Synchrony Financial (SYF) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the Synchrony Financial Fourth Quarter 2015 Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. [Operator Instructions]. And I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations. Sir, you may begin.

Thanks, operator. Good morning, everyone and thanks for joining our 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 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 is my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone and thanks for joining us. As you are aware, the fourth quarter marked a major milestone for our company. We completed the separation from GE through the successful execution of the exchange offer. We're very proud of this significant accomplishment. There are likely several new shareholders on the call today as a result. We welcome you. And several previous owners that may have opted for larger stakes in our company during the time of transition. We thank you for all your support in making this transaction a success and the team looks forward to seeing you this year. We're excited about our future prospects as a focused, standalone company and look forward to reporting our progress to you. We were honored to have our stock added to the S&P 500 index upon consummation of the exchange offer. This is a testament to our strong position among leading financial services companies. During the call today I will first provide a review of the fourth quarter. Brian will then give more details on our financial results and outline our 2016 outlook. Finally, I will conclude with the overview of our strategic priorities. I will begin on slide 3. Fourth quarter net earnings totaled $547 million or $0.65 per diluted share. Overall strong momentum continued across each of our business platforms driving strong purchase volume, receivables and platform revenue growth for this quarter. Compared to the fourth quarter of last year, purchase volume grew 8% with holiday sales supporting this strong growth. Online and mobile sales volume was a key component of our holiday sales. Our online and mobile sales growth steadily accelerated throughout last year with fourth quarter sales growing 23% over the same quarter of the prior year. Our online and mobile sales growth has far outpaced U.S. growth trends which have been in the 14% to 15% range. We delivered another quarter of strong receivables growth. Loan receivables were up 11% and platform revenue grew 5%. Asset quality strengthened as demonstrated by a 9 basis point decline in our net charge-off rate and an 8 basis point improvement in 30-plus day delinquencies. Expenses were in line with our expectations, with the increase being largely driven by investments being made in support of growth initiatives, as well as the infrastructure build associated with our establishment as a standalone company. Deposit growth continued at a very strong pace, with deposits increasing $8 billion or 24%, to $43 billion. Deposits now comprise 64% of our funding sources, squarely in line with our targeted range of 60% to 70%. Competitive rates, outstanding customer service and the continued enhancement of our product suite have driven these results. One of our strategic priorities is to build Synchrony Bank into a leading full scale online bank. And we plan on launching new product offerings later this year to growth and further boost the retention of our deposit base. Our balance sheet remains strong with a common equity Tier 1 ratio of 16.8% calculated on a transitional basis and liquid assets totaling $15 billion or 18%, of total assets at quarter end. During this time of transition we remained very focused on driving business momentum. During the fourth quarter alone we renewed several key relationships including Dick's Sporting Goods, Discount Tire, P.C. Richard & Son, Polaris and Mohawk Flooring. We also launched two of our recent wins with Newegg and Stash Hotel Rewards. We're enthusiastic about the prospects for these relationships and our ability to continue delivering significant value to these programs. Driving organic growth remains a key opportunity and we rigorously pursue initiatives to promote card usage and deepen penetration across all our partnerships. Given the rapid pace of change within the digital payments area, online and mobile channels are increasingly important channels for our business and we're seizing the opportunities that are being presented to us by the swiftly changing environment. Through our innovation and strategic partnerships we're helping to shape the future of how private label cards function in mobile wallets and provide value to our merchants and their consumers across mobile channels. This quarter we launched two mobile applications that leverage innovative technology to provide enhanced functionality across our mobile product suite. Both of these efforts build upon collaboration with our strategic partner, GPShopper, a leader in integrated mobile platforms among retail clients. First we launched the CareCredit mobile application. This app, available on the Apple Store and Google Play, enables millions of CareCredit cardholders convenient access to account servicing options. It includes the ability to locate healthcare providers and help focus merchants which can facilitate the connection across CareCredit's more than 195,000 total merchant locations. The app also features access to a digital card and offers a variety of value added notifications and updates. We already have seen more than 700,000 visits to date. We also launched the CarCareONE mobile app which readily connects millions of CarCareONE cardholders to more than 23,000 automotive related merchants nationwide. Users can quickly and easily access account servicing, a location finder and offers such as special financing on their smartphones. We also launched a pilot with JCPenney to offer their private label credit cards in Apple Pay. We continue to seek ways to increase the utility of our cards and their usage. Mobile applications are one of the ways we can readily connect cardholders and partners. In doing so we improve the experience for the cardholder, help to increase engagement and ultimately drive more purchase volume. Moving to slide 4 which highlights the performance of our key growth metrics this quarter. Loan receivables growth remains strong at 11%, primarily driven by purchase volume growth of 8% and average active account growth of 5%. The addition of the BP program in the second quarter also contributed to the annual growth rate. Platform revenue increased 5% over the fourth quarter of last year. We continue to drive incremental growth through strong value propositions and promotional financing and marketing offers that will resonate with our partners and customers. On the next slide I will discuss the performance within each of our sales platforms before turning over to Brian to review the financial results in more detail. We continued to deliver solid performance across all three of our sales platforms in the fourth quarter. Retail Card generated strong performance this quarter. Purchase volume growth was 8% and receivables grew 12%. The addition of BP in the second quarter also contributed to the growth rate. Platform revenue growth was 5%. As you may recall, there was a $46 billion gain on sale of portfolios in the fourth quarter of 2014. Renewing and extending our programs remain a key priority in this business and our success on this front is a testament to the strength and depth of our partnerships. This quarter we renewed our long-standing relationship with Dick's Sporting Goods, a key partner. With this extension we have nearly 92% of our Retail Card receivables under contract to 2019 and beyond. The strong position we maintain in this space and the collaborative partnerships we have developed provide a solid foundation for future growth. Payment Solutions delivered another strong quarter. Purchase volume growth was 9% and receivables grew 12% driving platform revenue growth of 7%. Average active accounts increased 11% over last year. The majority of the industries where we provide financing had positive growth in both purchase volumes and receivables with particular strength in home furnishing and automotive products. We were very pleased to have extended our long term relationship with Discount Tire, P.C. Richard & Son, Polaris and Mohawk Flooring this quarter. CareCredit had a solid quarter, purchase volume growth was 9% and receivables grew 7% driving platform revenue growth of 3%. Average active accounts increased 6% over last year. Receivables growth this quarter was once again led by our dental and veterinary specialties. In terms of business developments, we announced that Rite Aid is now accepting our CareCredit cards for prescriptions and general merchandise purchases in all 4,600 Rite Aid stores in the United States. CareCredit also announced the expansion of the patient financing agreement with National Vision, one of the largest optical retailers in the U.S. with over 800 locations across 43 states. In summary, each platform delivered solid results and continued to make progress in the development, extension and deepening of important relationships while continuing to drive organic growth. I will now turn the call over to Brian to provide a review of our financial performance for the quarter and our outlook for 2016.

Thanks, Margaret. I will start on slide 6 of the presentation. In the fourth quarter the business earned $547 million in net income which translates to $0.65 per diluted share in the quarter. We continued to deliver strong growth this quarter with purchase volume up 8%, receivables up 11% and platform revenue up 5%. Overall we're pleased with the growth we generated across the business in 2015. The value propositions on our cards continue to resonate with consumers. The business delivered growth in average active accounts as well as increases in purchase volume and the average balance per active account compared to last year. We also closed the BP portfolio acquisition in the second quarter so that helped improve our growth rate year over year. Platform revenue included a $46 million gain on sale of the portfolios in the fourth quarter of last year and excluding the gain platform revenue growth was 7%. Net interest income was up 8% in the quarter mainly driven by the growth in receivables. RSAs were up $36 million or 5%, compared to last year. RSAs as a percentage of average receivables were slightly under 4.5% for the quarter compared to 4.6% last year. On a full-year basis RSAs were 4.4% of average receivables in 2015 compared to 4.5% last year. The lower RSA percentage compared to last year is due to programs we exited last year where we paid a higher RSA as a percentage of average receivables as well as higher loyalty costs that are shared through the RSA with our retailers. The RSA percentage on a full-year basis has been relatively stable, around 4.5% for the past three years. The provision increased $26 million or 3%, compared to last year. The increase was driven primarily by receivables growth partially offset by the improvement in asset quality. The improvement in asset quality is reflected in lower 30-plus delinquencies which improved 8 basis points versus last year to 4.06% and the net charge-off rate which fell to 4.23%, 9 basis points below last year. Our allowance for loan losses as a percent of receivables is down 16 basis points compared to the fourth quarter last year to 5.12%. However, measured against the last four quarters of net charge-offs, the reserve coverage was 1.3 times. This is consistent with the coverage level over the past four quarters which has been in the 1.2 to 1.3 times range. Overall our reserve coverage metrics were fairly stable. Other income decreased $75 million versus last year primarily driven by the $46 million gain on portfolio sales last year, but also higher loyalty and rewards costs partially offset by an increase in interchange revenue. More specifically, interchange was up $27 million driven by continued growth in out of store spending on our Dual Card. This was offset by loyalty expense that was up $34 million primarily driven by new value propositions. As a reminder, the interchange and loyalty expense run back through our RSAs so there is a partial offset on each of these items. Debt cancellation fees of $62 million were down $5 million from last year due to the fact that we only offer the product now through our online channel. Other expenses increased $78 million versus the fourth quarter of last year. In addition to the infrastructure build that is now in the expense run rate, the majority of the increase was driven by growth and strategic investments in our deposit platform and our digital and mobile capabilities. The efficiency ratio for the quarter was 34% and 33.5% year to date which is in line with our annual guidance of below 34%. I will cover the expense trends in more detail later. Overall we had strong top-line growth and drove a solid quarter generating an ROA of 2.6%. I will move to slide 7 and go through our net interest income and margin trends. As I noted on the prior slide, net interest income was up 8% driven by loan receivable growth. The net interest margin was 15.73% for the fourth quarter, 13 basis points higher than last year. As we had expected and noted on our third quarter earnings call, the margin experienced a seasonal decline from the third quarter due to the buildup in receivables. However, the margin was about the guidance of 15% to 15.5% we set out back in January. As you look at the net interest margin compared to last year there are a few dynamics worth highlighting. While the yield on receivables was relatively stable at 21.2%, we did see a slight improvement in interest-earning asset yields as we carried a higher mix of receivables versus liquidity on average for the quarter. Cost of funding was relatively stable at 1.8% due to a higher mix of lower cost deposit funding, reductions in the bank term loan facility and the payoff of the GE capital loan which offset the cost of the senior unsecured debt issuance. Our deposit base increased by over $8 billion or 24%, year over year. We're pleased with the progress we have made growing our direct deposit platform; deposits are now 64% of our funding versus 56% last year. And while the fourth quarter margin was a little above the range we set up back in January, this was primarily driven by the benefit of using some excess liquidity to pay down the bank term loans. Overall we continue to be pleased with our margin performance which exceeded our guidance for the year. Next I will cover our key credit trends on slide 8. As I noted earlier, we continue to see stable to improving trends on asset quality. 30-plus delinquencies were 4.06%, down 8 basis points versus last year; 90-plus delinquencies were 1.86%, down 4 basis points. We continue to believe these improvements are driven at least in part by lower gas prices and generally a healthier consumer given the continued improvement in employment trends compared to last year. The net charge-off rate also improved to 4.23%, down 9 basis points versus last year. Lastly the allowance for loan losses as a percent of receivables was 5.12% which was down 16 basis points from the prior year. As I noted before, if you measure the reserve coverage against the last 12 months charge-offs we're currently at 1.3 times coverage which equates to roughly 15.5 months loss coverage in our reserve. As I noted earlier, this is fairly consistent with prior quarters. So, overall we continue to feel good about the performance of the portfolio and the underlying economic trends we're seeing. Moving to slide 9, I will cover our expenses for the quarter. Overall expenses continue to be in line and we delivered on our efficiency ratio guidance of below 34% for the year. Expenses came in at $870 million for the quarter and, compared to last year, are largely driven by separation-related costs, growth of the business and IT investments related to our digital and mobile capabilities. Looking at the individual expense categories, employee costs were up $58 million as we have added employees over the past year in key areas to support the infrastructure build for separation as well as growth of the business. Professional fees were up $26 million driven primarily by growth. Marketing and business development costs were down $37 million. The decrease was attributable to lower spend on brand advertising and marketing associated with our direct deposit products. As you may recall, last year we did a major brand advertising campaign following our IPO. Also given the strong growth in deposits we're able to dial back some of our deposit-related marketing spend in the quarter. Information processing was up $23 million driven by higher IT investments and the increase in transactions and purchase volume compared to last year. The efficiency ratio was 34% for the quarter as seasonally driven expenses tend to peak in the fourth quarter. The ratio was 33.5% for 2015, in line with our expectation of below 34% for the year. Moving to slide 10, I will cover our funding sources, capital and liquidity position. Looking at our funding profile first - one of the primary drivers of our funding strategy has been the 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 have grown our deposits by over $8 billion, primarily through our direct deposit program. This puts deposits at 64% of our funding which is in line with our target of being 60% to 70% deposit funded. And while we have now moved further within our target range, 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. We're also looking at additional ways to increase the stickiness of the deposit base, including the rollout of new products later this year such as checking and online bill pay. Funding through our securitization facilities has been fairly stable in the $13 billion to $15 billion range which is approximately 20% of our funding. This is consistent with our approach to maintain securitization at between 15% to 20% of our total funding. Our third-party debt, bank term loans and senior unsecured notes totaled 16% of our funding sources. As we have said in the past, our strategy is to continue to reduce our reliance on the Bank term one facility as this is a more expensive source of funding for the business compared to deposits and other lower-cost funding sources. We have continued to pay this down making a $500 million prepayment in early December and we also made a $1 billion prepayment in early January that will be reflected in the first quarter outstanding balance. Since the IPO we have paid down the Bank term loan facility from $8.2 billion last year to $3.2 billion currently. And we expect to continue to pay this down in future quarters. We also expect to continue issuing unsecured bonds and we issued $1 billion in three-year fixed rate senior unsecured notes in December. Overall we feel very good about our access to a diverse set of funding sources. We will continue to focus on growing our direct deposit platform and using the proceeds from future unsecured bonds to further prepay the bank term loan facility. Turning to capital and liquidity, we ended the quarter at 16.8% CET1 under the Basel III transition rules and 15.9% CET1 under the fully phased in Basel III rules. This compares to 14.5% on a fully phased in basis last year, an increase of 140 basis points over the past year. Total liquidity increased to $20.9 billion and includes $14.8 billion in cash and short term treasuries and an additional $6.1 billion in undrawn securitization capacity. This gives us total available liquidity equal to 25% of our total assets. We expect to be subject to the modified LTR approach and these liquidity levels put us well above the required LTR levels. Overall we're executing 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. Next on slide 11 I will recap our 2015 performance versus the outlook we provided last January. Starting with loan receivables our growth of 11% exceeded our outlook range of 6% to 8%. The growth in 2015 was driven by the strong value props on our cards and our marketing strategies with our partners delivering strong organic growth, as well as the addition of BP and other program wins. Net interest margin was 15.8% for the year which is better than the 15% to 15.5% range we provided back in January. We have continued to look for ways to deploy excess liquidity generated from strong deposit growth, taking the opportunity to pay down higher cost funding sources. Our net charge-off rate was slightly better than we expected with net charge-offs improving 18 basis points. We attribute this to our improved credit profile as well as the improving economic environment and likely some benefit from lower gas prices. The efficiency ratio for the year was 33.5% which was in line with our guidance of below 34% for the year. Despite the investment we made to build our standalone infrastructure, our efficiency ratio continues to compare favorably to the industry. We feel well-positioned to manage this going forward as we expect this business to generate positive operating leverage over the long term. And lastly, we generated a return on assets of 2.9% which was at the upper end of our guidance for 2015. So overall we were pleased with the results of our financial performance in 2015. Moving to our 2016 outlook on slide 12, our macro assumptions for 2016 are consistent with the consensus views on forward rates and unemployment, our framework assumes the Fed tightens 50 basis points this year and a stable to slightly improving unemployment rate. Our guidance for receivable growth is in the 7% to 9% range. We expect we will continue to grow sales volume at 2 to 3 times broader retail sales. This guidance doesn't assume any significant new portfolio acquisitions. We believe our margin will be in the 15.5% range this year. If rates do increase during the year we expect our neutral to slightly asset sensitive position would provide a small benefit to our net interest income. In terms of our funding plan more broadly, we will continue to grow our direct deposits and expect to move towards the higher end of our target of 60% to 70% deposit funding in 2016. We will also continue to be a regular issuer in the unsecured debt markets and will use the proceeds to continue to pay down the bank term loan well in advance of the contractual maturity in 2019. In terms of credit, given the view that unemployment will be stable to slightly improving this year and our play not to change or underwriting profile, we believe our net charge-off rate will continue to be relatively stable in the 4.3% to 4.5% range we experienced in 2014 and 2015. And while we expect net charge-offs to be stable, we do not believe the benefit we received in our reserve build in 2015 will repeat and reserve posts in 2016 will be more in line with receivables growth. Moving to the efficiency ratio, we continue to plan on running the business with an efficiency ratio below 34% on a full-year basis in 2016. Our efficiency ratio continued to compare favorably to the industry and we feel well-positioned to manage this going forward as we expect the business to generate positive operating leverage over the long term. Finally, we continue to expect to generate a return on assets in the 2.5% to 3% range in 2016, consistent with our guidance for 2015. Before I conclude I wanted to reiterate our thinking around capital for 2016. As I have stated in the past, although we're not subject to CCAR, we're planning to follow a very similar process. We will use the Fed's CCAR assumptions due out in February and develop a capital plan that we'll review with our Board and our regulators in early April and hope to hear back from the Fed in June. While I cannot be specific as to our capital plans at this point, our plans will include both dividends and share buybacks. And with that I will turn it back over to Margaret.

Thanks, Brian. I will close with an overview of our key strategic priorities. First, we remain focused on driving growth both organically and through new program wins across our three platforms. We have historically produced organic growth of 2 to 3 times market growth rates and we expect to continue to deliver similar growth. Innovative idea propositions and enhanced functionality and utility for card users are some of the ways in which we will accomplish this. For example, we rolled out several compelling value propositions, innovative programs like these and network expansion such as the one we initiated with Rite Aid for our CareCredit cards help to increase penetration. We also won over 20 new deals last year and the pipeline remains strong. We have a demonstrated track record of success that we plan to continue to leverage this year and beyond as we seek to add new partners and programs with an attractive risk and return profile. Second, we will continue to expand our robust data analytics and technology offerings. We will continue our mobile wallet development for private-label credit cards such as the pilot with JCPenney and Apple Pay. Our digital strategies have helped drive an increase in online and mobile purchase volume at a faster pace than the national growth rate. We're focused on leveraging our leading capabilities as the digital landscape evolves. We're expanding our robust data and analytics capabilities through investments in Big Data technologies and insight tools such as data visualization software. Our partners highly value the insights we bring and the impact it has on their programs. Third, we will continue position our business for long term growth. We will focus on building our Synchrony Bank franchise into a full-scale online bank through the development of a broad product suite to increase loyalty, diversify our funding sources and drive profitability. During 2015 we grew deposits a strong 24%. We will also leverage and explore adjacencies to our core business for growth opportunities such as expanding our small business platform. Fourth, we will continue operating our business with a strong balance sheet and financial profile. We expect to support our business model with diverse and stable funding. We also expect to maintain strong liquidity and capital to support our operations, business growth, credit ratings and regulatory targets. We intend to maintain earnings growth at attractive returns while demonstrating operating leverage. Finally, we're highly focused on positioning the business to return capital to shareholders. And now that we're fully separated from GE we will look to return capital this year through the establishment of a dividend and share repurchase program subject to Board and regulatory approval. We believe these are the right areas of focus and plan to leverage our prior success to pave the path forward. We look forward to updating you on our progress. I will now turn the call over to Greg.

Thanks, Margaret. That concludes our comments on the quarter. Operator, we're now ready to begin the Q&A session.

[Operator Instructions]. And our first question comes from Betsy Graseck with Morgan Stanley.

I just wanted to follow up on a couple of things. One was the comment about the capital return that you indicated. Just wanted to clarify that this year you would be expecting to have an ask for not just a dividend but also a buyback. And so just wanted to understand how you are thinking about sizing that. And also if it is a coincident ask or is it a step ask, first ask for the [indiscernible] and then ask for the buyback at different points of time? I just wanted to understand how you are thinking through that.

Yes, sure, Betsy. So the way that we're thinking about it and similar to what we have said in the past is we're going to follow - even though we're not technically subject to the CCAR process, we're going to follow a similar process and timeline. So the Fed is going to publish their assumptions here shortly, probably early February, we're going to run those assumptions in our models. We're going to review a capital plan that includes both dividend and share repurchase, we will review with the risk committee, with the Board and then we'll review it with the regulators; we'll probably do that around the April timeframe. And then similar to the other banks, we would expect to hear back and have some clarity around June. So that is how we're thinking about it. So we're optimistic that we can get something done hopefully in the second half of the year. And in terms of the absolute magnitude of the return, we really need to go through the process. So we're just not in a position to be very specific at this point. But as we have said in the past, we're going to be very thoughtful around the first ask. It is more important for us to get a dividend and share repurchase established than it is to be very aggressive the first time out.

Right. Okay I am just thinking through how a lot of folks have been - when you look at your capital ratio, obviously very, very strong. And you have got peers that are in the 90% payout ratio which is obviously quite high and folks that have been going through this process for several years in a row. That said, a 30% payout ratio also looks relatively light given the very strong capital ratio you have. So I am kind of thinking that those two bookends are bookends and that you might be somewhere in between. Obviously you can't really say given the fact that the rules aren't out yet. But is that a fair way to think about what the bookends would be?

Yes, I think you have to take a look at the peers and their trajectory over a number of CCAR cycles. And now they are at elevated payout ratios. Longer term we would hope to be kind of in the same ZIP Code, but we're going to start out slower than that. We're going to be thoughtful around the first ask. I think the other thing that you have got to keep in mind as you think about our capital return is we're growing our risk-weighted assets faster than most of the peers set. So if you just assume - let's just take the midpoint of our guidance, 8% RWA growth, we would need to retain roughly 35% of our earnings to support growth and keep the capital ratios flat. So over the long term, anything over a 65% payout ratio would then start to bring our capital ratios down more in line with peers.

Our next question comes from Sanjay Sakhrani with KBW.

I have a couple of questions. Let me start with the first one. Just on the NIM guidance, obviously you guys have done better than your expectations. And it would seem like a lot of the factors kind of work in your favor in terms of some tools you have to enhance the NIM. Is there something we should think about in terms of pressuring the NIM going forward that would lead you to have a little bit of a more moderating outlook?

Yes, Sanjay, I wouldn't think about it necessarily as a moderating outlook. We put guidance out last year at 15% to 15.5%, we performed a little better than that. I think we were at 15.77% for the year. We said approximately 15.5% for 2016. So this isn't a significant change from our perspective from how we have been trending. In terms of how to think about the margin for 2016, I think there is a few puts and takes. Obviously we will see slight benefits we think from deposit growth and interest rates. As I mentioned earlier, we built in two more kind of rounds of tightening, 50 basis points for the year, we will get a slight benefit from that. But then we also expect to see some slight offsets for growth in promotional balances. We saw that in 2015, payment solutions growth continues to outpace the other platforms and those balances come on initially at a lower yield. And then we did see higher payment rates more broadly across the portfolio in 2015. So we have tried to account for all of that in the guidance of about 15.5% feels right for 2016.

And then I guess just in terms of the seasonality, obviously there is like a lot of moving factors affecting your business given you are relatively new, you have got seasonality, the capital return aspect of it. But maybe you could just help us think about ROAs across the quarter and kind of what influences that, because that would just help us kind of tie our EPS throughout the year. Thanks.

Yes, sure, Sanjay. So if you are looking at the ROA and if you are building off of 2015 the one thing to think about is the reserve build which I mentioned earlier on in the call. So we did receive a fairly significant benefit in the reserve built for improved performance, particularly in the first half. So in the first quarter we only posted $19 million of reserves, we posted $47 million in the second quarter. So while we were building reserves we were getting a fairly significant offset in the first half. And given we expect credit to stabilize from here we would expect to see a higher reserve build in the first half of 2016, so more in line with our receivables growth. And so, if you take that back to ROA, we would expect to start the year closer to the midpoint of the range. And then similar to what you saw this year in the second half, it usually ticks up a bit in the third quarter. That is where we hit that seasonal low on charge-offs. And then it typically ticks down a bit in the fourth quarter with the higher marketing spend and the seasonal charge-offs. So that gives you a good way to think about it for the year.

Okay one final question. Just on expenses, obviously you are talking about an efficiency ratio less than 34%. But in the fourth quarter expenses were up a fair amount at 10%. Can you just talk about what is driving such strong growth? And even though you guys have this target of 34% or less than 34%, I mean you did better this year in 2015 and it would seem like you have natural operational efficiencies. So I mean, should we expect that kind of trend to continue? Thanks.

Yes, sure, Sanjay. So as you mentioned, expenses were up 10% compared to the fourth quarter last year. In the quarter we did have $22 million of compensation-related payments that were tied to the exchange offer in the quarter. So, if you adjust for that expenses were up 7%, so more in line with growth. And in the expense growth, the 7% growth was really largely driven by the investments we're making in long term growth of the business as well as active accounts were up, obviously receivables up, etc. As you think about 2016, we gave you very similar guidance on the efficiency ratio of below 34%. Maybe I will just spend a minute describing how we think about it. First, I would say we're very focused on driving productivity and operating leverage across the business. We will continue to get more efficient across the business. We always start the year with a slew of productivity initiatives. We're driving things like moving more customers to e-statements and off of paper. We're improving the efficiency of our call center and collections teams. We're always trying to simplify and reduce the back office and IT systems. Okay, but then we take those savings and we make investments that we believe are going to drive long term growth of our business. So we're investing in things like mobile, data analytics, CRM. And so, we're very focused on driving operating leverage, but we're not so wed to the efficiency ratio that we're going to stop investing in these long term growth areas.

Our next question comes from Don Fandetti with Citigroup.

Brian, can you just go a little bit about the day count impact this quarter? Trying to get a sense of what your purchase volume and platform revenue growth rates would have been without it.

Yes, sure, Don. So there was an impact from day count in the quarter. If you remember, in 2014 we were on GE's fiscal calendar. So in the fourth quarter of 2014 we had 94 days compared to 92 days this quarter. So this does impact some of the top-line metrics. That is part of the reason why you see purchase volume and platform revenue lagging the receivables growth a bit. If you adjust purchase volume for day count it would move from 8% to 10% growth. And then on platform revenue, this also stands out a bit. If you adjust for the $46 million gain on sale that we had in the fourth quarter last year and the fact that we had two less days this quarter of revenue, it was up 9% which is more in line with receivables growth.

Okay and, Margaret, obviously investors are more concerned around credit these days in the U.S. But based on your guidance it looks like you are expecting some relative stability. Can you just talk a little bit about what you are seeing and what you think may be the impact sort of energy job losses could be in your portfolio mixed in with lower gas prices? And then lastly, spend at the retailer level? There has been some concern around that.

Sure. I think, as we have talked in the past, we think in 2014 most of the extra gas dollars that consumers had were really used more towards either savings or paying down some balances which we certainly saw a bit of that. I think as gas prices continue to fall, we hope that some of that now is going to be used towards spending. Haven't really seen that yet, I think it is a little early in the year to kind of see that happen. Overall the consumer is definitely stronger. We see unemployment in a good place and we feel that is going to continue. What I would say on - in terms of portfolio itself and the impact on delinquencies in the oil and gas areas. Obviously we watched that, we're not really seeing too much of a shift there. Our portfolio is pretty much a very big macro look at the overall economy. So we're spread out across the whole entire United States. So we watch those things, but we're not seeing a big impact there. And then lastly, we do have a couple of oil and gas portfolios, but they are 3% more or less of our receivables. So, not a big impact there either.

Okay and just one last - eCommerce growth looks like it continues to accelerate. Can you talk a little bit about the Amazon Prime partnership and kind of where you are on that?

Yes, sure. I would say overall the growth came from all of our partners, not obviously just Amazon. We have continued to work really hard at allowing our customers as frictionless a process as they can whether it is on their mobile phone or online. Amazon continues to be a great partner for us. We're working very closely with them on the 5% offer. For those of you who have it, hopefully you saw through the holiday there was a lot more encouragement around marketing around using your 5% off. We're continuing to monitor the results of the 5% off campaign that we're doing working closely with Amazon. But overall obviously they had a great holiday and we were glad to be part of that with the offer that we had.

Our next question comes from John Hecht with Jefferies.

Just with respect to guidance, you moderately accelerated your expectations for loan growth. You took your range from 6% to 8% to 7% to 9%. And I am wondering can you parse that acceleration for us? Is this penetration in new partners like BP or is it increased penetration in more traditional customers or is it just better spend from the overall customer base?

Yes, sure, John. So when we put at a forecast, similar to what we did last year, we try not to include any new portfolio acquisitions. That is the case this year. So the 7% to 9%, it is right around our average organic growth rate over the past four years. And so, it is up a bit based on how we performed in 2015 from the guidance we gave last January. But it doesn't include any new portfolio acquisitions, it doesn't include any significant changes to the value props on our cards. So if you remember, in 2015 we posted 11% receivables growth, but that did include that BP portfolio acquisition. We didn't build anything like that in this year. And lastly, I would just say we also didn't build any real lift on retail sales. We think they will continue to be in that 2% to 3% kind of range. So that is what we kind of based the forecast on.

Okay. And then you guys did have some renewals in the fourth quarter. Can you talk about anything you are seeing in terms of competitive trends in that regard? And then finally, can you remind us are there any major renewals you need to think about coming up this year?

Sure. So I will start with the renewals we did. First of all, we're thrilled about the renewals we did. I would say the competitive landscape, particularly in the space that we're in, is slightly more competitive. But I don't think it is as competitive as you are seeing in the bigger portfolios that are moving on the co-brand side. I think people, because of the engagement with our partners, I think our competitors are being fairly reasonable there because they know it is really important to have a deal that works in good and bad times because you are really working very closely with that partner. So we continue to work that. I think some of the things that we have been able to build out, our mobile platform, our ability to demonstrate that we can bring in more sales has certainly helped us as we continue to work with our existing partners. So I would say that we feel pretty good about that. And I am sorry, your second question was?

Just remind us about any major new renewals--

Sure. So 92% of our Retail Card receivables are pretty much locked down to 2019 and beyond. We really don't have any one big one that is coming out before that.

Our next question comes from Bill Carcache with Nomura.

There has been some concern over your exposure to declining sales at some of your retail partners. Could you discuss how you are thinking about that risk and what is implicit in your 2016 receivables growth outlook for 7% to 9% in terms of expectations that you guys have baked in for how your retail partners' sales perform?

Sure. Obviously we pay close attention. I think the really positive news for us is when a retailer is having trouble, that is when the credit card program becomes even more important. And what I would say to you, it is extraordinarily important for us. This is where we should shine for our partners because we should be in there talking about how are we going to grow sales, what kind of campaigns should we be doing, how can we help you. And that is where true partnership comes in. So I would start with that. I think when we do our plans for the year we obviously start with what are the retailers saying about their growth and then we look to do 2 to 3 times that. I would say we have been in this business a very long time, we have winners and losers every single year. And the way we set those goals, we're able to usually drive better performance than what the retailer is doing in any given month in terms of their performance because the card becomes an even bigger part of what they are focused on. So we watch it, we're paying attention to it. But again, I would say this is where it is really important for us to show up as a partner to really help them turn things around.

Okay, that is helpful. I guess just separately following up on the points that you made about the partnership and kind of what is at the heart of that. And I think broadly the sharp contrast that we're seeing in the private label space between I guess on one side a group that does more balance sheet lending and arguably offers more of a commodity service versus at the other end of the spectrum one that has data analytics capabilities and is viewed by retail partners as somebody who can help them drive incremental sales growth. And obviously you guys are in that latter camp. So can you maybe talk a little bit about how your pipeline looks? And how your data analytics capabilities are playing into your discussions with potential partners? I look at like the slide that shows the 2015 performance and your receivables growth outlook then for 2015 versus what you actually came in at. Obviously BP was a part of that. But I kind of just wonder to what degree could we be looking at this potentially at some point in the future and potentially see wins - partnership wins possibly drive a little bit of upside. So, maybe if you could just give a little color on the pipeline.

Just, sure. So we have said in the past we really like partnerships that allow us to come in and really contribute and add value to the overall partnership, whether that is in the marketing front, the sales front, the data analytics front. What I would say is that every single retailer out there is up against a moderate sales or maybe even mediocre sales environment. So what we really try to do is figure out ways to leverage the tools and things we have to help them accelerate their growth. So when we start with conversations, whether it is an existing portfolio or a new portfolio, it always starts with capabilities. And that is where we're pretty disciplined on the kind of partnerships we want because we think when you are adding value every single day and your partner is seeing that value that you are adding, that is how you are able to keep relationships long term and then price becomes the second discussion. So that is what our job is. Our job every day for our folks out in the field, our folks who manage our partners is to really have one foot in the partner, one foot in Synchrony and really ensure that they are driving sales and helping that partner every single day. That is where analytics, our mobile application, all of this is really helping to keep those relationships and allowing us to extend them.

Our next question comes from Eric Wasserstrom with Guggenheim Securities.

Brian, I just wanted to follow up on the net interest margin discussion. And could you specify what your intent is with respect to your liquidity portfolio which is a massive amount of your balance sheet particularly relative to peers and how that is going to influence your margin over the course of the year?

Yes, Eric, what we tried to do - so, I guess I would start by saying I wouldn't expect a step change from how we're managing liquidity today. We run a number of internal scenarios, we look at the applicable regulatory guidance, we look at where we think the rating agencies expect us to operate, we look at our maturities coverage and we use all of those inputs to kind of size the liquidity that we hold. And then in 2015 what you saw us do was use anything that - based on all of those inputs, anything that we felt was truly excess liquidity, we used that to prepay the bank loan and we paid off obviously the GE Capital loan entirely. So we look at our higher cost forms of debt and we say, okay, what could we prepay and hopefully benefit the margin. And we're going to continue to do that. I just don't think - I think the improvement to expect there is going to be more around the margins rather than a step change in 2016. The other thing I would point out is I do think there is probably a longer term opportunity as we get a little more experience with our deposit platform. I mean the other thing you have to remember is we're acquired the deposit platform in January 2013. So we have a relatively limited set of data on the deposit platform. As we start to grow that business and we start to see how the consumer behaves, our deposit customer behaves, that will give us a little more comfort in bringing down the overall liquidity. So I think there is probably a longer term opportunity, I just don't think you are going to see a step change in 2016.

Okay, but just mathematically, to the extent that you continue to pay down the bank facility as you did in January, wouldn't that result in a net benefit to the cost of funds?

That would result in a net benefit to cost of funds. So as I said earlier, I think you have got some puts and takes as you think about the net interest margin. You have got a benefit from liquidity, a benefit from deposit growth and a slight benefit on interest rates if the Fed continues to tighten. And then I think you have got some offsets on growth and promotional balances and then just a generally higher payment rate across the portfolio as consumers continue to get more cautious. So again, we were at 15.77% for the year, we said about 15.5% for 2016 and we have tried to take all of that into account as part of that guidance.

Great and sorry, just one last question. Your guidance range on ROA is consistent with the prior year, but of course you ended up at 15% at the top end of the range. So does the fact that the guidance range remains the same, is the delta their year on year primarily the expectation about the reserve build?

Yes. I think that is exactly right. I would just go back to Sanjay's question where what moved us largely to the higher end of the range of 2015 was the benefit we received on the reserve build from the improved performance. If you go back, January - we were sitting at January 2015 I probably guided you to the midpoint of the range. And then the only thing that really played out a lot different than what we thought was margin was a little bit better but really lower reserve build. I think for the year receivables grew 11%, we only built the reserve 8%. So there was an implied benefit that we received in 2015. And now that we think that things are going to stabilize we would expect reserves to grow more in line with growth in 2016.

Our next question comes from David Scharf with JMP Securities.

Just want to circle back to online and mobile, because it is clearly the fastest-growing channel of purchasing. I know you referenced - I think purchase volume was up in the low 20%s. Are you able to provide any granularity around how much of AR growth is actually being driven by Amazon specifically and in the mobile and online purchase channels and more broadly?

Yes. We would not disclose that, particularly Amazon. Here is what I would tell you. The way we have approached mobile is really through the whole process. So we look at applications. So one of the benefits we have is you can apply on your mobile phone and get approved and start shopping. That is a big opportunity for us there. So if you look at just over growth in mobile applications year over here it was 73%. So we're certainly getting much more engagement from the consumers on the mobile phone. And then we go through servicing. Your ability to increase your credit line while you are standing at the store, those are the kinds of things that are really important for us. The last piece is payments which honestly I think all of us are reading. That has turned out to be slower than what people I think thought. We're in all the wallets that we possibly can be in and we'll continue that strategy. I just think this is - mobile and online is the way people are shopping now. We have to just continually work to embed our credit application into the application of the retailer. And that is really a lot of what we're going to be working on in 2016. So our view is this is where the industry is going or the consumer is going and we need to be in the forefront of that.

And along those lines, I believe that one of your private label competitors, Alliance Data/World Financial, I believe they have used the metric that around 10% of their credit applications lately have come from mobile. Is there any more specificity around where you may be at that point?

Well, I can give you the overall just from online and mobile which we kind of calculate as the same. And about a third of our - a little more than a third of our applications are coming in that way.

Okay. And then lastly, Margaret, is there anything about the mobile apps, mobile process in terms of the type of data you are able to capture for marketing services purposes?

Yes, sure. I think this whole data thing connected with mobile and online is really critical, because one of the benefits of our cards is because they run on a closed loop network. We can actually see how the customer is shopping. So we know they made a purchase on their mobile phone or they made a purchase online or they were in the store. And this is information and data we're really trying to pull together to really help our partners think through how they are even marketing to their customers. So, for instance, if we know someone shops multichannel meaning online, mobile and in-store, we have a very loyal customer and someone who tends to shop more often. And their baskets will be bigger and they will make more trips. So we want to make sure we're marketing to customers that way. So if you only use mobile we know that; we will market to you only using mobile or digital kinds of marketing versus someone who is maybe only shopping at the point of sale. So I think as we continue to expand our data analytics this will become, I think, an even more critical aspect of how we help our partners.

Yes, it sounds like you are able to capture more and basically provide more differentiated marketing services. And just lastly, as you think about the increased data set you are able to capture through mobile and the opportunities to target more effectively, are any of the retail partners looking for additional type of promotional offers or campaigns? I'm just trying to get a sense whether the shift in channel towards mobile and online is ultimately going to impact the types of marketing services that they are going to look to you to provide.

We work together with a partner and I'd say it is really a range. You have partners who are fairly sophisticated and see mobile as being a big channel for them and are really - we work with them on the marketing and how we're going out there. I think others are still figuring it out. One of the benefits I think we have been able to bring particularly to our smaller retailers, we partnered with GPShopper. Many of those smaller retailers don't have a mobile application. So just bringing that partnership together and then us embedding our credit application within their mobile app, that is where the partnership piece comes in. We can really take some of the learnings we have from our big retailers, apply to the smaller retailers and help them get their product set, if you will, right on the mobile phone. So, a lot of work going on that.

Okay. And then with a third of your credit apps coming through mobile, is there any difference in the acceptance approval rates, the borrower profile that is coming through that channel?

Yes, there are, there are. Our approval rates on mobile and online are lower than in-store.

Our next question comes from Mark DeVries with Barclays.

Most of my questions have been asked and answered, but just wondering if you could talk about at all how your hopes and aspirations around some external M&A opportunities might be impacting your capital ask. And I know you don't want to size the total capital ask, but is there any guidance you can give us on the proportion of that that may come from the dividend?

Yes, sure. So first on M&A, it is really the fourth priority for us. So in terms of our capital priorities organic growth is first and foremost. Dividend would be second, share repurchase third and then M&A fourth. We have a regular process around M&A opportunities. Anything that we would do on the M&A side would be largely capability driven, things that would be easier to buy than to build internally and would help us grow our core business. So don't expect things in other asset lending classes, it won't be too far from the core, it will be more capability driven. And obviously if we have line of sight to something we would build that into the capital plan - the capital planning process. And then just in terms of there is not a whole lot of guidance I can give you on magnitude or dividend, share repurchase split at this point. We need to go through the process which is going to kick off here shortly. The only thing I would point out is if you look at others' dividend payout ratios, they're all kind of in the same ZIP Code. Over time we would expect to be in the same kind of ZIP Code, but there is really not much more that I can give you this point.

Okay. And when I said M&A I kind of meant it more generically to also include portfolio acquisitions from new partnerships. Is that something that--?

Absolutely, I actually lump that into organic growth for us. It would be part of that bucket. If we had line of sight to something we would absolutely build that into the capital planning process. And as Margaret said, we have got a very good pipeline in all three of our platforms. I would characterize the deals as small to midsize deals, not the megadeals that are getting a lot of the attention right now. It is kind of the stuff that is core to our business and the stuff that we have done over the last two, three years.

Our final question comes from Moshe Orenbuch with Credit Suisse.

Just following up on that last comment, Brian, the new partners that you announced last quarter, Citgo and Guitar Center, have those been in the numbers? Are they coming in during 2016--

Guitar Center is in the numbers. Yes, Greg will get back to you on Citgo.

And just maybe kind of just more high level, as you think about - some of the previous questions talked a little bit about retailers struggling a little bit. Can you talk a little bit how does your relationship with the retailer kind of evolve in that scenario?

Yes, I would say we have more marketing meetings for sure. So I think we have retailers who have good and bad times. And if you just go back to the crisis, many retailers were struggling and sales were way down. I think this is probably the most important part of our business model that I think sometimes is not really understood which is part of our success of keeping relationships for a very long period of time is you really need to stick by the retailer when they are going through that challenge. And what I would say is we have part meetings, we're looking at ways to help them, we're trying to engage more on their strategy. So I would say even at the more senior levels we're usually talking about, okay, what are you trying to focus on, how can we help you and really drive that kind of engagement. Most of our engagement, particularly at the bigger retailers, are at the CFO/CEO level. So the card program is such an important part of their sales that we usually just have more engagement on what else can we be doing.

And Moshe, just to come back on the Citgo question. It is in the guidance for 2016, but it is a relatively small portfolio. We think it will come in in the first quarter most likely.

Okay, 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. Have a great day.

And thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating and you may now disconnect.