SYF - NYSE

Good morning, and welcome to the Synchrony Financial Second Quarter 2023 Earnings Conference Call. Please refer to the company's Investor Relations website for access to their earnings materials. Please be advised that today's conference call is being recorded. Currently, all callers have been placed in a listen-only mode. The call will be opened up for your questions following the conclusion of the management's prepared remarks. [Operator Instructions] I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. 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 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 responsive for and does not edit or 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 will now turn the call over to Brian Doubles.

Thanks, Kathryn. And good morning, everyone. In the second quarter, Synchrony delivered strong financial results, including net earnings of $569 million or $1.32 per diluted share, a return on average assets of 2.1% and a return on tangible common equity of 21.7%. Synchrony continues to demonstrate strong growth and financial performance as consumer behavior reverts to pre-pandemic norms and as our products and value propositions resonate strongly across our diversified set of platforms and partners. During the second quarter, we opened 5.9 million new accounts and grew average active accounts by 7% on a core basis. Once again, we set a new record as our $47 billion of purchase volume reached our highest level ever for second quarter. These strong sales continue to demonstrate the value of our diversified products and platforms. Health and wellness purchase volume grew 17% compared to last year, reflecting broad based-growth in active accounts, along with higher spend per active account. The 8% growth in digital purchase volume was driven by higher average active accounts and reflected continued momentum in several of our new programs. In diversified and value, purchased volume increased 7%, reflecting higher out-of-partner spend, strong retailer performance and the continued impact of newer value propositions driving penetration growth. Lifestyle purchase volume increased 10%, reflecting growth in average transaction values, and outdoor and luxury. And in home and auto, purchase volume was largely unchanged versus year as the benefit of higher average transaction values and growth in commercial products was largely offset by lower retail traffic and a reduction in gas prices. Dual and co-branded cards accounted for 41% of total purchase volume in the quarter and increased 14% on a core basis with several of our newer value propositions continuing to drive elevated growth. Our view into the consumer informed by the billions of real time transactional data that we regularly monitor shows continued normalization in consumer behavior toward pre-pandemic levels which has progressed in line with our expectations. Average transaction frequency continued to grow in the quarter, while average transaction values declined modestly. This decline, however, was partly attributable to lower gas prices. A deeper dive into our out-of-partner spend shows continued stability in key discretionary categories such as restaurants and entertainment, as well as in non-discretionary categories like grocery and discount stores. The reduction in average values was noted even among our highest credit quality borrowers which was also accompanied by some modest slowing in transaction frequency. Following the trend from previous quarters, our younger borrowers, as well as those in lower credit grades, continue to reduce the pace of spend. This quarter, given the seasonal impact of tax refunds, we saw a small sequential increase in our payment rates, largely driven by higher credit quality segments. Year-over-year, however, payment rates continued to decline across age and credit bands. Meanwhile, the external deposit data we track shows that the average consumer savings balances declined approximately 2% from the first quarter, but remain approximately 7% above 2020’s average level. So taken together, the payment spend and savings trends we're watching suggest that consumers continue to be well-supported by the constructive labor market and relatively healthy balance sheets as they gradually revert to their pre-pandemic norms. And as we continue to closely monitor the health of our consumers, we are also advancing the key strategic priorities of our business to position Synchrony for long-term success. One of our key priorities is the continued expansion of our multi-product strategy across partners, distribution channels and markets, allowing us to meet our customers’ how and where they want to be met and with a variety of financing solutions that address their specific financing needs in each interaction. We recognize that our customers' needs change over time. And Synchrony can and should be their financing partner of choice throughout life stages. Whether applying in person, online or through an app, we leverage our data and advanced analytics for our digital ecosystem to deliver fast, seamless offers designed to responsibly support each customer's particular purchase. For customers who appreciate the simplicity of an installment loan with flexible terms and payment schedules, Synchrony’s buy now pay later solutions have become popular options and are successfully attracting new accounts and driving deeper engagement. In fact, partners who have launched these products has seen a 29% lift in new accounts with over 95% of the sales coming from new customers. These solutions conveniently integrated into our broader partner relationships and product offerings and matched with our deep insights into the consumer, clearly expand our reach beyond our traditional set of customers and offer our partners another effective tool for engaging with their most loyal shoppers. Most recently, we announced that our partner, At Home, selected Synchrony is its exclusive buy now pay later provider, integrating this installment product with its existing suite of payment options. Customers can select Synchrony Pay Later at checkout, online and in store. And thanks to our integrated data and leading underwriting capabilities, most can be prequalified without impacting their credit score. At Home joins over 700 of our partners, providers and merchants that now utilize Synchrony's installment suite in the form of our pay later, Allegro and secured installment loans. We are excited to further roll out these offerings across more programs and through our proprietary distribution channels over the coming months. As Synchrony continues to broaden our product suite and empower these offerings with our dynamic decision and capabilities, we are better able to acquire and deepen relationships with our customers. We see these new installment products leading to cross-selling opportunities and product upgrades across the business and helping partners build lifelong customers. In campaigns across various portfolios, we have seen that 20% of private label cardholders are eligible for an upgrade to a dual card, which brings higher utility and better value propositions. And our customers respond to these upgrades, with nearly double the purchase volume and 1.6 times the lifetime value to Synchrony. For our partners, these deeper relationships translate into more loyal, better engaged shoppers. And so ultimately, the successful execution of our multi-product strategy means better experiences for everyone, reinforcing a dependable and resilient model for all of our stakeholders. As we head into the second half of 2023, Synchrony is well positioned to capitalize on these and other new opportunities while continuing to consistently deliver for our customers, our partners and our shareholders. And with that, I'll turn the call over to Brian.

Thanks, Brian, and good morning, everyone. Synchrony's second quarter results demonstrate the power of our differentiated model, our broad reach across industries and verticals and the compelling value propositions offered on our products were key drivers of our resilient purchase volume. These core Synchrony strengths, combined with our disciplined approach to underwriting, our diverse funding model and our RSA arrangements continue to provide effective offsets to changes in the macroeconomic environment. On a core basis, ending receivables grew 15% versus last year. This was driven by a combination of approximately 130 basis points decrease in payment rate and a 6% growth in core purchase volume. Our second quarter pay rate of 16.8% remains approximately 150 basis points higher than our five-year pre-pandemic historical average. Net interest income increased 8% to $4.1 billion, reflecting 19% growth in interest and fees from higher loan receivables and stronger loan receivable yields, partially offset by the impact of divestitures in the prior year period. On a core basis, interest and fees grew 25%, driven by loan receivables growth, higher benchmark rates and a lower payment rate credit continues to normalize towards pre-pandemic levels. Our net interest margin of 14.94% declined 66 basis points as higher funding costs more than offset the benefit of strong loan yields. More specifically, loan receivable yields grew 145 basis points and contributed 124 basis points to net interest margin. Higher liquidity portfolio yield contributed an additional 53 basis points to net interest margin. Offsetting these improvements was higher interest-bearing liability cost, which increased 263 basis points to 4.04% and reduced net interest margin by 215 basis points. Finally, our mix of interest earning assets reduced net interest margin by approximately 28 basis points as continued deposit inflows allowed us to build liquidity and pre-fund anticipated receivables growth in the second half of this year. RSAs of $887 million in the second quarter were 3.85% of average loan receivables. The $240 million decline from the prior year reflected higher net charge-offs and the impact of portfolios sold in the prior year, partially offset by higher net interest income. The RSA continues to provide critical alignment with our partners, and stability in Synchrony's risk adjusted returns as demonstrated through this period of credit normalization and higher funding costs. Provision for credit losses increased to $1.4 billion, reflecting higher net charge-offs and a $287 million reserve build which was largely driven by growth in loan receivables. The decline in other income was driven by $120 million gain on portfolio sales recorded in the prior year period. Other expenses increased 8% to $1.2 billion, primarily driven by growth related items as well as operational losses and technology investments. Our efficiency ratio for the second quarter improved by approximately 220 basis points compared to last year to 35.5%. In total, Synchrony generated second quarter net earnings of $569 million or $1.32 per diluted share, a return on average assets of 2.1% and return on tangible common equity of 21.7%. Next, I'll cover our key credit trends on Slide 8. As payment behavior continues to revert towards pre-pandemic historical averages, our delinquency in net charge-off rates continue to normalize towards pre-pandemic performance. Our 30-plus delinquency rate was 3.84% compared to 2.74% last year, which is approximately 60 basis points lower than the second quarter of 2019. Our 90-plus delinquency rate was 1.77% versus 1.22% in the prior year, which is approximately 40 basis points lower than the second quarter of 2019. Our net charge-off rate was 4.75% versus 2.73% last year, which is approximately 100 basis points below the midpoint of our underwriting target of 5.5% to 6% where Synchrony's risk adjusted returns are more fully optimized. While credit continues to normalize in line with our expectations, we're actively monitoring our portfolio and have undertaken some proactive targeted actions to position our portfolio into 2024. These actions have been focused on certain types of inactive accounts, as well as segments of the portfolio where we are seeing significant score migration into non-prime and are unlikely to have a material impact on purchase volume. Focusing on reserves. Our allowance for credit losses as a percent of loan receivables was 10.34%, down 10 basis points from the 10.44% in the first quarter. The reserve build of $287 million in the quarter was largely driven by receivables growth. Our provision did not include any material changes in our qualitative reserves or significant changes in our macroeconomic assumptions. Turning to Slide 10. Funding, capital and liquidity continue to be highlights of Synchrony's performance. During the second quarter, our consumer bank offerings continue to resonate with customers. We experienced positive net flows each week, culminating in direct deposit growth of $2.3 billion in the first quarter, which was partially offset by lower broker deposits. Deposits at quarter-end represented 84% of our total funding. The remainder of our funding stack is comprised of securitized and unsecured debt at 6% and 10% of our funding respectively. We remain focused on being active issuers in both markets as conditions allow. Total liquidity, including undrawn credit facilities, was $19.4 billion, up $521 million from last year. As a percent of total assets, liquidity represented 17.9%, down 198 basis points from last year as we manage our liquidity portfolio and fund strong loan receivables growth. Focusing on our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony made its annual transitional adjustment of approximately 60 basis points in January and will continue to make annual adjustments of approximately 60 basis points each year until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Under the CECL transition rules, we ended the second quarter with a CET1 ratio of 12.3%, 290 basis points lower than last year's levels of 15.2%. The Tier 1 capital ratio was 13.1% under the CECL transition rules compared to 16.1% last year. The total capital ratio decreased 220 basis points to 15.2% and the Tier 1 capital plus reserves ratio on a fully phased-in basis decreased to 22.4% compared to 25% last year. Continuing our commitment to robust capital returns, Synchrony announced approval of an incremental $1 billion share repurchase authorization for June of 2024, in addition to the $300 million remaining on the prior authorization. We also announced our intention to increase the company's common stock dividend by 9% to $0.25 per share from $0.23 per share beginning in the third quarter. During the second quarter, we returned $399 million to shareholders, reflecting $300 million of share repurchases and $99 in common stock dividends. At the end of the quarter, we had $1 billion remaining in our share repurchase authorization. Synchrony will continue to execute on our capital plan as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. We've also continued to seek opportunities to complete our fully developed capital structure through the issuance of additional preferred stock. We have a strong history of capital generation and management, which is empowered by our resilient business model. Given the uncertainties in both the macroeconomic environment and the financial services industry, Synchrony remains focused on actively managing the assets we originate and prudently managing the capital we generate to optimize our long-term value creation and resiliency. Finally, please refer to Slide 12 of our presentation for more detail on our full year 2023 outlook. We expect our ending loan receivables to grow by 10% or more for 2023, reflecting the combined impact of the payment rate moderation and purchase volume growth. We continue to expect payment rates to normalize but remain above pre-pandemic levels through the remainder of this year. We now expect our net interest margin within a range of 15% to 15.15% for the full year. Net interest margin in the first half was influenced by higher liquidity due to stronger-than-anticipated deposit flows and receivables gross prefunding. Deposit betas also trended better than expected in the first half, but we have since seen growing competition for deposits. Our revised full year outlook incorporates these first half trends, as well as the anticipated impacts of further interest rate increases by the Federal Reserve and the possibility of higher deposit betas in the second half of the year. As a reminder, we expect our net interest margin to fluctuate quarter to quarter, driven by higher liquidity as we pre-planned growth resulting in variation in the mix of interest earning assets and interest and fee growth partially offset by rising reversals as credit continues to normalize. Turning to our credit outlook. We now expect delinquencies to reach pre-pandemic levels during the second half of 2023 versus our previous expectation of an approaching peak in mid-year. Net charge offs should follow a similar but lacked progression through the year. Generally speaking, lost dollars will not reach a fully normalized level until approximately six months following the peak in delinquencies. Given the slightly more moderate pace of delinquency normalization, we now expect net charge offs to trend toward the lower end of our prior outlook between 4.75% and 4.90%. We continue to anticipate losses reaching fully normalized levels on an annual basis in 2024. We expect the RSA to trend below our prior outlook and be between 3.95% and 4.10% of average loan receivables for the full year. This improved range reflects the impact of continued credit normalization, lower net interest margin and the mix of our loan receivables growth. And given our higher-than-anticipated growth in the first half, we now anticipate quarterly operating expenses to trend at $1.15 billion for 2023. We remain committed to delivering operating leverage for the full year. Taken together, Synchrony's differentiated model continues to power resilient financial results to a range of environments and we look forward to delivering on our commitments as we close out the second half of 2023. I'll now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. Synchrony's differentiated model has positioned the company well through evolving environments. We consistently power best-in-class experiences for our customers and strong outcomes for our partners even as their needs change. Our business generates strong capital. We are adept at putting that capital to work in an effective prudent manner to deliver sustainable, longer-term growth at attractive risk adjusted returns. As I look ahead to the remainder of this year, I am confident in our ability to execute on our strategic priorities and deliver value to our many stakeholders. With that, I'll turn the call back to Kathryn to open the Q&A.

That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session.

[Operator Instructions] We'll take our first question from Arren Cyganovich with Citi.

With your payment rates still normalizing and purchase volumes relatively stable, what's going to drive the, somewhat a bit of a deceleration in your growth from 15% where it's been recently to kind of closer to 10% plus that you've talked about for year-end?

Yeah, good morning, Arren, and thanks for the question. I think it's a little bit less about our current period. You're right. We do anticipate the payment rate continuing to moderate as we move into back end, but be elevated versus the pre-pandemic period. And we do continue to expect to see on a dollar basis, strong purchase volume growth. I think when you look back at the acceleration last year, coming out of Omicron and the pandemic period, there was an acceleration beginning in the second quarter through the end of the year, which provides more difficult comps. I think when you look at it on a V basis and the asset build as payer rate really came off its high last year, it's just a more difficult comp. I think when you think about the volume we're going to put up here in the second quarter all the way through the end of the year, I think it's going to be strong when you look at that performance across all of our sales platforms.

Thanks. And then in the digital and health and wellness platforms, both of those are showing continued, really strong growth there. Can you provide a little color about within those segments what's driving the strong growth there?

Yeah, sure. Look, I would say we're very pleased with the growth that we're seeing across all of our platforms. You look at receivables, up 15% for the company, health and wellness leading the charge at 22%, digital up 18% but even home and auto up 10% is a really good result and really pacing ahead of our expectations so far this year. We've talked about in the past, health and wellness is one of the platforms where we've made incremental investments in marketing and products. And so I think you're seeing those investments pay off. Digital, you've obviously got the benefit of the new programs that sit inside of digital, all of which are performing really well. So we would continue to expect to over-index in those two platforms.

Okay. Thanks, Arren.

Thanks, Arren.

Thank you. We'll take our next question from Don Fandetti with Wells Fargo.

Hi, good morning. I was wondering if you could dig in a little bit more on what you're seeing in terms of consumer behavior. I know in the past you've talked about customer call-ins and what you're hearing in terms of slower wage or working less hours. Has there been any change there?

Yeah, I'll start on this one. I think, look, the consumer is still strong. I think there's obviously still spending, excess savings are coming down a bit, but they are still trending above 2020 levels. So when you look at having a pretty strong labor market, the one surprise I'd say so far this year is how resilient the consumer has been. You certainly see that on the growth side. We just reported our second quarter was a record in terms of purchase volume. Credit is very much in line with our expectations, maybe a touch better. We're still operating below 2019 levels. We're below our long-term target of 5.5% to 6%. So everything we're seeing on the consumer is still pretty positive. With that said, we're still operating cautiously. We're monitoring this every hour, every day, we're listening to the calls. I wouldn't say we're hearing anything abnormal. It really is kind of in line with our expectations, and as expected, credit will continue to normalize through the balance of this year and into next.

Got it. And on the allowance rate, are you still thinking that it's sort of steady to maybe improving a bit?

Thanks for that, Don. The first half of the year, I think when we look at the reserve provisioning, there have really been growth from provisions, I think 2.85% and 2.86% respectively for the first quarter and the second quarter. Again, we continue to expect that migration back down towards CECL day one. I think the delinquency formation that we have seen has been in line with our expectations. So again, that will trend out over time. I think the one shift why we haven't changed our macroeconomic assumptions or really things around student loans, they've just been a little bit slower, which is why I think you see us today talking about getting back to that pre-pandemic levels of delinquency in mid second half of this year. So again, it will migrate -- continue to migrate down as long as we believe the macro backdrop comes in line with our expectations.

Thank you.

Thank you, Don.

Thank you. We'll take our next question from Mihir Bhatia with Bank of America.

Good morning. Thank you for taking my question. Maybe to start, I think the first question I have is just on the regulatory front. Specifically thinking around CFPB's late fee rules and also the inquiry into the deferred interest medical costs. Maybe just talk about your perspective on those issues, where things are shaking out and if there's any updates to share and how you're just preparing. [indiscernible]

Yes, sure. So let me start on late fees. We've been we've been working on this for over a year now when the initial kind of proposal came out. We're having very productive conversations with our partners around different offsets. I would tell you that they clearly understand that this is an issue that the entire industry has to deal with. It's likely going to result in new pricing models and pricing actions across all issuers. So we've had those discussions with our partners. I'd say no real surprises. They expected to see the things that we're proposing like higher APRs, different types of fees, penalty pricing. And we've also been having a good dialogue around underwriting. And I think they fully appreciate that without some of these pricing offsets that are fairly significant portion of the customers that we underwrite today might lose access to credit. And just to be clear, that's something that we don't want, that's something that they don't want. So our interests are very much aligned on that point. Look, at the end of the day, our goal is to protect the partners. We want to offset the impact here and continue to underwrite the customers that we do today. And then lastly, I'd just say, look, there's a lot still to be decided here. We expect to see a final rule sometime in the fourth quarter. It's likely to be litigated. That's I think the consensus at least what we're hearing. But we've had teams focused on this for a while. We're as prepared as we could be. And so we'll just continue to play through and give you updates as we learn more. And then what was your second question?

It was just on the medical, if there's anything to -- do you have any comments on the inquiry into the deferred interest of the medical comps that they've also been talking about?

Yeah, look, I'd say first, we're very proud of the CareCredit products that we offer. In our view, CareCredit is not a medical credit card. The vast majority of what we do there is elective health and wellness spend. So 70% of the business is actually dental and pet care. We worked very hard to ensure that the products are fair and transparent. Deferred interest is a product that's been around for decades. We believe our practices are actually industry leading. So one positive outcome would be just to level the playing field and bring other issuers kind of up to the standards and the things that we do every day. So again, very proud of the product. It's actually one of the products that we get the absolute best feedback on from customers.

And then, just if I could switch here to the credit side, right? Your guidance for delinquency rates, and I think you've talked about consumer being resilient, delinquencies taking a little while to get back to pre-pandemic levels, which obviously is a good thing. But your guidance talks about it approaching pre-pandemic levels here in the next, I guess six months. What happens after that? I mean, your charge-off comments for 2024 suggests you think delinquencies will stabilize at those pre-pandemic levels. So maybe just talk about what gives you confidence that that will happen versus going through those pre-pandemic levels and continuing to grind higher? Thank you.

Yeah. Thanks, Mihir. So I think the way we think about it and we watch vintage performance, we watch how the world’s kind of come into delinquency. I just want to -- I just want to focus where we are today, right. When you look at average delinquency in the pre-pandemic period and compare it to -- apply that to the balances today, our 30-plus and 90-plus are 87% and 82% of historical levels and that's just been moving up slightly as we step through each of the quarters. I think translating that, that's about 60 basis points lower than 2019 for 30-plus, 40 basis points lower for 90-plus. So I think different than a lot of issuers, we are not at that pre-pandemic delinquency formation yet. Albeit, we are continuing to move closer to that in a very measured approach. And I think when you think about the loss rate, what's flowing to loss now we are at 82% of our, midpoint of our underwriting average. So we look at the formation today and say we feel good about where that is. When we look at the vintages performances, if I go back to ‘18 and ‘19, we're not seeing real significant deterioration in those vintages, they're through their peak loss periods. When we started looking at the pandemic level vintages and particularly in the ‘21 and ‘22 when a lot of issuers, I'd say, adjusted credit standards to kind of put it on, those vintages for us are performing in line with our 2018 and 2019 vintages. So we don't see performance in there or in the back book, if you call it that, that says we're going to be through our underwriting standards in target range for next year. I think we've also been for the first time this year, we did a little bit broader based actions and these were really around, I think de-risking the loss rate for next year and these are really around accounts that are either inactive or see significant score migration into non-prime. So not significant. It's unlikely to have a material impact on sales or credit. But just taking to what I'd say more appropriate prudent actions across the portfolio, in addition to the idiosyncratic options that we're doing. So we feel good with the actions we're taking. We feel good about PRISM and the decision trees that are in inside of PRISM in order to manage credit and adapt quickly to the environment and the vintage performances are in line with our expectations. So that sets us up to how we form. We'll obviously be back towards the end of the year and give updated guidance with regard to the full 2024 loss rate. Hopefully, that gives you some perspective of how we think about them here.

Great. Thank you.

Thank you.

Thank you. We'll take our next question from Ryan Nash with Goldman Sachs.

Hey, good morning guys.

Hey, Ryan.

So Brian, the second half net interest margin guide being in line with the first half, maybe just talk about what is driving your updated expectations. I think you mentioned betas could be higher. I'm assuming now you no longer have rate cuts as per the forward curve. Maybe just talk about what you're assuming for betas and how do you think about the puts and takes for the trajectory of the margin over an intermediate term if rates are going to stay higher for an extended period of time?

Yeah, thanks Ryan. So the betas we experienced in the first half of the year, if I make it broadly between savings and CDs, and the savings were mid-70s, were low 90s in CDs. And I think as we step forward into the second half, the one thing was a little bit more price increases from competitors. And I think that comes from a couple of different places. You have certain of the regional banks that are experiencing outflows relative to commercial deposits that's probably twofold, one, them running a little tighter on cash and, two, there's some -- I'd say risk mitigation strategies that some commercial firms are using. So they are becoming a little bit more competitive for deposits. You also see some of the big brick and mortar institutions who are trying to not have to raise their overall deposit rate but using an online product in order to raise rates. That dynamic really merged, I'd say late May into June. So as we think about that mid-70s, low-90s, in our back half assumptions we have it moving up, call, roughly 10 percentage points. So you'd see savings in the mid-80s and you see CDs around 100%. I think as you think forward about deposits, generally speaking, assuming that the market remains, what I'd say rational, we would expect it to be fairly stable. And then hopefully when you start to see rate decreases in the future that the betas will be in a similar type fashion and we can lower it. I think when we think about the back half broadly speaking about an interest margin, we should continue to see some tailwinds relative to the benchmark rates in the first half as they push through the floating portion of our portfolio in the back half. You continue to see revolve rate increases. Most certainly, if you expect the delinquency and losses to kind of come in line, your revolve rate should push up. There will be a little bit of offset there from the reversals as write-offs kind of rise. But again some tailwinds as we come through there. And then clearly some of the liquidity we both up in the first half will get deployed. The second half will also be impacted potentially how liquidity portfolio plays out in some of the wholesale funding that we're going to do in the second half both in the secured and unsecured market. So hopefully that gives you a flavor for how we think about the betas and then in the second half, Ryan.

Got it. And then, Brian, we're obviously waiting on a handful of potential regulatory changes in the coming months. Can you maybe just talk about what way, if any, you think this will impact the way that you think about managing both capital and liquidity on a go-forward basis? Thanks.

Yeah, Ryan. So again, Vice Chair Barr has indicated they will put out proposed rules around capital, which may have a comment period before a final rule is issued in -- then a implementation period a couple of years out to fully transition in. We've obviously been preparing and have run different scenarios relative to the different outcomes when you think about financial changes towards the risk weighted assets or the potential implications from an operating risk perspective. So I think we've been contemplating that relative to our capital plans, we haven't taken definitive actions. I think it's manageable for us. I think if the Fed decides to extend some of the long-term debt or TLAC requirements, from based on the rule that exists today, we feel like we're in a good position. We're in surplus position to know. So I think we feel good about what potentially can come, but obviously we'll look at the rules, we'll evaluate it and most certainly we'll adapt our business and try to be smarter with regard to changes to the risk weighted assets and how we optimize it. But we haven't taken actions to date, but we'll be closely monitoring and we'll certainly be addressing as we move forward.

Thanks for the color.

Thanks, Ryan.

Thanks, Ryan.

Thank you. We'll take our next question from Kevin Barker with Piper Sandler.

Thank you. We've seen payment rates remain abnormally high for an extended period of time relative to pre-pandemic levels. And obviously, loan growth is still fairly robust. I mean, do you expect or do you feel that there is a fundamental shift in consumer behavior right now relative to what you were experiencing in 2018, 2019, just given that these payment rates remain very high, and could remain elevated for an extended period of time. Just give us an idea of, if there was a shift in consumer behavior and what you're seeing today?

Yeah. Thanks, Kevin, for the question. So when we look inside payment rate, for a second, there's a couple of different dynamics. Let me start with, we don't see something today that says fundamentally the business, paying rates for us or others will be fundamentally different as we look out you'll call it a year for now or so. When I look underneath and break into segments, what you've seen is a normalization back to pre-pandemic levels for the non-prime and lower credit grades. And what's really kind of boosting the payment rate has been prime customers and super prime customers who have built up excess liquidity during the last couple of years and they continue to pay at a higher rate than they did pre-pandemic. So we expect those people ultimately to normalize back to, I'd say, the pre-pandemic period. We're going to have to wait and see whether that happens. The other dynamic that we have seen is, it has been arising in auto pay, which is a good thing for us. So we've had about 4 percentage point shift up to about 20% of the accounts paying on auto pay. And there, that does help entry rate, does help delinquency. It does change a little bit of the dynamics on the payment rate, but that's not something that we think is going to have a material shift. So again, we think this is continuing to be part of the [case sheet] (ph) recovery and part of the exit out of the pandemic period for now until we get more clarity with regard to when the excess savings or money that's been accumulated during the pandemic totally burns off of those higher credits.

Okay. And then maybe just a follow-up on the growth in 10% plus, right, it implies maybe a slowdown from where we are. Do you anticipate an impact on spending and your sales volume due to the student loan restart payments in October? I know you've already made quite a bit of comments on the credit side, but just give us an idea of your expected impact on the spending side.

Yeah, Kevin. So, again, we understand the population of people who have student loans. We understand the magnitude relative to the amount of the ones that they have outstanding of what is currently in forbearance and non-forbearance. I think when we look at that population and the mix of that population, first of all, they're very close to the FICO range we have, I think they're about 10 points different on event discourse, excuse me, difference. They're within 10 basis points of delinquency. So they look like the regular book, 46% of those people we have underwritten pre-pandemic that we're making payments. So we feel good about their ability to manage the financial situation. So I wouldn't anticipate an impact on that when we think about purchase volume as we move into the back half of the year and into early next year. Again, I want to be clear, I tried to mention earlier in the call, Kevin, I don't think we see purchase on a dollar basis really decelerating, it just goes back into, we have a really tough comp last year for everyone as you saw this acceleration coming out of the backside of the pandemic, which was pent-up spending in demand both for goods and services. So we feel good about the volume. Brian highlighted health and wellness and digital, which are really pulling the engine forward here and we expect that to continue.

Thank you, Brian.

Thanks, Kevin.

Thank you. Our next question will come from Rick Shane with JPMorgan.

Thanks guys for taking my questions. Kevin really covered my primary topic, but I'd love to discuss a little bit in terms of funding. You've alluded to the fact that in the second half of the year, you're going to look to the secured and unsecured markets. I'm just curious realizing that you guys have not faced the issues that some financial institutions have had related to deposits, whether the events of this year have caused you to at least take down your sort of target deposit ratio going forward?

Thanks, Rick. So, no, we have not altered our intended targets for the funding stack. We feel very confident and very proud of our deposit franchise which I believe provides 84% of our funding. As we look at the first half performance of this year, we are positive on net flows, every week, including the weeks where there was the bank turmoil. So we feel good about our ability to attract deposits and those deposits, when you look at the vintages, we've grown the vintages in the first half of the year back. So customers are sticking with us. We continue to have high retention rate with regard to CD. So the stickiness of having essentially 99% retail deposits are really helping us as we move forward. Our willingness and desire to tap the wholesale markets is a very important part of our funding sources. And I think to some degree, when you go longer periods without being into those two markets, it becomes more costly for people to willing to buy in and underwrite your name. So having a presence in those markets and continuing to be active over time, particularly when we have debt maturities is going to be important. We also have some maturities in the back half of the year relative to CDs and things like that. So to try to manage the betas, accessing the wholesale market in certain increments makes a lot of intuitive sense for us. So again, we feel good about the deposit franchise and that would be again 80-plus-percent of our funding stack as we continue to move forward is our goal.

Great. Hey, Brian, that's very helpful. As you think about the wholesale market, can you talk a little bit in this rate environment and supply and demand, is there -- what is the potential arbitrage in terms of funding versus the deposit market?

Yeah. Rick, for us, it's really about access. I mean obviously, credit spreads are a little bit wider than we would like given some of the uncertainty and then, well, certainly given some people's -- where benchmark rates may go even after the Fed meeting later this month. So we less look at it as an arbitrage, more as how do I create a steady foundation and have the proper mix going forward. And we think to some degree, we continue to drive what we think is very good performance in the business, show the credit performance here and show our ability to manage the regulatory environment that the credit spreads will tighten in over time. But we don't look at it as arbitrage. We more look at as how do I get a balanced funding need in order to really protect the balance sheet of the company and provide the appropriate liquidity under all situations.

Perfect. That makes sense. Thank you very much.

Thanks, Rick.

Thank you. We'll take our next question from Sanjay Sakhrani with KBW.

Thanks. Good morning. There's some news out there that there's at least one large portfolio out there for RFP, big technology company and obviously, Walmart still remains in flux. I'm curious, Brian Doubles, if you could give us a sense of sort of where Synchrony might stand for any larger portfolios or any other deals that might be out there?

Yeah, sure, Sanjay. Look, I would say, with a couple exceptions, most of what's in our BD pipeline right now are smaller start-up, kind of de novo opportunities, which we're really excited about, but obviously take more time to grow. I think on larger opportunities, obviously, we're very active there as well. But I would also say that's where we’re extremely disciplined as well. In terms of risk return, making sure we got the right balance, the right alignment with partners, I think that's just absolutely critical. So I think you're always going to see us steer a little bit more on the small to midsize deals because we just hold the higher deals to -- or the bigger deals to a higher level of scrutiny in terms of risk and return in alignment with the partner.

I appreciate that. And then I could just follow-up on some of the late fee regulation commentary. I guess, one, what I seem to be hearing is like there might not be a whole lot of move on the safe harbor amount that was proposed. And I'm just curious like as we think about how the adjustments might be made, it's a pretty significant decline in that rate. I guess what is your operating assumption as you move forward as you talk partners? I mean, is it as low as the safe harbor that's been proposed?

Yeah. So look, clearly, think that this proposal has a lot of unintended consequences to consumers, even the small businesses who rely on credit. So we don't agree with $8. We think that $8 is not a deterrent, it's not an incentive to pay on time. It will restrict credit to some customers. It will make credit more expensive to many customers. And so we're very active with the rest of the industry and the comment letter process. And we would certainly welcome a higher amount than the $8. But with that said, we have to prepare for the $8 to go into effect as written right now. And so that's kind of our base operating assumption. We do think that if the cost calculation were designed differently, we could certainly substantiate a cost higher than $8. And so that's another angle that we're pursuing here. But we need to have revenue offsets that we're ready to put in place to offset that because, again, our goal is to protect our partners here and continue to underwrite their customers just like we do today. And so those are the discussions that are ongoing in those. That's really where we've been focused for the last, kind of, 12 months.

Okay, great. Well, thank you so much for the color.

Yeah. thanks, Sanjay.

Thank you. We'll take our next question from John Pancari with Evercore ISI.

Good morning. Regarding the credit actions that you've mentioned you're taking into 2024 given some migration on the non-prime side, can you give us more color on what portfolios you're seeing this migration and what actions you're taking, if you can give us a little more detail on that front? Thanks.

Yeah. Thanks, John. Obviously, we can't get into specifics with regard to portfolios. But I think broader based, if you had a credit that was in the call it -- [$700 million] (ph) range and you saw a migration of 50 basis points or 60 basis points into non-prime, we would look at that account. Before we used to wait and kind of look at it. Now, we look at it in combination of other factors and decide immediately whether or not we want to reduce the exposure down to the balance. So credit line decrease or two, if it has other attributes that we may be more uncomfortable with, we do credit line closure and account closure on that account. And we do the same thing effectively in our inactive portfolio. So these are, what I'd say, in this way, it's not -- it's unlikely to have a material effect next year is because these are significant movements into non-prime, just because they're not performing the way they would and they had a very significant movement at the time. So again, not broad based. We only draw the fact, to be honest with you, John, because we said all our actions have been idiosyncratic. These are what I'd say minor refinements that -- but again, are more broader based if we see it anywhere in the portfolio, we're going to take action again. It's really more to de-risk next year a little bit, but not something that's likely to have material effect.

Got it, Brian. All right. Thank you. And then separately on the expense front, can you give us a little bit more color on your updated expense outlook. I know you bumped that up a bit and mentioned growth in operating losses. So maybe can you help give us more color there and maybe break it out and kind of set out what drove the revision?

Sure. So when we look at growth, I mean obviously the growth for us, we raised the guide for the beginning part of the year. We are seeing opportunities to invest more in the portfolio. Brian highlighted particularly in the health and wellness and CareCredit, the ability for us to lean into that segment a little bit more, we saw opportunities really to kind of grow with our Allegro product or others that made sense for us to grow the portfolio. So we are seeing growth. We've added some incremental resources around that, which we think drive it -- overall purchase volume has been a little bit stronger in the first half. Again, we expect to have some variable cost increases as you think about more active accounts in the back half of the year as we service those accounts. So from a growth standpoint, those are some of the attributes, and again, ones of which we're going to be, if we find a good risk adjusted return we want to lean into in this environment, from a growth standpoint. The operational losses, we -- the whole industry really benefited the last couple of years has a lot of fraud migrated to some of the buy now pay laters and other people who may not have had as robust fraud strategies in place. So we saw abnormally low and again this is industry wide, fraud relative to purchase volume. That is migrating back to I say is a more historical level. This quarter, we did have one particular incident from a partner who had an exposure which drove the cost up here a little bit, but there was an RSA offset to it. So again, we just see more normal migration back to what would be in the pre-pandemic period. It's not something that we look at and say this is going to become a challenge for the industry or for us individually, just more -- the migration back to more normalized levels.

I think adding to that is we're clearly getting operating leverage and you saw a pretty good year-over-year improvement in the efficiency ratio. So that's a key measure for us that obviously, we're very focused on.

Got it. Thank you.

Thanks.

Thanks, John.

Thank you. We'll take our next question from Betsy Graseck with Morgan Stanley.

Hi, good morning. This is Jeff Allison on for Betsy. I was just wondering if you could talk a little bit about the RSA sustainability at these lower run rate levels relative to the longer-term guide you have of the 4% to 4.5%. And what maybe is taking that lower in the 2023 guide with the NCO is going lower as well. Does that reflect something where maybe your retail partners are a little bit more willing to share in the higher OpEx you're seeing come through?

Yes. Thanks, Jeff. The RSA does incorporate expense in. So expenses would flow through to our partners as well as truly impacting now is again some of the pressure you saw in the net interest margin from interest-bearing liabilities cost. They flow through their partner as well. So I think you combine that with credit normalization and you really get the effect that we have. Again, the 4% to 4.25% where we started the year, now at 3.90% to 4.15% is at the lower end of a long-term guide. I think again, long-term guide has a slightly higher net charge off rate by higher margin where you share. But again, we look at the RSA and when you look at the performance when obviously we had much lower net charge offs and the profitability is higher, the RSA was higher. And now as you see a little bit of this interest-bearing liability cost increase, net charge off increase, slightly higher expenses, the RSA is performing like it should and is designed to where it's a little bit lower than expectation. Again, we updated the guidance to be 3.90% to 4.15% and we believe that that is for this year a good estimate of where the performance is going to be and we'll be back. But again, we feel good about a long-term guide and there hasn't been any fundamental shifts in the sharing of economics with our partners.

And then just in terms of your new account acquisition profile, I know you've talked in prior quarters about the relative tightening you guys have been doing. I was just wondering if we could get an update on any incremental actions you've taken over the last three months? And I know you already gave an update on the student loan repayment side of things. Just wondering if that factors into how you're underwriting people today and maybe what you're hearing from your folks who are calling in on that, that repayment starting?

Yeah, Jeff, we haven't taken any broad-based actions with regard to account acquisition. We really look there at performance against risk adjusted margin and probability to default on a partner channel basis. So we've been making more assignments there but not broad-based action. So we feel good about it. You got to remember us as an issuer, we get selected for credit versus others who do mailings and choose people to apply for credit. So we have to be hopefully smarter at the time of that decision in which we can gather more data, use data from our partners, usually data attributes bringing it to make that smarter decision. So the other important point I'd say is during the pandemic period, we really don't open and close the acquisition lever. We make small adjustments as we see fit, we're relative to line assignments, but we try to be consistent with our partners and really managing exposures through line. So again, no significant changes on account acquisition. I think you can see that in the consistency of our new account origination both last year and through the first half of this year.

Great. Thanks for taking my question.

Thanks Jeff.

Thank you. Our next question comes from John Hecht with Jefferies.

Good morning, guys. And thanks for…

Hey, John.

…taking my questions. How are you guys? First one is Brian Doubles. I think you gave a little bit more color on the usage of BNPL and I guess the increased usage of the BNPL product in your portfolio. It sounded like you're emphasizing it in a sense as maybe a customer acquisition tool for some of your counterparties. I'm just wondering with respect to that, is it -- I guess how does it -- is that at the point now where it affects volumes overall and fee structures and that margins overall? And if so, how does the impact of the BNPL product impact those metrics?

Yeah. Sure, John. So I think just to take a step back, I think just to reiterate what we think is this long-term strategy here is the multi-product and there's real benefits there that our partners are fully realizing now in terms of how these products can complement each other, right? They don't cannibalize, they actually complement each other. And they provide choice to both our partner and their customers. And I think that's really important. So in some partners, this may be customer acquisition tool, right, where we bring them in on a buy now pay later product and then we upgrade them over time and do our revolving product and a dual card. And when we look at the lifetime value of that customer, we can make that work, we can make the economics work. So I think that's kind of the power of this model is that you can make this more attractive to both us and our partners from an economic standpoint. One of the things that we've talked about is we've seen a little bit of a shift in that through the pandemic, you saw partners engaging in buy now pay later, if they need to drive sales, they want to bring in new traffic new customers. And then they took a little bit of a step back in a higher interest rate environment. So a lot of these products are actually really expensive and maybe there's a different model here. And that's really the model that we're employing, which is for some customers and some purchases, an installment loan makes sense. For some purchases, a revolving product makes more sense. And so it really is partner by partner in terms of the strategy that we're employing. But the good news is that we can customize that completely for the partner given the economic sharing and the arrangements that we have with them. So we can really make this work in a number of different ways and customize it in a way that is economically attractive for the partner, but also helps us balance the risk and the return.

Okay. That's very helpful color. Thanks. And then, Brian Wenzel, I think you touched on this, I apologize for any redundancy, but maybe quick color on the seasonality of Q3 and Q4 NIM, anything to consider there?

Yeah. Thanks, John, for the question. I think as you think about net interest margin, again, some of the liquidity deployed as we begin to build assets going into the back half of the year plus some of the tailwinds relative to some of the benchmark rate increases, you should see that net interest margin tick up a little bit in the third quarter and then kind of flatten out in the fourth. So -- but again, I think short-term, I think you see a little bit of benefit from where we exit out of 2Q.

That's perfect. Thanks, guys.

Thanks, John.

Thank you. We have time for one more question from Dominick Gabriele at Oppenheimer.

Great. Thanks so much for taking my question. I was just curious about the debt collection fees. They seem to be going up a little bit. And I was wondering if there's anything we should read into within that line, not just for Synchrony, but for the general industry when we think about net charge-offs moving forward? And I still have a follow-up. Thanks.

Yeah. So when I think about that product, I wouldn't -- well first of all, I'm not sure I can comment for the industry. I think when we look at it, what this represents, we primarily originate this through digital channels. And I see as we push more individuals, how do you see a little bit more sign up as people have the ability to really understand the product, its terms and conditions and sign up for it, number one. And, two, I think as you see average balances increasing, you then get a rate impact on the higher balance that's being protected. So again, a product that we feel good about the benefits that we offer to our consumers. And we do it in a way that's transparent to the digital channels, which obviously we pushed into in the last couple of years a little bit more heavily.

Great. Thank you. And if we just talk about expenses a little bit, the incremental expenses between the guidance numbers, could you just talk about where you're kind of putting on the gas pedal? Is it marketing? Is it at customer acquisition or is it tech advancement? How do we think about the incremental spend that drove the increase in, and run rate of expenses? Thank you so much.

Yeah, thanks for the question. So I think when you think about where we're putting on expenses, first, is going to be in some of the employee costs as we look to people to drive strategic initiatives inside our health and wellness platform and inside really our marketplace and some of the place where we're engaging with the consumer and products. So some of that requires headcount in order to drive some of the technology that’s in there. There clearly is a technology component that leans in there as we have contractors who are building capabilities that really enhance our customers' experience. And then you are seeing a little bit on the marketing wise, we continue to into some of the direct-to-consumer businesses inside of health and wellness as we try to promote the product to really drive the experience and manage what is a very difficult healthcare environment for folks who have more costs or shifting towards them. So it's really across those three levers, employee costs as well as technology and marketing. And you will see that again, that normalization of operational losses as we move forward.

And we've got a very disciplined approach on that. We make sure that we're getting the right return on those investments. You're seeing that come through in the top line growth. You're seeing the net effect of that operating leverage and the efficiency ratios I mentioned earlier.

Perfect. Thank you.

Thank you.

Thank you.