Synchrony takes hit from investors after charge-offs rise

Credit card issuer Synchrony Financial took an earnings hit Tuesday after reporting weaker-than-expected net interest income and a jump in net charge-offs. 

Synchrony, which partners with retailers on store credit cards, saw its shares fall 7% even though its net earnings jumped to $774 million in the fourth quarter, up 76% from a year earlier. 

Brian Wenzel, Synchrony’s executive vice president and chief financial officer, said there’s been a significant increase in the number of borrowers making the minimum monthly payment across all credit tiers. But he also said that Synchrony isn’t seeing cracks in the consumer.

“We don’t see things that are troubling to us,” Wenzel said. “We continue to believe that a lot of the pressure across the industry was too much credit being put out for certain cohorts, and their ability to really handle that credit.” 

For more than a year, Synchrony has pulled back on underwriting riskier borrowers, taking a cautious approach that it has said kept a lid on the number of customers falling behind on their payments.

The fourth-quarter credit-quality metrics at Synchrony were a mixed bag. The Stamford, Connecticut-based bank reported a slight decline in its 30–plus-day delinquency rate. That rate fell to 4.7%from 4.74% a year earlier. But its net charge-off rate rose to 6.45% from 5.58% a year earlier, and was higher than the average from 2017 to 2019.

The bank’s executives said they are confident in the credit outlook and their ability to reaccelerate profitable growth.

Synchrony’s revenue for the quarter rose 4% to $3.8 billion, but was still slightly below consensus estimates. The company is forecasting 2025 net revenue in the range of $15.2 billion to $15.7 billion. It reported net revenue of $16.1 billion for 2024. Synchrony reported earnings per share of $1.91, compared with $1.03 per share a year earlier, missing analysts’ consensus estimates by two pennies a share. 

Synchrony’s net interest income — the difference between interest earned on loans and paid out on deposits — rose 3% to $4.6 billion in the fourth quarter, up from $4.5 billion a year earlier, due to higher interest and fees on loans. Wenzel said “there is still room to grow,” from promotional fees, interest charges and paper-statement fees. 

The company expects a better operating environment going forward.

“We are watching for continued stability in the macro environment, more confident consumer spend behavior and continued improvement in our delinquency performance to support the gradual reversal of our credit restrictions,” Wenzel said.

Synchrony faced a huge potential earnings headwind from the Consumer Financial Protection Bureau’s rule to cut credit card late fees to $8, down from more than $30. In response, Synchrony “repriced its business higher on several fronts,” wrote Brian Foran, managing director at Truist Securities, in a note to clients. 

“The late fee cut has still not happened, and seems like it probably never does at this point,” Foran wrote.

The late-fee rule is the subject of a court battle after bank trade groups sued the CFPB to keep it from taking effect. Unlike other card issuers, Synchrony chose to get ahead of a CFPB’s rule by dropping its late fee to $8. Most of its competitors stuck with fees of roughly $30 or more.

To compensate for the revenue hit, Synchrony hiked interest rates on its credit cards last year and added monthly fees for customers who choose to receive paper statements, in order to blunt the rule’s impact. In December, a Texas judge ruled that the late-fee rule violates existing regulations. 

“Given the uncertainty with regard to the litigation process and the political landscape surrounding the rule, our outlook assumes no impact from the potential late fee rule change,” Wenzel said Tuesday. 

Purchase volumes fell by 3% to $48 billion during the fourth quarter, but the company still approved millions of new cardholders. Synchrony’s new account openings fell 19% to 5 million in the quarter, while average active accounts dipped 2% to 70.3 million. Loan receivables rose 2% from a year ago to $104.7 billion.

Last year, Synchrony completed its $2.2 billion acquisition of Ally Financial’s point-of-sale lending unit, Ally Lending, and it’s in the process of transitioning 2,500 merchants to its Synchrony Pay Later product. The company also finalized the sale of its Pets Best subsidiary, which resulted in a $750 million after-tax gain on sale. 

On a conference call, Goldman Sachs analyst Ryan Nash asked whether Synchrony plans to buy back stock or deploy capital in other ways to reaccelerate growth.

“I know a lot of people are going to try to make a read-through into what we did and the cadence for the quarter,” Wenzel responded. “I just want to be clear. The cadence for the quarter being lower than some of the prior quarters was more our kind of view on the market and what was going to be potentially a more volatile market given the presidential election and the aftermath on whichever an administration kind of came through in the flow-through effect. So we kind of predetermined that, that wasn’t a quarter that we were going to be heavily leaning in from a buyback perspective.”

Synchrony moved to a more conservative underwriting stance in 2023 through mid-2024, but that could change as U.S. consumers continue to show an appetite for taking on more credit and managing spending. 

Synchrony President and CEO Brian Doubles said the company added more than 45 new partnerships with merchants in 2024, including the guitar-maker Gibson, and renewed and extended its partnerships with Sam’s Club and JCPenney. It also introduced its Pay Later product, a buy now/pay later financing option with six-month, 12-month and 24-month installment payments.

Doubles said the buy now/pay later landscape has changed dramatically.

“I think it’s different than it was probably two or three years ago where you had partners that were leveraging fintechs, looking for buy-now-pay-later solutions, they were basically doing anything they could to generate and drive sales,” Doubles said. “Now they’ve kind of taken a step back and they said, ‘Hey, we want a product that can be a starter product, a way to bring in new customers and then over time, graduate them to a revolving product, co-brand card.’ And when you look at the economic model associated with that, it’s really compelling. It’s great for us.”