Or is it still a bit of a catch-up from some of the pandemic related maybe on the health care side?

Yes. Look, I would say maybe just to take a step back, I'd say, generally, we feel pretty good about the operating environment as we look at it here for the balance of the year. We were talking about high single digits earlier this year, I think we feel better than that's going to be in that kind of 10%-plus range. We're not relying on an enormous amount of payment rate moderation in that. It really is more top line purchase volume driven. We just had our highest first quarter ever in terms of sales on our products. So we're seeing really good growth across the portfolio. We had growth rates on receivables in the 5 platforms anywhere from 6% to 12%. So it's broad-based. It's not 1 platform that's really driving that. It really is across the business. So we feel like, at least for the balance of the year, the consumer is strong. As Brian said, 2/3 of them saved at least a portion of, if not all of the stimulus. So we're seeing that come through in purchase volume. We're seeing it in the credit metrics. So like I said, we feel pretty good about the environment right now, and it really is driving what we're seeing on the growth side and it's not necessarily a reversion to the mean on payment rate.

[Operator Instructions] From Autonomous Research, we have Brian Foran.

I guess as you think about the outlook for the consumer and how you feed that through managing the business, it's tricky, right? Because you've been very clear. Everything you're seeing recently is better than budgeted. Consumers in great shape. One of the narratives in the market is the Feds got a jack rates to 3% plus, and it's got to get unemployment up to tame inflation. And it's kind of like all going to play out over the next 6 months or so, but we really won't know the impact until next year. And so I guess the spirit of the question is like, as you think through your underwriting and your marketing this year, I know you're always making changes and always trying to be thoughtful and proactive. Is there any scenario where like you're tightening underwriting even though your book is doing great because of that forward Fed risk? Or how you think about meeting that unusual interest rate risk through the book and through your marketing plans as we move through the year?

Yes. Look, generally, I would say, Brian, we're going through a period of extraordinarily strong performance as it pertains to credit. I mean we've never seen delinquencies and loss rates where they are. This -- we don't underwrite to these levels. They're about half of what we would consider a target NCO rate. And so what I would tell you, we're not tightening an expectation of what's going to happen in 3 and 4 because we didn't take this opportunity to go a lot deeper, right? We're not underwriting to today's environment, whether it's how we're underwriting the consumer, how we're underwriting new programs? We're looking at this kind of an over time mean loss rate, and that's what we're underwriting to. So one of the things that we've talked about in the past, it's really important in our business is when times are extraordinarily good, we don't necessarily go a lot deeper. We try and maintain our discipline. And we look at the value of whether it's a customer or a program agreement, we look at that over a number of years and assume that, over that time period, you're going to have some reversion to the mean. And that's really the discipline that we have around our underwriting model. Again, whether you're looking at consumers or new programs and how we're pricing those, we try and factor in what we think is going to happen over the next few years and not take advantage of the extraordinarily good period that we're operating in right now.

[Technical Difficulty] You may now disconnect.