Good morning, and welcome to the Synchrony Financial Fourth 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 listen-only mode.

The call will be opened up for your questions following the conclusion of 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 responsible 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. Good morning, everyone. Today, Synchrony reported strong fourth quarter results, including net earnings of $440 million or $1.03 per diluted share, a return on average assets of 1.5%, and a return on tangible common equity of 14.7%.

These fourth quarter results contributed to full year 2023 net earnings of $2.2 billion or $5.19 per diluted share, a return on average assets of 2%, and a return on tangible common equity of 19.8%. This strong financial performance was supported by continued consumer resilience empowered by our multiproduct strategy and diversified sales platforms.

We achieved another year of record purchase volume, totaling $185 billion for the full year and up 3% from last year. Our compelling products and value propositions helped drive the origination of almost 23 million new accounts in 2023, and also helped grow our average active accounts by 2.5%.

The broad utility and value of our product offerings continue to resonate deeply with our customer base, leading to another year of record purchase volume. This combined with a continued moderation in payment rates to drive loan receivables growth of 11.4%.

Credit continued to normalize this fourth quarter, net charge-offs reached pre-pandemic levels, in line with our expectations and contributing to a full-year net charge-off rate of 4.87%, still below our target underwriting range of 5.5% to 6%.

We also drove continued progress toward our target operating efficiency ratio demonstrating cost discipline, while maintaining investments to ensure the long-term success of our franchise.

And through strong execution and prudent capital management over time, Synchrony continued our long history of capital returns, including $1.5 billion returned to shareholders this year. Since 2016, we have paid $3.6 billion in dividends and reduced our outstanding shares by 50%.

Synchrony's ability to consistently generate and return capital to our shareholders is enabled by our differentiated business model, which prioritizes the sustained delivery of attractive risk-adjusted returns through changing market conditions and economic cycles.

Our focused execution across key strategic priorities enabled Synchrony's resilient returns by reinforcing our core strengths and facilitating our ongoing evolution to meet changing preferences and needs.

With that in mind, Synchrony continued to grow and win new partners over the past year, with the addition of more than 25 partners and over 30 renewed relationships.

Among our new partnerships, we were excited to announce that J.Crew selected Synchrony to launch its first co-branded credit card, which will be a digital-first program with mobile wallet provisioning, robust pre-approval capabilities, scan-to-apply, and direct-to-device credit applications.

This competitive win is a testament to our culture of innovation, consistent investment in our digital ecosystem, and a strategic focus to empower our customers and partners to connect seamlessly through best-in-class omnichannel experiences. We also continued to diversify our programs, products, and markets during 2023.

Broadening the utility of our offerings and extending our reach. Synchrony believes in the power of choice, choice for our customers and partners, providers, and merchants as they engage in-person and digitally across a full suite of everyday financing options.

This year, we launched multiproduct pre-qualification and began presenting customers with side-by-side offers of both revolving and installment solutions to bring choice to the forefront.

These enhancements empower customers to weigh the benefits of various options in real time and make the decisions that best suit their financing needs in that moment. We continue to scale our pay later solutions, which is now offered at over 200 provider locations in our health and wellness platform and at 18 retail partners.

For our partners and providers, pay later seamlessly integrates into the broader partner relationship and product offering and provides another tool for deepening engagement with customers and the response has been strong.

Since we launched, partners who have offered these solutions have seen a 20% lift in new accounts, with 95% of pay later sales coming from net new customers. Synchrony's continued diversification and expansion of our offerings over the last year benefited from opportunities to extend our reach.

In the fourth quarter, we announced the sale of our Pets Best insurance business and through a minority interest from that sale, the opportunity to build a strategic partnership with Independence Pet Holdings or IPH, one of the leading pet-focused companies in North America.

Since acquiring the Pets Best business in 2019, we've grown pets in force by over 45% per year on average, more than double the industry's growth rate to become a leading pet insurance provider in the US.

We're very proud of what we've been able to achieve with such a great business and team, which enabled us to gain considerable insight into the pet industry more broadly over the last four years and we are confident that IPH will be able to use its pet insurance expertise to unlock new opportunities for Pets Best and offer still greater value for Pets Best customers.

And through the strategic relationship forged between IPH and ourselves, Synchrony is positioned to gain still greater exposure and insights into the rapidly growing pet industry, as we seek to expand access to flexible pet care financing across the country.

More recently Synchrony announced still another opportunity to expand our business and accelerate our growth with the acquisition of Ally Lending's point-of-sale financing business.

This $2.2 billion loan portfolio consists of partnerships with nearly 2,500 merchant locations, and supports more than 450,000 active borrowers in home improvement services and healthcare industries.

Through this acquisition, Synchrony will create a differentiated solution in the industry, simultaneously offering both revolving credit and installment loans at the point-of-sale in the home-improvement vertical.

This multiproduct presentation furthers our product diversification strategy, delivering consumer choice while maximizing conversions and sales for our partners. This opportunity also enables Synchrony to expand our home specialty financing in roofing, windows, and electrical services.

We are excited about the natural synergies we see between Ally Lending and Synchrony's Home & Auto, and Health & Wellness platforms. We look forward to leveraging our industry expertise and scale to drive operating efficiency and accelerate growth across platforms with attractive market opportunities and return profiles over time.

And of course, Synchrony's ability to successfully deliver a breadth of financing solutions across an expansive distribution network is reliant on delivering best-in-class experiences with each customer interaction.

This year, we continue to elevate the presence and utility of our offerings across in-person and digital transactions by adding digital wallet provisioning capabilities for eight partners, including PayPal and Venmo, Verizon, TJX and Belk. And our digital sales continued to grow at an outsized pace, climbing 9% to nearly 39% of our total 2023 sales.

Over the last year, Synchrony launched the first phase of our marketplace on synchrony.com and within our native app where shoppers can find hundreds of offers showcasing our partner brands paired with Synchrony's tailored multiproduct financing solutions.

In fact, as Synchrony leveraged our analytics and marketing capabilities to develop compelling cross-shopping opportunities in this initial launch, marketplace attracted over 220 million visits by shoppers for our partners, providers, and merchants, as we more than doubled the number of partners participating.

In summary, Synchrony is increasingly anywhere our customer is looking to make a purchase or a payment, large or small, in-person or digitally, and across an ever-expanding range of markets and industries. We can meet them whenever and however they want to be met with a variety of flexible financing solutions to meet their needs in any given moment.

Our ability to deliver the versatility of our financial ecosystem seamlessly across channels, industries, partners and providers alike is what positioned Synchrony so well to sustainably grow and deliver attractive risk-adjusted returns, particularly as customer needs and market conditions evolve.

With that, I'll turn the call over to Brian to discuss our financial performance in greater detail..

Thanks, Brian, and good morning everyone. Synchrony's fourth quarter results demonstrate the power of our differentiated business and financial model performing as designed.

Our diversified sales platform and spend categories enabled record purchase volume growth as our disciplined underwriting and credit management kept credit performance in line with our expectations. Our retail share arrangements ensured alignment of economic interest between Synchrony and our partners.

As credit normalized towards historical pre-pandemic levels, and funding costs increased from higher benchmark rates, our RSA payments were lower, providing a partial buffer to the economic environment, and enabling Synchrony delivery of consistent attractive risk-adjusted returns.

And our strong balance sheet provides the flexibility to return capital to shareholders, while investing in opportunities to achieve our longer-term strategic goals, all while delivering for our customers and partners and their evolving needs today.

Overall, our prudent business management and differentiated financial model have positioned Synchrony to deliver sustainable outcomes for our customers, partners, and shareholders through an uncertain macroeconomic backdrop this past year and as we move forward in 2024. Now, let's turn to our fourth quarter results.

Purchase volume increased 3% versus last year and reflected the breadth and depth of our sales platforms and the compelling value our products offer to bind with a resilient consumer. In Health & Wellness, purchase volume increased 10%, reflecting broad-based growth in active accounts, led by dental, pet, and cosmetic verticals.

Digital purchase volume increased 5% with growth in average active accounts and strong customer engagement. Diversified value purchase volume increased 4%, reflecting a higher in and out of partner spend. Lifestyle purchase volume increased 3%, with stronger average transaction values in Outdoor and Luxury.

In our Home & Auto, purchase volume decreased 4%, as lower customer traffic, fewer large ticket purchases, and lower gas prices more than offset growth in Home Specialty, Auto network, and commercial.

Purchase volume across Synchrony Dual and co-branded cards grew 9% and represented 43% of total purchase volume for the quarter, reflecting the broad utility and value that these products deliver for our customers. As we've discussed in the past, our out-of-partner spend is split roughly evenly between discretionary and nondiscretionary categories.

And this trend held steady throughout the year. In the fourth quarter, we saw assumptions in categories, as consumers shifted from travel spend to clothing for instance and from gasoline and automobiles towards spend at grocery and discount stores.

We've not seen any meaningful changes in the overall composition between discretionary and non-discretionary spend. The combination of broad-based purchase volume growth and approximately 110 basis-point decrease in payment rates drove ending loan receivables growth of 11.4%.

Our fourth quarter payment rate of 15.9% still remains approximately 115 basis points higher than our five-year pre-pandemic historical average. Net interest income increased 9% to $4.5 billion, driven by 16% growth in interest and fees.

The increase in interest and fees reflected the combined impact of higher loan receivables and benchmark rates, as well as a lower payment rate. Our net interest margin of 15.10% declined 48 basis points compared to the prior year.

The decrease largely reflected higher interest-bearing liability costs, which increased 169 basis points to 4.55% and reduced net interest margin by 138 basis points. This impact was partially offset by 66 basis points of growth in loan receivables yields, which contributed 55 basis points to net interest margin.

Higher liquidity portfolio yield added 29 basis points to net interest margin. And our loan receivables growth improved the mix of interest-earning assets, contributing 6 basis points to net interest margin.

RSAs of $878 million in the fourth quarter or 3.49% of average loan receivables, a reduction of $165 million versus the prior year reflecting higher net charge-offs, partially offset by higher net interest income.

Provision for credit losses increased to $1.8 billion, reflecting higher net charge-offs and a $402 million reserve build, which largely reflected the growth in loan receivables. Other expenses grew 14% to $1.3 billion.

The increase primarily reflected growth-related items as we continue to see strong growth in volumes as well as the return of operational losses to pre-pandemic average levels as a percent of our purchase volume.

Expenses in the quarter also included several notable items, including $43 million in employee costs related to a voluntary early retirement program, $9 million in real-estate-related restructuring charges as we continue to adjust our physical footprint in favor of hybrid working environment, $9 million for the FDIC's special assessment, $7 million of preparatory expenses in anticipation of a potential late fee rule change and $5 million of transaction-related expenses related to the sale of Pets Best.

Our efficiency ratio for the fourth quarter improved by approximately 120 basis points compared to last year to 36%. Excluding the impact of the notable items in the quarter, our efficiency ratio would have been approximately 200 basis points lower in the fourth quarter.

All-in, Synchrony generated a net earnings of $440 million or $1.03 per diluted share, a return on average assets of 1.5%, and a return on tangible common equity of 14.7%. Next, I'll cover our key credit trends on Slide 10. Overall, we see the consumer remaining resilient as we managed through inflation and higher interest rates.

The external deposit data we monitor also supports this view, as it shows average savings account balances return closer to pre-pandemic levels during 2023 and remained relatively steady through the third and fourth quarters. At year-end, average industry savings balances remained approximately 9% above levels from 2020.

Our disciplined through-cycle underwriting and active credit management has positioned us well as we enter 2024. Our delinquency ratios finished the year slightly above average levels from 2017 to 2019 prior to the pandemic.

At year-end, our 30 plus delinquency rate was 4.74% compared to 3.65% in the prior year and 12 basis points above our average for the fourth quarters of 2017 to 2019. Our 90 plus delinquency rate was 2.28% versus 1.69% last year and 4 basis points above our average for the fourth quarters of 2017 to 2019.

And consistent with our expectations, Synchrony's net charge-offs reached 5.58% in the fourth quarter compared to 3.48% in the prior year and an average of 5.49% in the fourth quarters of 2017, 2018, and 2019. We continue to monitor our portfolio and implement actions as necessary to proactively position our business for 2024 and beyond.

Moving to reserves, our allowance for credit losses as a percent of loan receivables was 10.26% down 14 basis points from 10.40% in the third quarter. The reserve build of $402 million in the quarter was largely driven by receivables growth. Turning to slide 12, Synchrony's balance sheet continues to be a source of flexibility and strength.

Our consumer bank offerings continued to resonate with customers in the fourth quarter, driving over $3 billion of growth in total deposits in the quarter or 13% compared to the prior year. At quarter-end, deposits represented 84% of our total funding, while securitized debt comprised 7% and unsecured funding 9%.

Total liquid assets and undrawn credit facilities were $19.8 billion, up $2.6 billion from last year and at quarter-end, represented 16.8% of total assets, up 42 basis points from last year. Moving on to 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 will continue to make its annual transitional adjustments to our regulatory capital metrics of approximately 50 basis points each January until 2025. The impact of CECL has already been recognized in our income statement and balance sheet.

Additionally, in the fourth quarter, Synchrony made a change to its balance sheet presentation of contractual amounts related to our retailer partner agreements.

At year-end, assets of approximately $500 million, which were previously classified as intangible assets, were reclassified to other assets and prior periods were reclassified to conform to this presentation.

This change in presentation had a corresponding impact to each of our regulatory capital metrics and resulted in an increase of approximately 50 basis points to our capital ratios in both the current and prior years.

Under the CECL transition rules and including this balance sheet change, we ended the fourth quarter with a CET1 ratio of 12.2%, 110 basis points lower than last year's 13.3%. The Tier 1 capital ratio was 12.9% compared to 14.1% last year. The total capital ratio decreased 60 basis points to 14.9%.

And the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 22.1% compared to 22.8% last year. During the fourth quarter, we returned $353 million to shareholders, consisting of $250 million of share repurchases and $103 million of common stock dividends.

At the end of the quarter, we had $600 million remaining in our share repurchase authorization. We remain well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan.

We will also continue to seek opportunities to complete the development of our capital structure, through the issuance of additional preferred stock as conditions allow.

Synchrony remains committed to our capital allocation framework, which prioritizes investment in organic growth and payment of our regular dividends, followed by share repurchases and investments in inorganic growth opportunities where the rates of return meet or exceed that of our other potential uses of capital.

To that end, as Brian mentioned, Synchrony announced the acquisition of the Ally Lending point-of-sale financing business, which we view as a great opportunity to expand our leadership position in home improvement and health and wellness verticals, while leveraging our industry expertise and scale to unlock still greater value.

We've agreed to purchase approximately $2.2 billion of loan receivables at a discount. Upon closing the transaction and subject to completion of purchase accounting, we expect our CET1 ratio to be reduced by approximately 50 basis points inclusive of our provision for credit losses of approximately $200 million relating to the initial reserve builds.

Synchrony expects this acquisition to be accretive to full-year 2024 earnings per share excluding the impact of the initial reserve build for credit losses.

Upon integration of our business, conversion to our PRISM underwriting model and execution of our strategy, we expect to achieve attractive internal rate of return with approximately 3.5-year tangible book value earn back.

Additionally, the sale of our Pets Best business will result in approximately $750 million gain net of tax in 2024, which will contribute to an approximately 80 basis-point increase to our CET1 ratio, inclusive of the capital required to be held on minority interest in IPH.

Excluding the gain on sale, we expect the transaction to be neutral to earnings. We're excited about the opportunities we’ve identified to continue to drive consistent growth at appropriate risk-adjusted returns, and have established a long track record of execution across both strategic and financial objectives.

During 2023, we drove strong growth in purchase volume, which combined with the payment rate moderation to deliver solid growth in loan receivables. We were opportunistic in funding net growth and continue to expand our deposit franchise and in turn delivered attractive net interest income.

Credit normalized in line with our expectations and our RSA functioned as designed. And finally, we fulfilled our commitment to deliver positive operating leverage. Turning to Slide 14, let's review our outlook for 2024.

Our baseline assumption for this discussion include a stable macroeconomic environment, full-year GDP growth of approximately 1.7%, a year-end 2024 unemployment rate of 4.0%, and an ending Fed funds rate of 4.75% with cuts beginning in the second half of 2024.

This outlook also assumes the closing our Pets Best and Ally Lending transactions in the first quarter of 2024. And given the uncertainty of timing and implementation of a potential final rule regarding late fees, we've not assumed any related impact to our 2024 financial outlook.

In the event that the final late fee rule is published, we will provide an update with the associated impact to our financial guidance. Starting with loan receivables, we expect our compelling value propositions and the broad utility of our products will continue to drive purchase volume growth.

We also expect payment rates to continue to moderate although we anticipate they will remain above pre-pandemic levels through 2024. Together, these dynamics should deliver ending loan receivables growth of 6% to 8%. We expect full-year net interest income of $17.5 billion to $18.5 billion.

Net interest income should follow typical seasonal trends through the year, adjusted for several impacts. One, higher interest-bearing liabilities expense as our fixed-rate debt re-prices with higher benchmark rates. Two, the impact of competition for retail deposits and pace of deposit repricing once rate cuts begin.

Our expectation is for betas to trend near 30%, as rates begin to decline later in the year, thereby reducing impact to interest expense during 2024. And three, interest and fee yield growth, partially offset by higher income reversals. We expect net charge-offs of 5.75% to 6%, within our targeted underwriting range of 5.5% to 6%.

Losses are expected to peak in the first half before returning to pre-pandemic seasonal trends following the normalization of delinquency metrics in 2023. We expect RSAs of 3.5% to 3.75% of average loan receivables for the full year.

This reflects the impact of continued credit normalization, higher interest expense and the mix of our loan receivables growth, partially offset by purchase volume growth. The reduction in RSA demonstrates the functional design of the RSA and the continued alignment of interest with partners.

And finally, we expect to reach an operating efficiency ratio of 32.5% to 33.5% for the year driven primarily by the optimization of our loan yields as credit normalization occurs. This outlook excludes the impact of the Pets Best gain on sale, which we recognized in other income.

We remain committed to delivering operating leverage for the full year and continuing to invest in our long term success of our business. As demonstrated again this past year, Synchrony's purpose-built business and financial model is performing as designed.

Through an evolving backdrop, our diversified portfolio of products and platforms continue to drive growth. Our leading credit management ensures attractive risk-adjusted returns, our RSA provides a buffer against changes in economic performance and our stable balance sheet creates opportunity.

Taken together, our business continued to deliver value for each of our stakeholders in 2023 and positioned well for 2024. I'll now turn the call back over to Brian for his closing thoughts..

Thanks, Brian. Synchrony delivered another strong performance in 2023.

We executed on key strategic priorities that expand the breadth and depth of our customer acquisition and engagement, further diversify the products, services, and value we provide, and enhance the quality of the experiences we power for our customers, partners, providers, and merchants.

This focus on deepening our core strengths while continuing to evolve with the ever-changing world of commerce has enabled Synchrony to deliver strong financial results and returns to our shareholders, while also preparing our business for the future.

We are confident in our ability to continue to sustainably grow and deliver resilient risk-adjusted returns over time, and are excited about both the near and longer-term opportunities we see ahead to deliver still greater value for our many stakeholders. And 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, Investor Relations team will be available after the call.

Operator, please start the Q&A session..

[Operator Instruction] We'll take our first question from Terry Ma with Barclays. Please go-ahead..

Thanks, good morning.

Can you maybe just talk about the cadence we should expect for delinquencies in 2024? Should the fourth quarter or first quarter be kind of peak delinquencies? And then as we look forward out to 2025, can you maybe just talk about your confidence level that you'll stay within this net charge-off range of 5.75% to 6%?.

Sure. Thanks, Terry. When we look at our delinquency formation and really in the fourth quarter, first I think you have to recognize we normalize slower than all of our peers, which is partially attributable to the fact that we didn't really adjust the credit box during the pandemic.

Our advanced underwriting tool PRISM, which we invested heavily in since 2017 and the data elements we bring in. So that really helped the formation as we exit out of 2023.

It's important to note that when you look at both the 30 plus and 90 plus delinquency rate, that is in the fourth quarter, they're only 12 basis points and 4 basis points respectively over the three-year average from 2017 to 2019.

And then when I look at the mix of credit that sits in delinquency today, it's substantially similar to that of the 2019 credit mix. So, when I look at that, I then look at little bit at the trending, Terry, and performance of delinquency.

When you look at it, the consistency of the growth month-on-month, year-over-year, 30 plus and 90 plus has not shown deterioration. It has been very consistent, a range between 109 basis points and 116 basis points each month. 90 plus has been between 55 basis points and 63 basis points. So, it's been very consistent.

Relative to seasonality, it has been generally in line. So I look at those factors as we kind of -- entry rate continues to be better than 2019.

So now, as I roll that forward, what we expect from a charge-off perspective is that your first-half charge-offs are going to be higher in the first half, lower in second half, and should give you a range of 5.75% to 6% for the year. So, inside of our underwriting target.

Again, recall that we did take actions in the second quarter and third quarter, which we outlined. Those are beginning to see and you should see the effects of those beginning into affect delinquencies here in the first half of 2024. So with that, we feel good about where credit is.

We'll continue to monitor the trends in credit, what's rolling in, but the positive entry rate, which has a slightly negative effect on the float to loss, but that positive entry rate is really encouraging for us as we enter the year..

Got it, thank you. And then my follow-up on just the NIM and NII guide. It looks like you assumed about two rate cuts.

Can you maybe just talk about what we should expect if we get more than two rate cuts for the year?.

Yeah. Thanks for that question, Terry. If I look at what we're projecting, we actually had three rate cuts, really beginning in September of 2024 going through the end of the year, which I hit the point on betas, it's 30%.

So if you think about having rate cuts that late in the year, digital banks generally lag about 30 to 90 days with regard to when they start to move rates, and then you also have to take into consideration the fact that in the fourth quarter when we want to maintain higher level of financing to fund seasonal growth.

So that's why the beta is a little bit lower. If you were to get rate increases either more than that early in the year, you would get in theory some benefit on to the net interest margin and lower interest on interest-bearing liabilities..

Got it. Thank you..

Thanks, Terry..

Our next question comes from Rick Shane with JPMorgan. Please go ahead..

Thanks, everybody, for taking my questions this morning. Really just wanted to talk a little bit about the relationship between NCOs and RSAs when we look at the '24 guidance. '24 guidance from an NCO perspective basically puts you at the higher end but within the range of NCO targets.

RSA looks a little bit lower than what we would have seen on a pre-pandemic basis. And I'm assuming that's really not a function of credit, but more a function of interest rates.

And as we look forward, if we assume net charge-offs wind up in that 5.5% to 6% target range, but interest rates start to come down, will the RSA trend back up? I just wanted to sort of get a sense of what we should be looking at in a normal environment for that RSA ratio..

Sure. Thank you, Rick. First thing, I am going to continue to point you to Page 4 of our materials this morning, which shows the risk-adjusted return, really the relationship between NCOs and RSA, which generally trend in line with each other. You are right.

As you think about 2024, you do see some lift continuing on the net charge-off line which pulls back through the RSA, you continue to get headwinds as the interest-bearing liabilities will reset. We have -- 92% of our CDs will reset in 2024, 74% of our debt will reset in 2024.

So you're going to have a full-year effect of the rate increases that we've seen in 2022 and 2023 flow through the book. And again, we're expecting -- I think in the guidance, we said, listen, payment rate does not get back to pre-pandemic levels.

So you're not getting the full interest and fee yields going back through, you have higher interest-bearing liabilities, which will in theory benefit the company through a low RSA to the extent that interest-bearing liabilities comes down faster through other resets, you would see an increase to the RSA..

Great. That's it from me. Thank you guys..

Thanks, Rick..

Thanks, Rick. Have a good day..

Our next question comes from Ryan Nash with Goldman Sachs. Please go ahead..

Good morning, guys..

Good morning, Ryan..

Good morning, Ryan..

Brian, maybe as a follow-up to the first question. I just wanted to flush out the NII and NIM guide a little bit more.

Can you maybe just talk about, one, what gets us to the bottom end of the range to the top of the range, obviously, it's a pretty wide range and maybe just explain a little bit further, what is the 30% beta? Is that a point-to-point? Is that a downside? I just want to make sure we fully understand that.

And lastly, just given that you are liability-sensitive on the way up, do you still see a path to a 16% NIM and over what timeframe? Thanks..

Yeah. Thanks for the question, Ryan. So let me deal with the beta comment first. So, when you think about beta, this is really the beta in year for really effectively the end of the year. I think, if you think about betas over a longer period of time, so think about what you would see in any rate declined cycle here.

I would not expect a beta one, we didn't get one on the way up. So, we wouldn't get one on the way down. When you look at our book of -- our portfolio of liabilities, we were approximately 80% beta on savings, 90% beta on CDs. I would expect that over that cycle coming down.

So, over time, you're going to see it kind of probably mirror the way it went up, it will mirror on the way down. So, that's how I would think about betas over the over the longer-term.

When you think about the net interest income, the question here becomes, what is the assumption? If you go -- we have three rate cuts in and the market has six, some have as early as March. So, most certainly, if interest-bearing liabilities starts earlier and there is greater rate declines, that could push your NII dollars up.

Conversely, if rates don't get cut off, it could push you a little bit lower. And the big other factor that’s going to come through here is going to be what this payment rate continue to do. We have been conservative, I think on payment rate, saying it doesn't get back to pre-pandemic levels.

I think it's been slower than our anticipated decline here in 2023. So those are generally the moving pieces as I think how you slide between a range of $17.5 billion to $18.5 billion..

Got it. And maybe as a follow-up on credit, you talked about starting to see delinquencies follow more normal patterns and also [charge-offs] (ph) speaking by the second-quarter.

Brian, if your outlook proves to be correct, when do we start to see the allowance coming down? When does it peak and come down? And maybe just help us understand the potential magnitude that it could come down over the course of the year. Thank you..

Yeah. So we're entering the year at 10.26% on a coverage rate basis. I would expect in the first quarter, you're going to see a rise in normally seasonally rises, receivables go down, number 1. Number 2 is [Technical Difficulty] of just under $200 million, around $200 million for the Ally Lending portfolio that we bring over.

There will be some on the purchase accounting marks that will increase that coverage rate a little bit as well it doesn't go through the P&L. So you're going to see a rise really in the first-quarter, call it, seasonally. We anticipate that it will be lower than 10.26% as we exit out of [2024] (ph).

So you're primarily going to see growth builds as we move throughout the year, but you will see rate declines. Some of the QAs burn-off or get realized. And again, if credit performs as we think it would, you’d be exiting down towards the day-one, we won't be at day-one most certainly in 2024, but trending downwards as we move through the year..

Thanks for the color, Brian..

Thanks, Ryan..

Our next question comes from Moshe Orenbuch with TD Cowen. Please go ahead..

Great, thanks. I know that your guidance doesn't contemplate the late fee ruling yet because it hasn't been issued, but maybe could you -- you did mention that you spent $7 billion kind of in preparation.

Could you talk about the things that you are doing in preparation and kind of any updated thoughts you have on the fact, that we're sitting here kind of in that towards the end of January and haven’t heard anything yet from the CFPB?.

Yeah, sure, Moshe. I'll start on this. We're obviously still waiting for the final rule to be issued, but with that said, while there still some unknowns in terms of the implementation period and other things that we'll see in the final rule, we've been working on this for almost a full-year now at this point. It's very complicated.

Our teams have done a lot of work in preparation for this. We spent a lot of time with our partners. We've agreed on pricing actions and offsets that we would deploy when we see the final rule. So it's really all the work that has been going on over the past year. I mean it's systems work. You've got to issue a lot of CITs, change in terms.

And so it's really that kind of stuff. I will say that the conversations with our partners have been very constructive. They fully recognize that without these offsets, that a meaningful portion of their customers that we approve today and that we underwrite and give credit to would no longer have access to credit.

And that's something clearly we do not want, they do not want. So really no change to what we said in the past. Our goal is to protect our partners, fully offset the impact of the final rule when it does come. And we want to continue to provide credit to the customers that we do today..

Great, thanks. And just as a kind of as a second thought, when you look at the different kind of verticals, obviously you had strong growth in 2023, and a couple of them in Home & Auto had been somewhat weaker, particularly as you got closer to year end.

As you look into 2024, any changes in mix in terms of the growth, anything that you're seeing for launches and product refreshes that are going to drive in those various lines?.

Yeah, I think, look, generally we would continue to expect outsized growth in Health & Wellness. That's a platform where we've accelerated investment in the past year or two. We're seeing really good growth from our acquisition of Allegro Credit. It's a big market. We've got a leading position.

This is dental, vet, cosmetic, great engagement with partner network. And so that's a platform we'll continue to invest in, and we would expect to see growth there on the higher side relative to the other platforms. The other one I would mention is digital.

That's where we've got Venmo, Verizon, PayPal, Amazon, and so I think you'd continue to see some outsized growth there. And then maybe a little bit softer in lifestyle and home and auto. I don't know, Brian, if you’d add anything to that..

No, you'll see Health & Wellness and digital will be above average. Diversified value will be around company average, maybe a hair below, and then you'll see lifestyle.

And listen, the home and auto trend, particularly in the home, what we're seeing there is lower foot traffic in the store, and we see frequency not necessarily terribly down but it's more transaction values. Our people are -- they're buying a mattress, they're not buying high-end mattress, they're buying a little bit lower.

So we would expect that trend to continue into the start of 2024..

Thanks very much..

Thanks, Moshe..

Thanks, Moshe..

Thanks. Our next question comes from John Hecht with Jefferies. Please go ahead..

Good morning, and thanks for taking my questions guys. Most of my questions have been asked and answered, but I guess one other question I have is, I think we've had depleted recoveries on the charge-offs side, part of that equation over the past couple of years.

I'm wondering, Brian, to what degree does maybe a recovery and recoveries impact the NCO guide?.

Yeah. Thanks for the question, John, and good morning. When we look at recoveries, we've done a couple of things really through the pandemic. Number one, we made a strategic shift to in-source our recovery operations.

So we used to have a lot of it externally managed, we brought it in-house, which effectively drove rate increases on the ultimate recoverability of dollars written off, so that was a positive as we move through.

You are right, when you look at it, particularly when you're doing some level of forward flow, on a rate basis, that's down and your total charge-offs are down, but I think the swing that we had of being more efficient by in-sourcing has helped to offset that. So, I think on a relative percentage, it's been flat.

Most certainly, it should rise as we step out of 2023 for a couple of reasons. Number one, you're right, we will get more volume just on the net charge-off basis. And then if you do see an easing of rates, the cost of capital associated with people who purchase written-off paper should go down and you get better pricing in the market.

So, there's a number of different dynamics for us that it hasn't been much of an issue on net charge-offs and probably exiting out of '24 maybe provides a tailwind beyond..

Okay, and maybe kind of a higher-level question. I think, Brian, I think you mentioned non-discretionary versus discretionary purchase activity was consistent.

I'm wondering, I mean, given inflation is stabilizing, we got student loan repayment turn back on, are you seeing anything on the margin that would reflect changing consumer behaviors? Is it just sort of been steady-as-she-goes given those changes in the macro?.

Yeah, as we highlighted, John, what we're seeing is a little bit of a rotation out of some of travel into some of the other items. Again, that was a trend more in the fourth quarter. We would expect travel to ease as you move into 2024, so that's bigger. So, we do not see the shift between discretionary and nondiscretionary.

We do not see a shift where the consumer is trying to really stretch dollars. We do see our transaction values down and frequency up a little bit, which means that as the consumers are making purchases, they are trying to be efficient with the dollars, but not really, really pulling back. So, as I look at it that, I don't see big overwhelming trends.

I would tell you, for the first 20 days and I always put that as a frame of reference, sales have been a little bit softer than expectations as we entered into 2024, but that's only 20 days of data and If I talk to some of my retail rent, they would tell you whether did play a factor, you had several states that have been cold and significant storms.

But there has been lower foot traffic generally across the board as we started 2024..

Great. Appreciate the color..

Thanks, John..

Thanks, John. Have a good day..

Our next question comes from Mihir Bhatia with Bank of America. Please go-ahead..

Good morning, and thank you for taking my questions. Maybe to start with, I wanted to ask about portfolio renewals and just portfolio movements. And I apologize, a two-part question.

But firstly, can you just remind us of your renewal cadence? Are there any large programs coming up for renewal here in the next 24 months? And then second part is just we've gone through a period of credit normalization, you still have the late fee rule outstanding.

So I was wondering what the environment is like for renewals and RFPs currently as you talk to retailers? Are retailers waiting for a little bit more certainty or -- I mean I know you announced J.Crew this morning, you also buying the Ally portfolio.

But, like, what about the other big retail programs? [indiscernible] like, can you put your pipeline in context maybe, like, what it looks like and just put that into context for us relative to last year or few years ago or normal environment? Thanks..

Yeah, so I would say, first, I'll take the second part first, which is late fees and how that's impacting the pipeline. I do think it does make pricing new business, even renewals to some extent, a little more challenging. But we've been able to kind of work through that. You mentioned J.Crew. We're excited to announce that new program.

But you've got to spend time. That's part of the negotiation, right? And there's speculation there and there's some uncertainty. And so you kind of got to try and cover yourself for those possible outcomes, which we believe we've done. So it does make, I think, pricing new business or renewals a little more challenging.

I do think there'll be some clarity here in the next month or two, and that will clear that up and make things a little bit easier from that perspective. But it has influenced, I think, not only us, but other market participants. It's a big part of the conversation when she gets through.

The way I think about the kind of the BD or the sales process, it's a lot about capabilities, technology, data analytics, data share, all those things. But then when you get to the financials, this is a big part of the discussion that's crept in there over the last 12 months just given the uncertainty.

The other thing, just in terms of our pipeline for renewals, the vast majority of our programs are out there 2026 and beyond.

With that said, if we have an opportunity, as always, if we have an opportunity to renew early, if there's something the partner wants to change in the deal or something we want to change, we'll get together and see if we can kick the term out a few years. So that's something we're always actively trying to work on with our partners..

Yeah, the only thing I'll answer is or just add, but you'll see in February, again, we'll continue to update the revenue that's under contract in ‘26 and beyond. So expect that in February..

Excellent. Thank you. And then just switching gears, in terms of the health of the consumer, it sounds like stable, still feel pretty good about it. So I was wondering about your underwriting posture here. Clearly, soft landing is becoming more of a consensus view.

I know you aren't prone to big gyrations there, but how are you feeling about that underwriting posture? Maybe just talk about like what your standards look like today versus maybe one year ago or even 2019.

Is this like 2024 like more of a normal year? Is it still a little on the tight side and the opportunity to loosen and drive growth? Just any comments there..

Yeah, here we are again, it’s gotten a lot of issues and troubles they've tried to underwrite growth in ‘21 and ‘22 vintages, which people are paying the price for now. Some refer to it as growth mass. Some refer to it as losing standards and lower returns.

So we're not going to use credit as a mere growth lever for us, we are more proven than we were a year ago. Again, we talked about we do idiosyncratic actions on partners and channels, I don't want to say every day, but most certainly we watch it every day.

We took broader based actions both in 2Q and 3Q given the shared consumer and what other people have done from an underwriting basis. We were slightly encouraged in the fourth quarter as we've seen at the bureaus that other issuers have begun to take credit actions, which will benefit the industry in the latter part of 2024.

But I think we're going to be cautious as we move throughout the year. We're going to continue to watch the trends of the consumer. Again, we haven't seen the consumer stretch.

When we look at payment rates, the payment rate movements by credit rate have been relatively consistent, and probably the biggest mover has been in the [6.60 to 7.20] (ph) range, which you'd see in a non-prime person. So again, we look at it and say, okay, I don't see the consumer stretching from a spending standpoint and struggling.

We don't see the payment rate changing. We're going to continue to watch the flow and the delinquency. Again, entry rate continues to be better than 2019, which again, the flow to loss gets worse whenever entry rate goes down. But we generally -- we're generally cautiously optimistic on credit, and which is reflected in the guide of 5.75% to 6%..

Thank you..

Thanks, Mihir. Have a good day..

Our next question comes from Sanjay Sakhrani with KBW. Please go ahead..

Thanks. Good morning. Brian Doubles, you were pretty active on the transactions front with the sale of the pet insurance business and part of the business and then the acquisition of the Ally Lending business.

Could you just maybe a little bit more on what drove those decisions and then what the pipeline for other deals look like? I mean, I think there's one big fish at least out there in terms of a portfolio.

So, can you just talk about what the positioning is there?.

Yeah, let me -- well, why don’t I start with Ally because it's the more recent of the two transactions. I mean, look, I think we're super excited about this acquisition. I think it's actually great for both companies. These were conversations that JB and I started back in the first half of ‘23.

I think this wasn't a scale business for Ally, but on our side, this is absolutely a scale business. This is exactly the type of acquisition that we look for. These are businesses and industries that we know really well. We obviously have a presence already in home improvement and health and wellness.

In fact, as we got into this, we realized that we serve some of the same partners. So as I think about Ally, it really just complements and accelerates our current strategy.

I also think that, and Brian covered this, got a very attractive financial profile, it’s EPS accretive, it's got a nice ROA that'll be in line or maybe a little bit better than the company average. We get 2,500 new merchants. We get 500,000 new customers. So there's really a lot to like here.

I mean, this is a nice bolt-on acquisition for us and will be a nice ad for both Home & Auto, but also Health & Wellness. And then Pets Best was really more opportunistic. We weren't looking to sell the pet insurance business. It's been a great business for us.

We're obviously creating a lot of value in a relatively short period of time We did a great job growing the business. From 2019, we grew the pets in force over 5x. We took the business to number seven or number eight to the number four pet insurance provider in the US. And when IPH approached us, it was a great offer, tough to turn it down.

It's over 10x our original investment. We'll record a nice after-tax gain. But I think more importantly than that, it allows us to stay invested in the pet space and do it with someone, a great partner like IPH that has the scale, that has the expertise.

And so we think there's not only a nice financial gain, but a long-term strategic play here that will benefit us. So it's a nice way to close out the year with two, I think, really great transactions..

Other deals? What else is out there?.

Sorry, Sanjay, one more? Say that again?.

Yeah, you were saying -- I asked, sir, what else might be out there? One big portfolio out there right now..

Yeah. Look, we got a lot on our plate. I'd start with that. We got to get both of these transactions closed, which we hope to do in the first quarter. We got a lot going on in 2024, for sure. With that said, we typically get invited into most RFPs in this space and the things that are important to us haven't changed.

We look for a good risk adjusted return. We look for really good alignment with the partner. I think that's probably the most important thing, particularly when you're looking at large deals.

You've got to make sure that both partners like the deal in good times and bad times, that our interests are aligned around marketing and credit and underwriting and really all aspects of the program. So we'll always be in the market for opportunities that fit that screen..

Got it. And just one follow-up.

I guess, Brian Wenzel, like in your reserve coverage, what do you -- or for the year, what are you assuming for the unemployment rate specifically?.

The unemployment rate as we exit out of 2024 is 4%..

Got it. All right, great. Thank you..

Thanks, Sanjay. Have a good day..

Our next question comes from Jeff Adelson with Morgan Stanley. Please go ahead..

Hey, good morning. Thanks for taking my questions. Last year you ended up seeing your loan growth come in about the initial expectations of that kind of initial 8% to 10%.

I guess I'm wondering if you think there's maybe some potential upside or a similar setup this year? And then more specifically, could you talk a little bit more about the specific drivers that you see getting you to the low end versus the high end of the range there in that 6% to 8% in terms of payment rate, consumer spend, new account growth, and maybe even how additive you think that this installment opportunity could be to your growth? It seems like you're maybe leaning in a little bit more here with the acquisition and the pre-qualification launch this year..

Yeah, when I look at the growth rate, Jeff, what gets you to the lower end of the range is a couple of things potentially, right? A softer consumer, right? The macroeconomic environment softens up, number one. Number two, payment rate remains more elevated than we anticipate. You'll be at the low -- could be at the lower end of that range.

If we -- if the credit actions we've taken deliver more of a sales impact than we expect, again, it's not material in whole, that could put you lower than range. Conversely, as you think about the high end of the range, if payment rates decline faster than we think, number one.

If you see the economy maybe be a little bit more robust than what we're seeing on -- we gave you GDP growth rate there, but the economy's a little more robust, and we see spending elevate. You can see some more there.

With regard to, well, certainly the home specialty, that's been a vertical inside of Home & Auto that has grown nicely for us, will continue to grow nicely for us. It's really not going to move the company average, so it's a nice acquisition.

The acquisition itself is not necessarily generally going to be material enough to move a lot of the underlying metrics. You'll get the pop day one and most certainly it will grow as we create the synergies between our home specialty platform and what's a very attractive Ally Lending point of sale platform.

So the combination will grow a little bit faster, but it shouldn't move the overall needle of the company..

Got it. And just to follow up on the new expense ratio guide, I know in the past you've given more of a quarterly dollar amount. It seems like you might be implying a pretty very low single digit type expense growth next year.

Is that right and where do you think you're kind of gaining some efficiencies from here? Is it on marketing, lower comp, et cetera?.

Yeah, so first of all, on the switch to really efficiency ratio, Jeff, if you recall a number of years ago, we were actually on efficiency ratio and that's what we guided long term. We pivot during the pandemic because of the implications to revenue, because of the payment rate dislocation that we saw.

So we're trying to be more helpful to investors and analysts by going to dollars. Now we're just really migrating back to where we should be from an efficiency ratio standpoint and where the industry generally operates, number one.

With regard to the expense dollars, if I look at controllable dollars, so if I take operational losses out, we can control them, but take that out for one second, and you remove marketing, which is more contractual for us based upon volume. We are growing expense at a slower rate. So we're getting operating leverage inside the company.

We need several investments as you saw in our notable items, both on a voluntary early retirement program as well as some smaller but again, meaningful impacts to our facilities that will drive a benefit in 2024. So I think from a controllable expense standpoint, they're going to be -- you're going to see operating levers when it comes to that.

With regard to operational losses, we've invested in some incremental tools that have there some new strategies. So we expect that growth rate to really flatten out as we move ‘23 to ‘24..

Great. Thank you..

Thanks, Jeff. Have a good day..

Our next question comes from John Pancari with Evercore ISI..

Good morning. Just have a couple of follow-ups on the late fee topic.

I guess in terms of the offsets, can you just remind us what is likely to be the most material mechanism in offsetting the impact of the late fees? Is it incremental fees or the underlying interest rates that you're dialing in? And then, secondly, how -- can you talk about the competition for negotiating the offsets that you indicated are in place? Is it, how heavy is it in terms of competition? Are there competitors out there willing to eat the cost? And could you possibly see any relationships move as a result of this?.

Yeah, let me start with the second one first. I think we're all on a level playing field here in terms of the new late fee proposal. So as we're in there trying to, whether it's a renewal or new business, the impact is the same. I think it all comes down to what is the issuers required rate of return, what are the things that are important to them.

So I don't see it changing the competitive dynamic much because it impacts us all equally. It really depends on the type of portfolio, what's important to the partner, the sharing, the alignment, all the things I talked about. So I don't think it will have -- I don't see it having a big impact there.

And particularly at the point at which we have some clarity here around a final rule, then I think it becomes even clearer in terms of what to bake in.

And, Brian, why don’t you talk a little bit about the APRs and fees?.

Yeah. So, obviously, John, we have a set of pricing strategy changes that will come through, some of which come through with a faster cadence in 2024, which will be fee oriented as well as some policy orientation. And then there will be APR increases that build with some of which you'll see in 2024 if the rule gets issued and then build into 2025.

So we'll be back if the rule does get issued. We'll come back and probably provide a little bit more color with regard to how to think about that in the context of 2024. Some of these will have a bigger short-term impact, some of them will have a bigger long-term impact.

And so, we'll be in a position to provide a little more clarity when we have a final rule and we start to roll out some of these actions..

Got it. Okay, great. Thank you. And then, secondly, just around your purchase volume, I appreciate the color you gave in terms of the drivers between the different verticals.

Overall, as we're looking at 2024, what's your expectation for total card purchase volume or overall purchase volume as you look at the full year versus 2023, and the same for overall account growth? Thanks..

Yeah, so I'd say, we're not specifically guiding, John, on purchase volume. Obviously you've seen the rate of asset growth decline from 2023 to 2024, there was some impact last year really around that asset growth of -- stemming from payment rates decline, which again, we don't think it will have as big an impact in 2024.

So I think you're going to see something generally consistent with probably last year. I mean, a good benchmark is sit back and say, we do see GDP at 1.7%. We grow multiple of that. So again, probably generally consistent with the last year. You've got to remember, too, our purchase volume at $185 billion for 2023 was a record high for this company.

So we are facing a difficult comp as we move into 2024. But again, we're proud of the sales platforms and the differentiation and diversification that's inside of those platforms..

Okay, great. Thank you..

Thanks, John. Have a good day..

Our last question will come from Mark DeVries with Deutsche Bank. Please go ahead..

Yeah, thanks. I wanted to ask about your thoughts around preferred equity issuance for this year.

Brian, does that need to be additive to total capital levels or does it free you up to replace some of that with or return some common? Talk a little bit about potential timing, what you kind of need to see from a market perspective and also how much you might look to issue?.

Yeah, thanks for the question, Mark. As we look at the capital stack, we fully developed our Tier 2. We have about 75 basis points, give or take, of capacity in Tier 1, which puts the max amount you probably can do just to reach the target level for Tier 1 of about $750 -- $700 million to $750 million, ultimately that you'd want to do.

We don't necessarily think of that relative to common equity as more as we want to develop, most certainly the most cost-effective capital structure that we want, the timing of which is going to depend upon market conditions. Rates throughout 2023 were incredibly high and wasn't necessarily the best time to kind of issue it.

We'll look at how the markets develop in 2024 and whether or not there's desire to invest or demand for the products. And we'll also look at the structure of whether or not that's a more retail-oriented preferred stock or not. So there's a number of different factors that go in.

It just really goes into how do I fully develop all the levels of the capital stack from a regulatory standpoint..

Okay, great. And then just to follow up on kind of your updated thoughts on plans for how to deploy the capital created by the Pets Best sale..

Yeah, I don't think our priorities change. We generated some capital in ‘23 by making some adjustments. We'll spend about 50 basis points of capital on the Ally transaction. We'll generate about 80 basis points on the Pets Best sale and net of the investment that we're taking back in IPH. So I think that kind of goes [on the pie] (ph).

We will look to the priorities of organic growth, number one, maintaining the dividend, two, and then three, we'll look either at share of purchases or if there's other inorganic opportunities. Again, I think we're very focused when it comes to inorganic opportunities. It has to be the right thing.

It has to be priced incredibly well, which we feel we got with Ally Lending. And so we'll be prudent when it comes to deploying that capital. But again, we're not changing the strategy or the cadence because of the Pets Best transaction..

Got it. Thank you..

Thanks, Mark. Have a good day..

Thanks..

Thank you. Thank you for your participation. You may disconnect your line at this time and have a wonderful day..