Is Synchrony Bank in Trouble?

While it’s true to say that the consumer finance business is unfailingly cyclical, it’s rare to find conditions as antithetical to the industry as the ones we are experiencing right now.

In fact, it almost appears as if there is a cosmic conspiracy intent on wrecking the fortunes of companies that specialize in providing retail credit.

Exceptionally high interest rates – and curbs on household spending – are just some of the ways this perfect storm of headwinds threatens any lending operation that dares open its metaphorical doors.

And if things weren’t bad enough, the liquidity squeeze afflicting the banking sector has only added more volatility to an already unstable situation.

But among the weeds of this current predicament can be found Synchrony Bank, a consumer finance corporation that has shown remarkable resiliency to the challenges of late.

Indeed, if a prolonged recession is on the cards, there might not be many firms that make it out alive.

However, SYF could be one of the few who do. Its exposure to high-margin opportunities in the e-commerce space means it has avenues of growth that other enterprises do not, while its extremely cautious credit loss allowance makes its conservative positioning attractive.

Moreover, Synchrony demonstrated its pedigree during the 2020-22 era, remaining a profitable concern throughout the entirety of that dreadful period.

That said, nothing is certain, especially with the macro climate is so utterly unpredictable. Therefore, let’s take a look under the hood and see what Synchrony Bank really has to offer.

Synchrony Bank: A Wealth Of Partnerships

According to SYF’s independent internal analysis, the company is the world’s leading brand when it comes to total cardholders, with a growing appeal to borrowers in the Millennial and Gen Z demographic base.

Furthermore, its reach spreads across “deep and diversified industry platforms,” with such venerable names as Walgreens and PayPal represented in its stable of associates.

However, for the long-term viability of any business, a company must have some way of generating consistent or intermittently repeatable cash flows over time.

In some ways, Synchrony Financial has uncovered the perfect solution to this conundrum. It’s teamed up with a raft of large, multi-national entities whose sales volumes represent some of the biggest revenue hauls in the world.

For example, one of its most significant collaborations is with the online marketplace giant Amazon. The bank provides the venture with various credit card solutions for shoppers on the site, reaping its own reward through the interest it charges on outstanding balances.

Similarly, Synchrony has found a way to drive these relationships to bring about a higher risk-adjusted return for every account it controls. This has manifested in a 98% increase in total sales, and a growth in revenue of up to 36% as users add more and more supplementary cards to their collections.

And SYF never rests on its laurels. The company continues expanding its portfolio and product lines, launching its buy now, pay later offering with Discount Tire and Belk, while ensuring its pet financing solution, CareCredit, is the first choice for BluePearl and VCA Hospitals.

How Strong Is Synchrony’s Balance Sheet?

If any company can survive this new and unfolding economic disaster, the underlying health of its asset base will undoubtedly play a critical role.

Indeed, a lack of immediately available funds did for Silicon Valley Bank earlier this year when its customers decided to initiate a run on the institution after confidence in the organization dissolved.

Unfortunately, SYF’s latest quarterly earnings report paints a mixed picture of the business, with some bright spots interspersed among some otherwise less-than-optimistic warning signs.

To begin with, regarding ready cash issues, the firm looks to be in a good place. Synchrony’s undrawn credit facilities were up 11% for the period, while its liquid assets grew to $14.2 billion, giving it an overall increase in total liquidity of 10% at $17.2 billion.

In addition, the company’s funding sources rose 300 basis points to $85.9 billion, which, coupled with an increase in its loan receivables and average balance per account of 15% and 10%, respectively, suggest it’s moving in the right direction.

However, new accounts are down 13% year-on-year, while interest expense has risen 170% to $602 billion. What’s more, net earnings dropped 29% even as total interest income increased to $4.7 billion.

Can Synchrony Keep On Improving?

A key differentiator that separates SYF from its industry peers is the firm’s willingness to embrace and exploit technological change.

For instance, the company’s real-time credit decision-making process is informed through its proprietary and multidimensional underwriting protocols, entailing anything from using alternative data sources – such as utility and telecom information – to biometric and partner-specific intelligence.

Crucially, despite Synchrony having over 90 million users at each of its top four digital commerce programs, it believes there is a further $700 billion total partner opportunity to be realized in the market. This comes atop a $400 billion chance in its Lifestyle vertical and another $2.3 trillion in the Home & Auto domain too.

Is Synchrony Bank About To Collapse?

Although SYF faces some obstacles in revamping a few of its flagging performance metrics, the business is in good shape going forward.

As such, its worsening interest expense isn’t much of a worry as higher benchmark rates affect all credit providers equally.

Moreover, Synchrony returned $803 million to shareholders in the fourth quarter, including $700 million spent on share repurchases alone.

However, after its 10% loss in value this year, SYF will be in a good position to rebound. And, until that time occurs, there’s always a 3.16% dividend yield to keep the income investors happy.

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