Greg Ketron - Director of Investor Relations Margaret Keane - President, Chief Executive Officer & Director Brian Doubles - Executive Vice President, Chief Financial Officer and Treasurer.

Moshe Orenbuch - Credit Suisse Sanjay Sakhrani - KBW Bill Carcache - Nomura Betsy Graseck - Morgan Stanley Ryan Nash - Goldman Sachs Eric Wasserstrom - Guggenheim Securities Mark DeVries - Barclays David Scharf - JMP Securities James Friedman - Susquehanna Arren Cyganovich - D. A. Davidson John Hecht - Jefferies.

Welcome to the Synchrony Financial Third Quarter 2016 Earnings Conference Call. My name is Vanessa, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode, later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr.

Greg Ketron, Director of Investor Relations. Mr. Ketron, you may begin..

Thanks, operator. Good morning, everyone, and welcome to our quarterly earnings conference call. Thanks for joining us. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call.

The press release, detailed financial schedules and presentation are available on our website synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I want to remind you that our comments today will include forward-looking statements.

These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance.

You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for, and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

Margaret Keane, President and Chief Executive Officer; and Brian Doubles, Executive Vice President and Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions. Now, it's my pleasure to turn the call over to Margaret..

Thanks, Greg. Good morning everyone, and thanks for joining us. During the call today, I will provide a review of the quarter, and then Brian will give details on our financial results. I'll begin on Slide 3, third quarter net earnings totaled 604 million or $0.73 per diluted share.

We delivered strong growth in each of our sales platforms, driving double digit growth in loan receivables and net interest income this quarter. We also grew purchase volume 8% over the third quarter of last year. Looking specifically at our online and mobile purchase volume, sales grew 26%.

Our online and mobile sales growth has continued far outpace U.S. growth trends, which had been in the 15%. We remain focused on developing solutions to support this important sales channel.

Looking at asset quality metrics, 30-plus days delinquencies were 4.26%, compared to 4.02% last year and our net charge off rate was 4.38%, compared to 4.02% in the third quarter of last year. We continued our discipline on expenses which increased only 2% over the last year.

The strong revenue growth and control over expenses helped generate positive operating leverage and drove our efficiency ratio down to 30.6% from 34.2% last year. Our growth was supported by another quarter of strong deposit generation, which increased 9 billion or 23% to 50 billion this quarter. Deposits now comprise 71% of our funding sources.

The number has been trending above our original target of 60% to 70%, but we plan to continue to drive deposit growth by focusing on competitive rates and outstanding customer service, as well as the build out of our product suite.

Our balance sheet remained strong with a common equity Tier 1 ratio of 18.2% and liquid assets totaling 16 billion or 19% of total assets at quarter end. We were pleased to initiate our capital plan in the third quarter. This quarter we paid a dividend of $0.13 per share and repurchased shares totaling 238 million.

We are also deploying capital through our strong balance sheet growth. Organic growth is more significant driver of our performance and continues to be our biggest opportunity. This quarter we renewed several key partnerships, including TJX companies, our strong performing program and great partnership.

Card holders can continue to access loyalty rewards, mobile account management and other exclusive benefits with cards which can be used at T.J Maxx, Marshalls, HomeGoods and Sierra Trading Post stores as well as through online.

We also extended our 17 year partnership with hhgregg, a leading specialty retail of home appliances, televisions, consumer electronics and home furnishings.

Through our partnership, card holders will be able to continue to access special financing offers, in store and online deals, convenient online bill pay and other exclusive benefits when using their hhgregg card in their 220 stores.

And we renewed our partnership with Nationwide Marketing Group, North America’s largest buying and marketing organization. They work besides thousands of appliance, furniture, electronics and other dealers to help them grow their business and we’re happy to continue to provide consumer financing through this group.

We’re also pleased to have renewed an important endorsement by the American Dental Association. Endorsements are an integral part to helping us to extend the reach of our CareCredit platform. We also continue to sign new partnerships. We signed a long-term agreement with Nissan to introduce a new cobranded consumer credit program.

The program will be offered to Nissan and Infiniti dealerships in the U.S. as well as online. It will provide Nissan and Infiniti credit card holders with office rewards and exclusive benefits. In addition, we reached an agreement with At Home, a big box specialty retailer of home décor products, to introduce a new consumer financing program.

At Home card holders will be able to take advantage of commercial and financing office on qualifying purchases, exclusive discounts, loyalty rewards and other benefits including mobile account servicing.

We launched a new program with The Container Store, The Container Store private label credit card offers financing options for the purchase of the retailers more than 11,000 products, customized variety of services and organization solutions.

We also launched a new program with the Google Store, which was announced in conjunction with Google’s release of their new Pixel phone.

We’re partnered with Google to launch Google Store financing, where we provide financing for their new hardware products including the Pixel, Google Home, Daydream View VR headsets, Chromecast Ultra and Google Wi-Fi. We had a very strong program launch and are excited about the prospects of this new partnering program.

We remain focused on pursuing new profitable opportunities to grow our business. Although, organic growth remains our biggest opportunity and as such we’re working closely with our partners to continue to deliver leading edge capabilities, value, increased penetration and to drive program growth.

Moving to Slide 4 which highlights the performance of our key growth metrics this quarter, loan receivables growth remained strong at 11%, primarily driven by purchase volume growth of 8% and average active account growth of 7%. Interest and fees and on loans grew 12% over the third quarter of last year.

During the quarter we continue to drive growth by delivering value to partners and card holders via attractive value propositions, promotional financing and marketing offers. On the next slide, I’ll discuss this quarter’s performance drivers across our sales platforms.

We continue to generate strong growth across all three of our sales platforms in the third quarter as shown on Slide 5. Retail Card delivered another quarter of strong results. Receivables growth of 11% was driven by purchase volume growth of 7% and average active account growth of 6%.

Interest and fees on loans increased 11%, primarily driven by the receivables growth. Broad based growth across retail car partner programs continued in the third quarter. As I noted earlier, we renewed TJX companies, a key partnership for us.

We also signed two new relationships with Nissan and At Home and launched a new Google Store program during the quarter. Our long tenure relationships are an important part of our story.

We’re able to leverage the expertise we’ve developed over the decades of running this business into a platform that attracts new important partners such as Nissan and Google. Payment Solutions also delivered another strong quarter. Receivables growth of 14% was driven by purchase volume growth of 14% and average active account growth of 13%.

Interest and fees on loans increased 14%, primarily driven by the receivables growth. The industries where we provide financing had positive growth in both purchase volume and receivables, with home furnishings, automotive products and power leading the way.

We renewed several Payment Solutions relationships this quarter including hhgregg and Nationwide Marketing Group. This quarter we also extended our relationship with Kawasaki Motors Corp, USA to continue providing consumer financing for power sports products distributed by KMC to a network of approximately 1,100 independent retailers.

Qualifying buyers will have access to special financing options for Kawasaki products from Synchrony. And we also launched the new program with The Container Store during the quarter. VP usage continues to be strong across payment solutions, representing 26% of purchase volume in the third quarter. CareCredit also delivered a strong quarter.

Receivables growth of 10% was driven by purchase volume growth of 8% and average active account growth of 8%. Interest and fees on loans increased a strong 11%, primarily driven by the receivables growth. Receivables growth this quarter was again led by our dental and veterinary specialties.

In addition to the renewal of the key endorsement with the American Dental Association, we also announced program renewals with four prominent dental organizations. Extending the network and utility of our CareCredit card continues to be a primary area of focus.

And our focus on card utility has helped drive the reuse rate of 52% of purchase volume in the quarter. We’re also focused on developing technology that streamlines and enhances the CareCredit experience.

This quarter we introduced CareCredit Direct, a private and secure platform wherein patients can apply for financing privately at the Healthcare provider practice, get a credit decision while they’re there and if approved, use their CareCredit card to pay for the services that day.

Each platform delivered strong results and continued to develop, extend and deepen relationships and drive value to card holders. I’ll now turn the call over to Brian to provide the details on our results..

Thanks, Margaret. I'll start on Slide 6 of the presentation. In the third quarter, the business earned $604 million of net income, which translates to $0.73 per diluted share in the quarter. We continued to deliver strong growth this quarter with purchase volume up 8%, receivables up 11%, and interest and fees on loans up 12%.

Average active accounts increased 7% year-over-year driven by the strong value propositions and promotional offers on our card, which continue to resonate with consumers.

We also see positive trends in average balances and spend, with growth and average balance per active account up 4%, compared to last year, and purchase volume per average active account increasing 1% over the last year. The interest and fee income growth was driven primarily by the growth in receivables.

The provision increased $284 million compared to last year. The increase is driven by higher reserve build and receivables growth. Regarding asset quality metrics, 30-plus delinquencies were 4.26% compared to 4.02% last year, and the net charge-off rate was 4.38%, compared to 4.02% last year.

Our allowance for loan losses as a percent of receivables was 5.82%, compared to 5.31% last year. The asset quality metrics which I’ll cover in more detail later reflects a gradual pace of normalization that we had highlighted last quarter. RSAs were up 34 million compared to last year.

RSAs as a percentage of average receivables were 4.3% for the quarter, compared to 4.6% last year.

The lower RSA percentage compared to last year is due mainly to the retailers sharing and the incremental provision expense, which more than offset the increase in sharing from the year-over-year improvements on net interest margin and lower efficiency ratio. We expect the RSA percentage on a full-year basis to trend towards the 4.2% to 4.3% range.

Other income was flat versus last year. While interchange was at 19 million, driven by continued growth and auto store spending on our dual card, this was offset by a loyalty expense that increased by 23 million, primarily driven by new everyday value propositions.

As a remainder the interchange and loyalty expense went back to the RSAs, so there was a partial offset on each of these items. Other expenses increased 16 million or 2% versus last year.

We continue to expect expenses going forward to be largely driven by growth, strategic investments in our sales and deposit platforms and enhancements to our digital and mobile capabilities.

The efficiency ratio for the quarter was 30.6%, which was 362 basis point improvement over the prior year, driven by strong growth in the business and maintaining discipline on expenses. I'll cover the expense trends in more detail later. Overall, our performance drove a solid quarter, generating an ROA of 2.8%.

I'll move to Slide 7 and cover our net interest income and margin trends. Net interest income was up 12%, driven by strong loan receivables growth. The net interest margin was 16.27% for the quarter, up 30 basis points over the last year. As you look at the net interest margin compared to last year, there are few dynamics worth pointing out.

First, we benefited from a higher mix of receivables versus liquidity on average compared to last year, as we previously deployed some excess liquidity to fully pay off the bank term loan facility in early April. We’re also deploying liquidity to support our strong receivables growth.

The yield on receivables increased 13 basis points to 21.58%, driven by slightly higher revolve rate compared to last year. We typically see the revolve rate increase in the third quarter. We also benefited to a degree from the prime rate being higher compared to the prior year.

These benefits more than offset the impact of the slight mix shift due to the continued strong growth and lower yield in Payment Solutions receivables. The platforms receivables have grown on average 15%, compared to Retail Card and CareCredit receivables that have grown in the 9% to 10% range over the past year.

The cost of funding was up 3 basis points to 1.85%, due mainly to an increase from higher short-term benchmark rates. Our deposit base increased 9 billion or 23% year-over-year.

The cost of our deposit base is lower than alternative forms of funding such as wholesale funding and we're pleased with the progress we made growing our direct deposit platform and increasing the mix of funding coming from deposits. Deposits are 71% of our funding versus 63% last year.

As we look out to the fourth quarter, we typically see some seasonality in our margin and expect the net interest margin to decline back into the 15.9% range, due primarily to the seasonal buildup in receivables. Overall, we continue to be pleased with our margin performance, which has exceeded our guidance for the year.

Next, I'll cover our key credit trends on Slide 8. Overall the credit environment remains favorable and we continue to see significant growth opportunities and attractive risk adjusted returns.

However, as we noted previously, we continue to anticipate a modest degree of normalization from the very low credit trends we experienced over the past three years. Given the healthy economic backdrop, we would expect the pace of this normalization to occur gradually overtime.

Our view takes into consideration factors such as portfolio mix, account maturation, consumer trends and payment behaviors.

In terms of the specific dynamics in the quarter, 30-plus delinquencies were 4.26% compared to 4.02% last year, and 90-plus delinquencies were 1.89% compared to 1.73% in the prior year, both in line with the levels we've been operating at over the past three years.

The net charge-off rate was 4.38% compared to 4.02% last year, consistent with our expectations. The allowance for loan losses as a percent of receivables increased to 5.82% in the third quarter, which was largely in line with our expectation.

The reserved bill reflects the growth in the portfolio, the normalization in net charge-offs as well as lower recovery pricing, which we believe is partly attributable to the new proposed regulations around third party collectors.

Part of the increasing credit cost is offset through our retailer share arrangements and is reflected in the decline of the RSAs as a percent of average receivables to 4.3% this quarter, compared to 4.6% last year. This is also reflected in our full year guidance for the RSAs, which is now 4.2% to 4.3%.

Looking to the fourth quarter we typically see an uptick in net charge-offs and given the seasonal build in receivables, we expect to see a modest decline in the allowance for loan losses as a percent of receivables. However, given the normalization trends, this decline is likely to be smaller than it has been in the past three years.

We continue to expect net charge-offs to be around 4.5% for 2016, which is in line with our guidance for the year. We’ll provide a full year view on 2017 and conjunction with the outlook we’ll provide in January.

So in summary, while credit will normalize from here, it's important to reiterate that we are still operating in a pretty favorable environment and the risk adjusted returns for earning on the new accounts we're bringing on are still very attractive. Moving to Slide 9, I'll cover our expenses for the quarter.

Overall, expenses came in at 859 million for the quarter, a 2% increase over the last year and are primarily driven by growth of the business. Looking at the individual expense categories, employee costs were up 43 million as we have added employees over the past year in key areas to support the growth of the business.

This increase also reflects costs related to bringing certain third-party services in-house to be managed by our employees, as well as the replacement of certain services that were provided to us under our transition service agreement with GE.

Professional fees were up 12 million; this is primarily driven by growth in the business and certain third-party services.

Marketing and business development costs were down 23 million, higher costs driven by increases in portfolio marketing campaigns and promotional offers, which helped drive the strong growth in purchase volume and receivables, were more than offset by redirecting some marketing spend into everyday value propositions, which is reflected in the loyalty program expense.

Lastly, given our strong growth in deposits, we were able to reduce some of the marketing costs associated with that platform. Information processing was up 10 million, driven by continued IT investments and the increase in transactions and purchase volume compared to last year.

Other expenses down 26 million due to reduction in costs, which are no longer being billed to us by GE, as well as benefits derived from EMV in the form lower fraud expense.

The efficiency ratio was 30.6% for the quarter, 362 basis points lower than last year, as the business continued to generate significant positive operating leverage through strong revenue growth and maintaining discipline on expenses. Year-to-date the efficiency ratio was 31%, 236 basis points lower than the same period in 2015.

We expect the ratio to trend up in the fourth quarter from the third quarter level as we see seasonally higher marketing and volume related expenses during the holiday season, as well as continued spend on strategic investments.

However, given the strong start to the year we do expect the ratio to be around 32% for the full year 2016, well below the guidance we provided in January. Moving to Slide 10, I'll cover our funding sources, capital and liquidity position, as well as summarize our capital plan.

Looking at our funding profile first, one of the primary drivers of our funding strategy has been the continued strong growth of our deposit base. We continue to view this as a stable, attractive source of funding for the business. Over the last year, we've grown our deposits by $9 billion, primarily through our direct deposit program.

This puts deposits at 71% of our funding, which is slightly higher than the top end of our target range of being 60% to 70% deposit funded. We expect to continue to drive growth in our direct deposit program by continuing to offer attractive rates and great customer service, as well as building out our digital and mobile capabilities.

Longer term we would expect to grow deposits more in line with our receivables growth. Overall we’re pleased with our ability to attract and retain our depositing customers. Our retention rate on our deposits has consistently been in the 88% to 89% range over the past couple of years.

Funding through our securitization facilities has been fairly stable in the $12 billion to $14 billion range, and is now 18% of our funding. In September, we successfully issued just over $750 million in three-year fixed rate notes, this is consistent with our approach to maintain securitization between 15% to 20% of our total funding.

Our third-party debt now totals 11% of our funding sources and reflects the full prepayment of the bank term loan in early April.

We will continue to be a regular issuer in the unsecured debt markets, and in August we did issue a total of $750 million in senior unsecured debt, 500 million in 10-year fixed rate notes and 200 million of floating rate notes that mature in November 2017.

So a fairly active quarter on the issuance front, and overall, we feel very good about our access to a diverse set of funding sources. Turning to capital and liquidity, we ended the quarter at 18.2% CET1 under the Basel III transition rules, and 17.9% CET1 under the fully phased-in Basel III rules.

This compares to 16.7% on a fully phased-in basis last year, an increase of approximately 120 basis points over the past year. Total liquidity increased to 24 billion, and includes 16.4 billion in cash and short-term treasuries, and an additional 7.1 billion in undrawn credit facilities.

This gives us total available liquidity equal to 27% of our total assets. We expect to be subject to the modified LCR approach, and these liquidity levels put us well above the required LCR levels.

During the quarter we paid a $0.13 common stock dividend per share and repurchased 238 million of common stock out of 952 million our board authorized for the four quarters ending June 30, 2017.

We will continue to be opportunistic regarding share repurchases subject to market conditions and other factors including any legal and regulatory restrictions in acquired approvals. Overall we continue to execute on the strategy that we outlined previously.

We’ve built a very strong balance sheet with diversified funding sources and strong capital and liquidity levels and we expect to continue deploying capital for growth and further execution of our capital plan in the form of dividends and share repurchases. With that, I'll turn it back over to Margaret..

Thanks, Brian. I'll close with the summary of the quarter on Slide 11, and then we can begin the Q&A portion of the call. We delivered another quarter of strong operational performance across key areas of our business.

We drove strong organic growth and renewed several key partnerships and signed and launched important new partnerships during the quarter and looking ahead, our pipeline remains strong.

Supporting our growth is our fast growing online bank, which delivered another quarter of strong deposit generation, further strengthening our overall funding profile. Our capital and liquidity position also remained strong and we were pleased to commence the payment of a dividend and also repurchase shares during the quarter.

I'll now turn the call back to Greg to open up the Q&A..

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

And thank you, we will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Moshe Orenbuch with Credit Suisse..

Great thanks. Brian, your comments about the net interest margin kind of coming back into that level, I guess what struck by is it felt like the seasonal improvement was a little better than - both in yields and the margin a little better than normal.

Anything - you mentioned the revolve rate, so does some of that stick as we go forward, I mean how should we think about that over the fourth quarter and into ‘17?.

Yeah, I think most of you think about the fourth quarter typically receivable yields come down just for seasonality.

So if you look back over the past few years and you look at the receivable yield from the third to the fourth, it generally comes down in the fourth quarter, given you’re building a lot of receivables obviously for holiday and the fact that they don’t generate finance for deal in the quarter.

So it is really that seasonal trend that is driving the forecast in the fourth quarter, the other dynamics are relatively stable. I think if you look at margins more generally we have been very pleased all year with the margins and the way that they have performed. If you remember back in January we thought NIM was going to be around 15.5%.

We kind of revised that guidance to 15.75%, something in that range after we saw the strong deposit growth that obviously is continuing and then we are able to improve the yield on liquidity portfolio and also really optimizing amount of liquidity that we are holding.

So all those things all else being equal should continue to flow through and we think those will flow through to the fourth quarter, that's why we kind of guided to the - took the guidance up to 15.75% for the year to 15.90% in the fourth quarter which should put you around somewhere around 15.90% for the year.

So overall I think we performed very well on our margins relative to what we thought back in January..

Perfect that sounds great and just as a follow up, similarly just on the operating expenses I mean you had some extra expenses now with FDIC and yet your efficiency ratios still coming in better. It feels like that should continue unless there is other stuff that you would want to call out as we go over the next couple of quarters..

Yeah, we have been very pleased as well with the efficiency ratio all year really and we are 31% year-to-date, so we are well below the 34% that we indicated back in January. You we are obviously benefitting having very strong revenue growth of 12% year-to-date on the prior year.

As you might expect and as we talked about in the past the efficiency ratio will come up in the fourth quarter. And we always spend more in marketing around holiday; we also tend to have more volume related expenses.

But due to the strong start of the year in the fourth quarter trend even as we see it, we expect the efficiency ratio will be somewhere around 32% for the full year or so. Significantly better than what we thought back in January..

Great, thanks very much..

Yeah..

Thank you. Our next question comes from Sanjay Sakhrani with KBW..

Thank you. Good morning. Maybe just hit on the yield again Brian if you don’t mind. I think Moshe mentioned the year-over-year increase in the yield was better for teams even it is for being on seasonality there is some other component to it.

Is it late fees maybe and should we expect that to continue as the delinquency rates remain relatively elevated?.

Well I think you always get a little bit more in a revolve in the book when you see a slight uptick in delinquencies, we are seeing that receivable yields were up 13 basis points year over year or so.

This is really the first quarter where we have seen that kind of revolve rate and the benefits from the revolve rates poke through the downward pressure we had, just given the really strong growth and payment solutions.

So that’s the trend we are talking about all year, payment solutions is growing faster than the rest of the portfolio, roughly 15% growth rates relative to 9 to 10 in care credit and retail card and that was pricing downward pressure on the margins but now we are seeing that high revolve rate kind of poke through and gave us about 13 basis point yield improvement year-over-year..

And is there anything more that can happen with the liquidity portfolio because I mean it seems like you can still optimize some on the yield side going forward?.

There is probably a little bit there Sanjay, it is not going to be dramatic, I think we have got really nice job this year, using the excess liquidity from the strong deposit growth to pay down the bank term loan I think we feel good about what we have done year-to-date, we get more yield on the cash and securities that we are holding, but I would say anything additional is going to be pretty modest going forward..

Thank you..

Yeah..

Thank you. Our next question comes from Bill Carcache with Nomura..

Thank you. Good morning.

I do have a question on slide 8, specifically the allowance for loan losses as a percentage of period and receivables and so clearly the very strong loan growth that we have been seeing has been driving reserve building but in addition to that growth driven building we have had kind of the normalization affect also driving building and so we kind of go from the low of 5.12% allowance gradually rising to kind of 5.8.

That credit normalization effect has also driven some building and so it is kind of as we extend the thinking of credit continuing to normalize over the next several quarter for modeling purposes, is that kind of reasonable to expect that we kind of move into kind of like a six handle and [ph] gradually as we get over the next several quarters until 2017 that that number continues to rise or does that kind of flatten out at some point that where normalization is kind of achieved just trying to get substrate to think about that..

Yeah, sure Bill. Let me just kind of break down the reserve billed in the quarter. So I would say generally the reserves came in very much in line with our expectations.

If you remember we gave in a range of 5.7 to 5.8 in last quarter, we had a rate of 5.7% and this quarter we came in at 5.82%, so better than expected growth over big chunk of that reserve built in the quarter. I think just in the quarter and last 90 days we had 2.4 billion receivable.

The recovery assumption that I mentioned earlier, that drove about 36 million of the build in the quarter, which is about 5 basis point of coverage. So if you adjust for that the coverage would have been around 5.77%.

So right middle of that range that we provided and if you think about it is helpful just to breakdown the reserve build in the quarter a little bit and this is not just to be cleared, this is not how we calculate the reserve but it gives you way to think about the different pieces.

So if you take that 2.4 billion on receivables growth in the quarter and you just take that at the old coverage rate of 5.7% that gives you built of about 135 million of the 221. Right and then you got the coverage rate increased by 12 basis points which is about 86 million.

And if you break that down into two pieces you got the 36 million for the recovery pricing that I have mentioned and then you got about 50 million or about 7 basis points as really for that normalization effect that we are seeing in the book over the next 12 months. So hopefully that gives you some pieces on the way to think about it going forward..

Okay, that’s really helpful, thank you.

And then as a follow up I was hoping you could share your thoughts on I guess what - maybe just broadly speaking has been some very favorable commentary from a capital perspective on given the Feds decision to eliminate qualitative failures for financials that are not considered GSIFs [ph] and also other changes including RWA growth partial by that termination during, it is really abrasive scenario, that it would seem to certainly significant source of potential upside for any non-GSIFs with significant excess capital and including yourselves just hoping that maybe you could share a little bit on how you guys are thinking about that?.

Yeah, sure Bill. First just a quick reminder of that again we are not fee card bank but obviously we are trying to follow very similar rule that are in place for financial institutions of our sides.

Given that new proposals that are out there I think clearly positive development, I think the moment to put in place more reasonable expectations for banks of our size. So we are obviously pleased to see that.

I think it is still early to tell how significant the impact maybe, most of the more meaningful proposals I think will be adopted after the 2017 cycle so I have to see kind of what gets finalized but clearly the removable, the qualitative test for smaller financial institutions I think that’s helpful.

The treatment of dividends clearly the RWA assumptions those are all helpful but it is really hard to assess an impact until some of these things get finalized but I think it directionally headed the right way for us..

Thank you..

Yeah..

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley..

Hi good morning..

Good morning..

Good morning..

Just two questions one on the recoveries, I just want to make sure I understand what is driving the decision to resource around that and then secondly just had a question you did a analytics activity how much do you feel like you need to invest from here, how much have you invested so far and how much you think you need to invest from here to really get to where you want to be on data analytics and talk a little bit about the revenues that you can generate of the back of it thanks..

Sure Betsy may I just cover the coverage quickly and then Margaret will do the data analytic.

So the recovery assumptions as I just mentioned that were drove about $36 million of the reserve built which is about 5 coverage so in August we saw decline in the pricing we are getting on our recovery so obviously we built that in an assumption in the reserve model and we believe that pricing reflects some impact that is new regulation that are being proposed for third party collectors.

The proposal will likely make it a little more difficult, little more expensive to collect and we believe that is influencing the pricing in the market.

So as those rules get finalizing, collectors get a better sense of the impact here we may see additional impact on the pricing but as it is right now we put out best estimates based on what we are seeing in the market today..

Okay thanks..

Yeah so on data analytics I take two things, one as we continue to work with more channels we know that we have to really get more sophisticated and real time in our analytics.

We don’t really disclose how much we stand but what I can tell you as we are working very hard this year to build out a service sophisticated platform where we are really looking at building out data and CRM capability that goes well beyond just data for growing but also from a productivity perspective and really enhancing the whole win to win experience from our customer from the time they apply for credit all the way through to servicing and we have a pretty big cross functional team working on number of initiatives around data analytics.

I believe and I think as our partners continue to look at ways to create more loyalty with our customers this is going to be in an important element of what we can bring to our partners combining that with the digital experience that are customers or starting to go through in really that area is growing exponentially.

So it is an important area, with mobile and data analytics together I think these are two big growth levers for us as we look to really help our partners grow with our customer..

And it is growth in the form of productivity enhancement for you but also winning new business?.

Yeah, it’s both.

It is really using data just the much more smarter at how you are running the entire business from your origination all the way through to servicing and really looking at ways to make that customer experience even more seamless and frictionless using data and then hopefully using the data in a way that allows us to get the next purchase to get a bigger basket to drive that loyalty back in and enhance the experience with our retailers as they go from channel to channel..

Okay, awesome thank you..

Thank you. Our next question comes from Ryan Nash with Goldman Sachs..

Hey. Good morning, guys..

Good morning..

Good morning Ryan..

May be I will start with the RSA loans I think I am sure they came in better and Brian reiterate the guidance of 420 to 430, just what I am looking clearly we are down call it four to twelve year to date and we are down at least 25 bps each quarter so just want to understand if we would end up on the low end of the range you would imply flat year-over-year relative to last year so I just wanted to say what is the specific fourth quarter this year given the factor we reserve built in, in your comments you said that we shouldn’t expect the same seasonal decline I am just trying to understand the puts and takes of how we would get either not only in the range but also just to the bottom of the range on RSA?.

Sure Ryan, I think the one thing that get missed when model RSA, one I think obviously seasonality piece of that but I also think that people tend to view it as an offset to credit in isolation and I think it is obviously includes much more than that and so if you look at your year-over-year I mean just talk about the quarter for the second we had obviously very growth, we had better margins fairly big improvement year-over-year, much better efficiency ratio and at least in terms of the margins and efficiency ratio we think that carries through to the fourth quarter but for the seasonal elements that I mentioned earlier and so all of those positive dynamics in the business push the RSA higher.

Right and then those improvements in the quarter and our expectations going forward there is going to be an offset there for the incremental provision and so I think you got to carry some of the real positives through in the fourth quarter and then obviously those push the RSA higher offset by what we are expecting on provision..

Got it and maybe I feel in different direction that’s okay maybe we could talk about loan growth it is obviously coming in I take much higher than your guidance from earlier in the year, can you just talk about how much is coming from new customers and how much is coming from increased penetration rates and maybe in retail card can you give us a sense of maybe where you are in penetration across the range of merchants and how much improvement in penetration you are making, where do you think you can get to over time?.

Sure Ryan there is a lot in there so just remind me if I missed something but I think generally we have been very pleased with the growth that we had all year. We have got receivables growth of 11%, we guided early in the year to 7 to 9. So we are obviously tracking well ahead of the guidance we have put out there in January.

And when you look at the underlying growth drivers they are all pretty strong. You look at purchase volume per average active account was up, average balance per active account were up, we really measure as oppose to new accounts, what is really more important measure for us is active account.

With private label and dual card you are really trying to move that more towards the top of all that card [ph] and get that usage and get that repeat purchases and so if you look at last two or three years and just compare that to average active account growth in last few quarters were up 7%.

That growth has accelerated which is really positive dynamic for us, so I think there is really good evidence, good indicators of consumers are spending more, they are seeing real value in our card, the things we have done around the value propositions.

In Amazon, in Wal-Mart, we just announced another one at Guitar Center, those are really paying off.

And then if you look at some of the additional things that we track and talk to you about online and mobile were up 26% in the quarter that compares to about 15% for the industry, the reuse that we are getting in care credit was up year-over-year 52% versus 50% year ago and we are bringing on new partners.

We are bringing on new partners I would say the majority of those are start-up programs; those aren’t really influencing the growth that we had so far year to date. And so to the second part of your question, most of the growth is really organic growth, it is driving that increased penetration.

That is something that obviously tracks by program, it is how we measure our teams, that’s all we focus on that’s the only way to really grow 11% in a retail environment that’s growing 2% to 3% and that’s been pretty consistent and our growth rates have been pretty consistent over the past five years.

So I think we feel really good about overall the fundamentals that we are seeing on growth.

Did I miss any part of your question?.

No, I think you answered almost thanks, thanks for taking my question..

Great thanks Ryan..

And thank you. Our next question is from Eric Wasserstrom with Guggenheim Securities..

Thanks very much, I know there has been lot of discussion but I just want to go back to one item and maybe I didn’t fully understand but as I look at the yield on cards had a I guess about 60 basis point delta sequentially and I am wondering if there is any pricing activity associated with that change..

No, we haven’t really made any pricing changes, really as the factors that I indicated we got a little more revolved but if you go back and look at prior periods there is always the seasonal increase from the second quarter to the third quarter.

it is maybe a little bit more outside this time but that’s really the driver and then we are getting a slight impact from a slight benefit from the increase in the prime rates, you have seen a little bit of that in the quarter as well..

Got it, it was more than magnitude that was done, that I was curious about and then maybe just looking at purchase volumes, they did decline just a bit sequentially in retail and care credits, any trend to underscore there?.

I don’t think so, there is not always the perfect corollary between purchase volume and receivables you saw that as well in the first quarter when the purchase volume far outpace receivables.

And I think as we indicated then this quarter we are comparing against the full quarter of BP and we are also comparing against the Amazon launch of 5% off so those are both factors when you look at purchase volume.

I think more importantly receivables grow 11%, given what we are seeing in the mix or revolvers in the book which is great for us, that really drives the majority of our earnings and you are seeing that comparing interesting fees..

Thanks very much..

And thank you. Our next question is from Mark DeVries with Barclays..

Yeah. Thanks.

Brian you just indicated you are seeing very good response particularly at Amazon and Wal-Mart, but something little bit more specific without identifying one in particular as to what kind of improvement you are seeing in tender share at this point from the enhanced rewards?.

I obviously can't be specific on either program but I would say in both cases they are performing better than our expectations. And I would price modestly better than our expectations only because we really know how to model this, we did 5% off that loans [ph] I think more than five year ago.

So we have got really good data in analytics around value propositions particularly really attractive ones like 5% off, 531 in cents [ph] and we know what to expect in terms of transactors, revolvers what we expect to see from tender shift what kind of spend we expect on the card, what kind of payment behaviors and so.

We had a pretty good view on what we thought both of those would - how both of those would perform and I would say we are ahead of our expectations on both..

Okay great and for the online retailers that you have, how many of them have the option like they have got in Amazon where the private level card becomes top of wallet by default and for those that don’t do that there is an opportunity to kind of move into that and really drives better tender share?.

Yeah, that’s definitely is, all of them have the option to do it even retails are not fully online.

So to have that check out is really golden and it really comes down to kind of philosophy within the retailer in terms of someone have a choice and others it is just really around getting the prioritization of getting that particular element into their system to get in place.

So it is something that we put together what we call our digital mobile, online playbook for retailers and this is something that we talk a lot about.

So it is a big opportunity for us as we move forward and continue to work but I would say is on the mobile world in general and online world in general there is a lot higher engagement across all our partners right now in this particular area as they are all really coming to terms of the fact that they have to be best in class.

So we are spending a tremendous amount of time and effort, really working with our partners across all three pipelines to really make that happen..

Okay, thanks..

And thank you. Our next question comes from David Scharf with JMP Securities..

Hi. Good morning. Thanks for taking my question. First, wonder if I just get back to the recovery side as it is impacting the allowance forecast in collections.

Can you expand a little more specifically on just how the proposed collection rates that are being revised, impact your efforts and whether that is likely to result based on new collection practices and to little more early stage in DQ that doesn’t quite roll in or some of the change practices likely to impact more your latter stage caring efforts but just a little more specificity on its cost centre and other efforts just what has to be quantified?.

Right now these are proposals and these proposals for new regulations around third party collectors. Obviously we sell a portion of our charge off to third parties and we believe that pricing that we are seeing in the market right now is somewhat influenced by these new proposal.

So the proposal includes things like more documentation, more work for the third parties to substantiate the debt at the each stages for the collection process, reduce contact other restrictions things like that, additional disclosures and so, lot of these things aren't finalized at this point but I think people are anticipating that at a minimum it is going to be little more difficult, little more expensive based on these new proposals and they are building that into their pricing.

So as we started to see that right around in the August time frame, we felt that in the reserve model and that is driving, what I would call relatively modest impact of five basis points on the coverage..

Got it and along those lines I know that the two largest debt buyers both public after a couple of years of commenting of elevated pricing and not much supply growth in the US, just a last couple of quarters seems to have been indicating that pricing has been leveling off and so forth.

Are you finding that the pricing as a percentage of principal balance that you are able to sell charge offs for are declining or they pretty much holding firm with the historically more elevated prices that you saw earlier in the year..

Yeah, we did see a decline in the pricing and we think a part of that is driven by this dynamic that I just described on some of these anticipations of some of these new regulations that are coming in. We don’t get obviously complete transparency at the end of the pricing.

So this is what we believe at least partly influencing what we are seeing in the market..

Got it, very helpful, thank you..

Yeah..

And thank you. Our next question is from James Friedman with Susquehanna..

Hi. Thanks, I had just two quick questions.

Margaret, in the past year you had made some comments about the digital channels, I was wondering if you could help us to quantify those that are even quantitatively like how much is that driver of the growth of the company? And then Brian I was wondering if you could elaborate and you talk about this a bit, but the loyalty payment at 145 million if you look at the new absolute [ph] it is the higher that we have seen and then as a percentage of the purchase volume it was also high so anything that you could share on the trajectory that would be helpful, so one on digital and two on loyalty.

Thank you..

I would say the bulk of sales are still done predominantly in store, but what I would say is that it is definitively shifting and each quarter we see incremental growth on online and digital and as we stated our online sales were up 26% over last year and that continues to grow every single quarter. About a third of our applications occur digitally.

We received about 12 million mobile applications since we launched in 2012, that’s grown at about 80% year-over-year so that’s a big growth channel for us that I think you would continue to see expanding.

And we are seeing faster growth in the industry so I think the important part of digital and online is really our ability to continue to integrate with our partners and so one of the things we are really working hard on now obviously we have done [indiscernible] those things we have digital cards on our own.

What we are seeing now is more and more retailers are creating their own apps and we are really trying to work to be in that app so that is really seamless and frictionless process for the customers they are shopping around on a mobile app of a particular retailer.

So I think you are going to see as focusing even more on that retailers come to us and ask to really engage at a much higher level, that’s my point earlier, I think this isn’t a little bit of a shift in terms of how retailers are even thinking about mobiles and putting a lot more efforts there, that’s why we are very highly engaged right now across all three platforms really..

Thank you..

And then on your loyalty question, that’s a trend that we have continued to see all year. We have obviously introduced many new value propositions over the past year.

We introduced the Sam's Club 5-3-1, Amazon Prime 5%, we have got new programs at Chevron and BP, new value proportion at Wal-Mart that three two one, so all of those are obviously influencing both the interchange and the loyalty lines as you see.

Generally more loyalties is a good thing, it means we have grown our receivables; we are generating finance charge revenue.

The lines also run back to the RSAs there is an offset there and if you are looking at just a relationship between royalty and interchange the one thing I would just point out is this is very different than purpose card, given we have significant value propositions like Amazon where we don’t charge interchange but we still offer very attractive value proposition.

We would expect to see loyalty increase a percentage of interchange going forward. That’s really we don’t look at those lines and isolation we really measure on kind of in the context of the overall deal structure.

So it is like if we have the opportunity to launch a better value proposition and it is going to drive more usage on the card, generate strong receivables growth that’s a good thing for us, it is a good think for our partners and it really comes down to the shared economic model..

Thanks for taking my questions..

Sure..

Thank you. Our next question is from Arren Cyganovich with D. A. Davidson..

Thanks. With respect to the efficiency improvements that you have seen, maybe you could talk a little bit about the potential for that to continue to go down or you use some of the savings to reinvest in digital and maybe online checking those kinds of things working that operating efficiency actually go to over time..

Yeah, this has been a very strong year to date performance I mean it is not just a temper expectation, probably not a realistic expectation that we are in a grow revenue in 12% and expense too. So we are very pleased with how we performed year to date.

Well obviously we have been given an outlook for 2017, we do the call in January, but I think the important thing is we are very focused on driving operating leverage. This is a scalable business, now that the infrastructure cost are in the run rate, we would expect to continue to generate positive operating leverage over the long run.

We are always working to get more efficient across the business, we always start the year with a bunch of productivity initiatives, cutting out waste in the business, getting more efficient, moving more online off the paper and we use those savings that we generate there primarily to invest in long terms growth ideas, so things like mobile, data analytics, CRM, but even taking those investments into account, we’d still - our goal would be to continue to generate operating leverage going forward..

Great, that’s helpful. And then just back to the allowance, you’d mentioned that the seasonality that you typically see in the fourth quarter causes the allowance for loan losses to relative receivables to fall a little bit. It looks like it’s been around 18 and 19 basis points in recent years.

Can you give a little bit further kind of pinpoint in terms of how much that reduction will be less during the fourth quarter this year?.

I mean it’s hard to get specific, it will be - we still expect a reduction, so more than zero, but less than 19. And we’re talking about basis points, so it’s a big estimate that we make at the end of the year given the seasonal growth. So I can’t get more specific.

We do expect it to come down, but just not quite as much as it has in the last three years.

You have to remember, in the last three years, we were in an improving environment, so whatever build we’re recording in the fourth quarter was at least partially offset by improved performance and now it’ll be more reflective of growth and the normalization trends that we’re seeing in the portfolio..

Got it. Okay, thank you..

We have time for one more question..

Well, thank you. Our last question comes from John Hecht with Jefferies.

Thanks very much guys.

Margaret, you’ve given a lot of information about the online, the trends of the business, I’m wondering if you could just - if you get down to the customer level, can you guys highlight any - whether it’s spend trends, borrow trends or credit trends, is there any difference between an online customer and a store based customer?.

No, the online spend and the trends are the same. I’d say, the one area that we continue to ensure we’re focused on is really ensuring the authentication of the customer. So I think that’s where pro-rates might be slightly lower just because you’re dealing with an online channel versus an in-store experience.

But that’s a great area where we’re spending a lot of time and investing in new technology to really make sure we’re best in class. So that would be the only I think fundamental difference..

Okay, that’s good color, thanks.

And then last question, I’m wondering if you could just remind us of your partner maturity profile as we go into 2017?.

Yeah, I think we’ll have that in our investor deck that will come out in a few days. But there’s really - you’ll see from that there’s really nothing material contractually kind of the 2019, 2020 timeframe..

Great, thanks guys..

Yeah, thank you..

Hey, thanks everyone for joining us on the conference call this morning and your interest in Synchrony Financial. The investor relations team will be available to answer any further questions you may have. We hope you have a great day..

And thank you ladies and gentlemen. This concludes today's conference call. We thank you for participating. You may now disconnect..