Synchrony Financial (SYF) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the Synchrony Financial First Quarter 2016 Earnings Conference Call. My name is Vanessa and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to 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 want to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company’s performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today’s call. Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized webcasts are located on our website. Margaret Keane, President and Chief Executive Officer and Brian Doubles, Executive Vice President and Chief Financial Officer will present our results this morning. After we complete the presentation, we will open the call up for questions. Now, it’s my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone and thanks for joining us. During the call today, I will provide a review of the quarter and then Brian will give details on our financial results. I will begin on Slide 3. First quarter net earnings totaled $582 million or $0.70 per diluted share. Overall, solid momentum continued across each of our business platforms driving strong double-digit growth in purchase volume, loan receivables and platform revenue this quarter. Compared to the first quarter of last year, purchase volume grew 17% and platform revenue and loan receivables grew 13%. We continue to see strong growth in our online and mobile purchase volume. Our online and mobile sales growth has been steadily accelerating and first quarter sales grew 29% over the same quarter of the prior year. Our online and mobile sales growth has far outpaced U.S. growth trends, which had been in the 14% to 15% range. Asset quality metrics were relatively stable this quarter in line with our expectations. 30-plus day delinquencies were 3.85% and our net charge-off rate was 4.7% in the range of losses we have experienced in the first quarter over the past 2 years. Expenses were in line with our expectations increasing 7% over last year. This was largely driven by investments we made in support of our growth initiatives. However, our overall efficiency ratio improved 1.8 percentage points to 30.4%, reflecting our strong revenue growth this quarter. Our receivables growth is supported by continued deposit growth, which grew $10 billion or 29% to $45 billion this quarter. Deposits now comprised 69% of our funding sources at the high end of our targeted range of 60% to 70%. Competitive rates, outstanding customer service and the continued enhancement of our product suite have driven these results. And at this point, you can expect for us to grow a little beyond that original target range. One of our strategic priorities is to build Synchrony Bank into a leading full-scale online bank. We plan to launch new product offerings later this year, which will augment growth and enhance the retention of our deposit base. Given the significant growth in deposits, we were able to fully pay off our bank term loan on April 5. We are pleased that we were able to pay off this loan well ahead of its contractual maturity in 2019. Our balance sheet remained strong, with a common equity Tier 1 ratio of 18.1% calculated on a transitional basis and liquid assets totaling $15 billion or 18% of total assets at quarter end. We renewed several key relationships during the quarter, including Stein Mart and La-Z-Boy. We also signed a new partnership with Marvel and recently launched the Marvel MasterCard with an attractive cash-back value proposition. We are further leveraging this relationship by developing creative ways to market our deposit products to the Marvel fan base. The new value proposition delivers the greatest benefit on leisure activities, including dining out, movies, concerts and amusement parks. Cardholders receive 3% cash-back on spending in these types of categories and 1% cash-back on other purchases. We are excited about this partnership and the value this new card will bring to loyal Marvel fans and others who enjoy the benefit of a cash-back program. The partnership will also offer a unique opportunity to co-promote our deposit products in conjunction with the Marvel feature film. We launched a new campaign called Save Like a Hero which will feature Synchrony Bank saving products and be tied to the release of Marvel’s new Captain America movie. This is the second starter program we have rolled out in the travel and entertainment space. You will recall that last quarter we also launched our Stash Hotel Rewards program. We think this is an area that provides attractive opportunities. During the quarter, we also launched our new Citgo card program. Citgo cardholders will be able to earn rewards and save on fuel purchases at any of the 5,000 plus locally owned and operated Citgo locations in the United States. We continue to work with our partners, new and existing, to develop compelling value propositions for their cardholders. This quarter, we launched a new value prop with Walmart. The program brings even more value to the everyday purchases customers make using their Walmart cards. The 3-2-1 Save cash-back program provides qualifying cardholders the opportunity to earn rewards for purchases they make everyday, including 3% back on purchases made on walmart.com, 2% back on fuel purchases at Walmart and Murphy USA gas stations and 1% back on purchases made at Walmart stores and everywhere that Walmart cards are accepted. The 3-2-1 Save program simplifies and strengthens the card proposition for Walmart cardholders. We work closely with Walmart to meet the evolving needs of their customers and we are excited about this program as it also recognizes the increasing move to online and mobile shopping. It is the first credit card program designed to offer Walmart cardholders even greater savings on their online purchases. We are highly focused on innovating ways to drive organic growth as it remains a key priority and opportunity. We continue to work closely with our partners to deliver growth across all sales channels. Moving to Slide 4 which highlights the performance of our key growth metrics this quarter. Loan receivables growth remained strong at 13% primarily driven by purchase volume growth of 17% and average active account growth of 7%. The addition of the BP program in the second quarter of last year also contributed to the annual growth rate. Platform revenue increased 13% over the first quarter of last year. We continue to drive incremental growth through strong value propositions, promotional financing and marketing offers that deliver value to our partners and customers. On the next slide, I will discuss this quarter’s performance drivers across our sales platforms. We continue to deliver solid performance across all three of our sales platforms in the first quarter. Retail Card generated especially strong results this quarter. Purchase volume growth was 17% and receivables grew 14%. The addition of BP in the second quarter of last year also contributed to the growth rate. Platform revenue growth was 15%. The strong growth in Retail Card was broad-based as we saw growth across our partner programs. As I noted earlier, we had an active quarter in Retail Card. We renewed and extended the Stein Mart program. We signed a new partnership with Marvel and launched the new Marvel MasterCard this month and we launched the new value proposition with Walmart, the 3-2-1 Save cash-back program. The position we maintain in this space and the collaborative partnerships we have developed provide a solid foundation for further growth. Payment Solutions also delivered another strong quarter. Purchase volume growth was 15% and receivables grew 13% driving platform revenue growth of 14%. Average active accounts increased 12% over last year. The majority of the industries where we provide financing had positive growth in both purchase volume and receivables, with particular strength in home furnishings and automotive products. We renewed a key home furnishing relationship with the extension of our La-Z-Boy partnership. We continue to expand card reuse and payment solutions, with repeat purchase volume growing 18% year-over-year. Reuse represented 27% of purchase volume in the first quarter. CareCredit also delivered a strong quarter. Purchase volume was up 14% and receivables grew 9%, driving platform revenue growth of 6%. Average active accounts increased 7% over last year. Receivables growth this quarter was led by our dental and veterinary specialties. Card reuse continues to be an area of focus in CareCredit and purchase volume from repeat usage on the card grew 17% compared to last year. Reuse represented 50% of purchase volume in the quarter. Our CareCredit digital innovations continue to resonate with cardholders. The CareCredit app has been downloaded more than 350,000x and visited more than 2.3 million times since we launched it last fall. In addition, our provider locator averaged more than 800,000 hits per month in the first quarter. In summary, each platform delivered solid results and continue 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 the details on our results.

Thanks Margaret. I will start on Slide 6 of the presentation. In the first quarter, the business earned $582 million of net income, which translates to $0.70 per diluted share in the quarter. This compares to $552 million or $0.66 per diluted share last year. We continue to deliver strong growth this quarter with purchase volumes up 17%, receivables up 13% and platform revenue up 13%. Average active accounts increased 7% year-over-year, driven by the strong value propositions on our cards, which continue to resonate with consumers. We also see this in average spend, with purchase volume per average active account increasing 9% over last year as well as growth in average balance per active account up 4% compared to last year. We also closed the BP portfolio acquisition in the second quarter last year, so that helped to improve our growth rate year-over-year. Net interest income was up 12% in the quarter, mainly driven by the growth in receivables. RSAs were up slightly, $10 million compared to last year. RSAs as a percentage of average receivables were 4.0% for the quarter compared to 4.5% last year. The lower RSA percentage compared to last year is due mainly to higher provision expense associated with growth in the programs as well as higher loyalty costs that are shared through the RSA with our retailers. We typically see the RSA decline from the fourth quarter due to lower post-holiday related volumes. We still expect the RSA benefit on a full year basis to trend slightly under 4.5%. The provision increased $216 million compared to last year. While the increase was driven by receivables growth, we also had the benefit of a lower reserve build last year due to improved asset quality metrics. I will cover this in more in detail later. Asset quality metrics were relatively stable. 30-plus delinquencies were 3.85% compared to 3.79% last year and the net charge-off rate was 4.70% compared to 4.53% last year. Credit metrics were in line with our expectations and consistent with the range we have seen in the first quarter over the past 2 years. Our allowance for loan losses as a percent of our receivables was 5.5%. Measured against the last four quarters’ net charge-offs, the reserve coverage was 1.3x, which is consistent with the coverage level over the past six quarters. Overall, our reserve coverage metrics were stable. Other income decreased $9 million versus last year. Higher loyalty and rewards costs were partially offset by an increase in interchange revenue. More specifically, interchange was up $30 million, driven by continued growth in our store spending on our Dual Card. This was offset by loyalty expense that was up $32 million, primarily driven by new value propositions. As a reminder, the interchange and loyalty expense run back through the RSAs, so there was a partial offset on each of these items. Debt cancellation fees of $64 million were down $1 million from last year due to the fact that we only offer the product now through our online channel. Other expenses increased $54 million or 7% versus last year, more in line with the growth of the business. Now that we are comparing the periods where the infrastructure build is largely in the run rate, we expect going forward expenses to be driven largely by growth as well as strategic investments in our deposit platform and our digital and mobile capabilities. The efficiency ratio for the quarter was 30.4%. The first quarter is typically the low point for the efficiency ratio due to marketing, business development and volume related expenses being at their lowest level for the year. The efficiency ratio will normally increase from these levels for the remainder of the year. I will cover the expense trends in more detail later. Overall, our strong performance drove a solid quarter generating an ROA of 2.8%. I will move to Slide 7 and cover our net interest income and margin trends. As I noted on the prior slide, net interest income was up 12%, driven by strong loan receivables growth. The net interest margin was 15.76% for the quarter, relatively stable to last year and the prior quarter. As you look at the net interest margin compared to last year, there are a few dynamics worth highlighting. The yield on receivables declined 21 basis points to 21.1%, reflecting higher payment rates and a slight mix shift due to the continued strong growth in Payment Solutions, where the yield is lower than our overall portfolio yield. The decline in receivables yield was offset by a slight benefit from rates earned in our liquidity portfolio due to higher short-term benchmark rates resulting from the Fed tightening in December. We also benefited from a higher mix of receivables versus liquidity on average this quarter as we used excess liquidity to pay down the bank term loan facility. The cost of funding was relatively stable at 1.9% due to an increase from rising short-term benchmark rates and the costs of the senior unsecured debt issuance, which was largely offset by a higher mix of lower-cost deposit funding, reductions in the bank term loan and the payoff for the GE Capital loan last year. Our deposit base increased by over $10 billion or 29% year-over-year, we are pleased with the progress we made growing our direct deposit platform. Deposits are now 69% of our funding versus 59% last year. While the first quarter margin was a little above the range we set out 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. Next, I will cover our key credit trends on Slide 8. As I noted earlier, we continue to see relatively stable asset quality performance, which was generally in line with our expectations. 30-plus delinquencies were 3.85% versus 3.79% last year and 90-plus delinquencies were 1.84% compared to 1.81% in the prior year. The net charge-off rate was 4.7% compared to 4.53% in the first quarter last year. Both the delinquency metrics and net charge-off levels are consistent with the results in the first quarter of 2014 and 2015. We continued to believe their performance is being sustained due in part by lower gas prices and generally a healthier consumer given the continued improvement in employment trends. Lastly, the allowance for loan losses as a percent of receivables was 5.5%, down slightly from 5.59% last year. As I noted before, if you measure the reserve coverage against the last 12 months’ charge-offs, we are currently at 1.3x coverage, which equates to roughly 15.5 months loss coverage in our reserve, which is fairly consistent with prior quarters. So overall, we continue to feel good about the performance of our portfolio and the underlying economic trends we are seeing. Moving to Slide 9, I will cover our expenses for the quarter. Overall, expenses continue to be in line with our expectations. Expenses came in at $800 million for the quarter, a 7% increase over last year and are primarily driven by growth of the business and IT investments related to our digital and mobile capabilities. Looking at the individual expense categories, employee costs were up $41 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 down $16 million, driven primarily by lower third party expense as a result of our completion of the separation from GE. Marketing and business development costs were up $12 million. The higher costs were driven by increases in portfolio marketing campaigns and promotional offers, which helped to drive the strong growth in purchase volume receivables. Information processing was up $19 million, driven by continued IT investments and the increase in transactions and purchase volume compared to last year. As I noted earlier, the efficiency ratio was 30.4% for the quarter due to seasonal low points in marketing, business development and volume related expenses. We expect the ratio to trend up from this level during the remainder of the year. However, we expect it to remain below 34% in line with what we communicated back in January. 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 continued strong growth of our deposit base. We continued to view this as a stable, attractive source of funding for the business. Over the last year, we have grown our deposits by over $10 billion primarily for our direct deposit program. This puts deposits at 69% of our funding, which is near the top end of our target range of being 60% to 70% deposit-funded. And while we have now moved further towards the top end of our target leverage, 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 are also looking at additional ways to increase the stickiness of this deposit base, including the rollout of new products later this year such as checking and online bill pay. Given we are near the top end of our range and we expect to continue to drive deposit growth, we would expect deposits to move a little above 70% of our funding in the upcoming quarters. Longer term, once we reach our optimal mix of deposits, we would expect to grow deposits more in line with our receivable growth. Funding through our securitization facilities has been fairly stable in the $12 billion to $14 billion range and is now 19% of our funding. In March, we successfully issued $750 million in 3-year notes. This is consistent with our approach to maintain securitization of between 15% to 20% of our total funding. Our third-party debt, bank term loan and senior unsecured notes now total 12% of our funding sources. As we said in the past, our strategy was to reduce our reliance on the bank term loan facility as this would become a more expensive source of funding for the business as rates start to rise. Given the significant growth in deposits, we made $2.7 billion of prepayments in the quarter and paid off the remaining $1.5 billion in early April. We are pleased to have fully paid this loan up well ahead of its contractual maturity in 2019. Overall, we feel very good about our access to a diverse set of funding sources. Turning to capital and liquidity, we ended the quarter at 18.1%, CET1 under the Basel III transition rules and 17.5% CET1 under the fully phased-in Basel III rules. This compares to 16.4% on a fully phased-in basis last year, an increase of 110 basis points over the past year. Total liquidity increased to $22.2 billion and includes $14.9 billion in cash and short-term treasuries and an additional $7.3 billion undrawn securitization capacity. This gives us total available liquidity equal to 27% of our total assets. We expect to be subject to the modified LCR approach and these liquidity levels put us well above the required LCR levels. I would also like to provide an update on our capital plan. Our plan was reviewed and approved by our Board of Directors in late March and we submitted the plan to the Fed in early April. This is in line with the timeline we have communicated on previous calls. Overall, we are executing on the strategy that we outlined previously. We have built a very strong balance sheet with diversified funding sources and strong capital and liquidity levels. And with that, I will turn it back over to Margaret.

Thanks, Brian. I will close with a summary of the quarter on Slide 11 and then we will begin the Q&A portion of the call. During the quarter, we exhibited broad-based growth across key areas, signed and renewed important partnerships and expanded our network in the utility of our cards and continued to develop innovative solutions and value propositions to help drive sales. And our pipeline of additional opportunities remains strong. Our digital channels remain a key component of our overall strategy and we delivered strong growth both online and through our native app. We are pleased with the ongoing success of our fast growing deposit platforms and strong balance sheet. I will now turn the call back to Greg to open up the Q&A.

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

Thank you. [Operator Instructions] And our first question comes from Ryan Nash with Goldman Sachs.

Hey, good morning guys.

Good morning, Ryan.

Maybe we could start with your expectations for credit, first we did see charge-offs up slightly year-on-year, but yet still down from 2014 levels. And I was wondering is there any change to your call it relatively stable 430 to 450 guidance? And if not – and if so, how do we think about the trajectory of both provisions and charge-offs over the next few quarters?

Yes, sure Ryan. So, I think it still feels like we are operating in a pretty stable environment when it comes to credit. We continue to think that losses will be stable for the balance of the year. We have been pretty clear that we don’t expect them to get better from here. I think that’s pretty consistent across the industry. If you look at the performance in the quarter, it was largely in line with our expectations. If you look at the year-over-year comparison, you have to remember that we had a really strong first quarter last year, which was frankly is better than we expected. We only had a $19 million reserve build in the first quarter last year. So, really what you are seeing now is more of a normalization and generally more in line with our expectations. So, if you look at reserve coverage levels, they are also very consistent. Reserve coverage as a percent of receivables was 5.5%. It was down just 9 basis points from last year. If you look at the reserve coverage against last 12 months charge-offs, it was 1.29x versus 1.26x a year ago, so also very consistent. So, I think for the balance of the year, we continue to say our losses will be stable, an overall change to that 2-year kind of average that we gave in January.

Got it. And maybe I can ask a question, Margaret, on the outlook for growth, both loan growth and the pipeline for new business wins. Maybe on loan growth, can you talk about how we should think about it from here, how much of the growth is coming from improving penetration rates versus new client wins? You highlighted a couple of times that the year-over-year growth from BP will subside next quarter. So, I just want to think – understand how to think about loan growth? And then the portfolio pipeline for new deals, can you maybe talk about potential startups and maybe any other portfolio deals that you are looking at?

Sure. I think we have said in the past that we do have BP in the numbers. So that’s a little bit of the growth. But the real growth is coming from organic growth and increased penetration. And throughout CareCredit 50% of the sales are repeat and Payment Solutions, we are seeing nice repeat. I think one of the key drivers of our results is really two things. One is the value props that we continue to enhance and drive into our retailers and we work closely with them to really develop those value propositions. And going back to what Brian saying about the consumer being stable on credit, I do think consumers continue to look for a reason to shop. So, having very strong value propositions is really key. The second is really all the innovation we continue to do on mobile. Our online sales overall, were up 29% year-over-year in the quarter, which is really a testament to the ability to apply and buy I think. And you combine that with the strong value propositions. I think this is why you are really seeing the kind of growth you are seeing. So, I would say most of it is through existing cardholders who are deepening their loyalty to the brand of that particular retailer. On the pipeline itself, our pipeline continues to remain robust. It’s really a mix, I would say of startups as well as existing portfolios that we are looking to win. It’s a combination of both. We have, as I said in the past, dedicated resources in all three platforms. We are working on our network, so in CareCredit being able to add RiteAid things like that. So very focused on the front end on winning deals and feel we have a good pipeline going forward.

Just as a very, very quick follow-up, have you disclosed what percentage of overall sales are mobile and online, just I am trying to get a sense for how fast that grew over the next few years?

Yes, we just do the combined digital, which is the 29%. And again, the bulk of the sales are still in store obviously, because that’s the bulk of where people just continue to shop, but this metric continues to excel. And probably one of the case is when we see a consumer shop multi-channel, we definitely get higher penetration on the cards. So, if they shop in-store and online, for example, we know they are more loyal and intend to stay longer with us. So really working through all those channels is very important.

Thanks for taking my questions.

Thank you. Our next question comes from John Hecht with Jefferies.

Good morning, guys. Thanks very much. You guys provided a lot of the factors with respect to growth in the debt, but I am wondering can you talk about active account growth and average spend level trends and how these compared to recent quarters?

Yes, sure, John. So, I would say the trends have picked up a little bit from recent quarters primarily around active account growth. So, the big thing for us relative to general purpose cards, we are always measuring active accounts and that obviously includes new accounts. Active accounts are more important for us, because we are trying to create those incentives for cardholders to use the card more often. We want to create value propositions that push our card more towards the top of wallet. And so if you look at purchase volume growth, about half of that came from higher spend per active account. That was up about 8.5% from the prior year and then the other half came from an increase in overall active accounts, up 7.5%. So, a lot of what we are doing around the value propositions is getting – we are getting consumers to use the card more often and they are also spending more on the card when they use it. So I think all those trends are moving – continue to move in the right direction, but they did get incrementally better this quarter from where we have been trending.

Okay. Thanks Brian. And you talked about the RSA and the seasonality and so forth. Is it – in thinking about the seasonality going forward, should we just think it kind of moves up so it ends up in the range of guidance throughout the year. And the second question with respect to the RSA business, 3-2-1 program at Walmart impact that at all?

Yes. So let me just take the first one. The RSA would typically be fairly stable in the first half of the year. As I mentioned, just given we had a very small reserve build last year, and when that happens, our partners benefit from that. So if you compare against last year, we had a higher RSA percentage last year than what you saw. The RSA this quarter is actually probably more in line with what you should expect going forward. It’s pretty stable in the second quarter. And then we always see a seasonal increase in the RSA percentage in the third quarter and it comes down a bit in the fourth quarter, but it is typically elevated in the second half of the year. And then your second question on Walmart, you will see – depending on how that plays out, it’s still very early, but you will see any time we launch a value proposition, you typically see loyalty costs, interchange will increase and there is a partial offset in the RSA for those items. But I would continue to use slightly below 4.5% range for the year that we gave you.

Alright. Thanks very much.

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

Thank you. Good morning. Brian, I know it’s the first quarter, but the NIM is trending better than your guidance, is it fair to say that there is some upside given that trend, similar question for the efficiency ratio, understanding the seasonality, but can we hold kind of the year-over-year increase in that ratio?

Yes. So let me just take NIM first. It was slightly above the 15.5% outlook due to the fact that we had really strong deposit growth. We did use some excess liquidity to pay down the bank term loan. So when you look at the average liquidity in the quarter compared to last year, it was a little bit lower. So those are all positives and some of those were factored in the guidance we gave you and some of them came in a little bit better. I think as you think about the rest of the year, if deposit growth continues at this pace, we could see some benefit there in our margins. We are always looking at ways to optimize liquidity, so there could be a slight benefit there. However, there would probably be a couple of offsets. One is we continue to see really strong growth in Payment Solutions. You saw that this quarter. And so you will see a little bit of an offset in our receivable yields. And then our guidance did include, if you remember, it included 50 basis points of Fed rate increases in the back half of the year. We had those in June and December. And so the markets pricing and maybe one rate increase. So that would be just a little bit of pressure on the guidance. So I think there are some put and takes, I wouldn’t think about the margin for the balance of the year trending too significantly in either direction from the 15.76 we reported this quarter.

Okay. Efficiency ratio?

Yes. And then on the efficiency ratio, obviously is very strong in the quarter, 30.4%. it’s definitely going to trend up from here. There is no question. We benefited from having very strong revenue growth in the quarter. We didn’t spend a lot on marketing and strategic investments. Those typically accelerate throughout the balance of the year. I m not going to give you any more specific guidance and we feel really good particularly how we started the year that we will stay below the annual guidance of below 34%. So I think that is – that’s definitely a good number. We are really pleased with how we started the year, but I am not going to give any more specifics than what we said back in January.

Got it. Just one final question for Margaret, I guess one of the concerns I heard during the quarter and just a follow-up on one of the questions asked before, was that Walmart program and possibly kind of the rising costs to issuers as it relates to enhanced rewards, I mean can you just talk about how you guys think of the that, I understand that it’s a share between the merchants as well, but maybe you could just articulate kind of what you guys are thinking in terms of strategy? Thanks.

Sure first of all I think we are always looking at ways to enhance value props, right, because the ultimate goal for both us and the partner is to grow the program. And if we grow the program through the sales and receivables, we all win. So that’s kind of a fundamental. Whenever we do a launch like this, obviously we work closely with a partner. And in terms of the overall economics, there is economics in these deals that we can move around and Brian can talk a little more specifically about that if you want. So for us, the more we grow the program and the more we drive loyalty in the cards through those value proposition, the better we are off as well as the partner. We are pretty excited with this particular launch because it’s a program that I think aligns very close to the strategic direction of Walmart, where they really want to drive online sales. So for us, this is a program that is a big launch and one we are excited about, one that I think we can grow the overall program. And when you grow the overall program, we all win. I don’t know Brian, if you would add more on the economics.

Yes. The only thing, I know you guys get this, but the costs of these value propositions run to the RSA, so the partner is sharing in the costs with us to drive growth in the program. And then the other thing that we don’t talk a lot about, but we also set aside marketing and loyalty dollars in the programs and we jointly agreed with the partner on how to spend those dollars. So we can always reallocate from the marketing funds and maybe we will choose to do less one off promotions and shift some dollars into an everyday value prop. I think this is a really good example where we leverage our data analytics capabilities and we look at spending trends and customer insights to really determine the best way to use those marketing dollars to drive growth.

Thank you.

And thank you. Our next question comes from Betsy Graseck with Morgan Stanley. Pardon me, Betsy your line is open, perhaps you are muted.

Hi, yes. Sorry, it’s muted. Sorry. Good morning.

Good morning.

Good morning.

Okay. So a couple of questions, one on the deposit side, you indicated that you have your goals on deposit funding, just wondering how close you believe you are to that and what would keep you from wanting to increase deposits as a percentage of total funding from here?

Yes. Sure Betsy. So we obviously continue to have really strong deposit growth. We are up $10 billion year-over-year or 29%. It’s been fairly consistent over the past few quarters. I think the only new dynamic is that we did see an influent deposits this quarter when the Fed raised rates. We didn’t move our rates, but I think the announcement of a rate hike prompted people to go check what they were earning in traditional savings account. And they decided to move some money around. So we did see a benefit from that in the quarter. In terms of the target range, we are at 69% of our total funding. We gave you a range of between 60% to 70%. So we are at the high end right now. In my earlier comments, I indicated that we are going to continue to grow deposits. We will probably grow deposits faster than we are growing our receivables, at least based on the market conditions that we see right now. So I would expect that deposit percentage to trend a little above 70% in the next few quarters. And then we are always looking at whether or not we should revisit that target and maybe take it up a little bit, but I think we are going to see how the rest of the year plays out before we do anything there.

Okay. And I would think your deposit growth is adding low cost funding relative to the other funding mix that you have got, so you are using that to drive incremental loan growth that is potentially a little more competitive. In other words, you are using the cheaper funding cost to drive more loan growth that is maybe a little bit more skewed towards value to your partners, is that fair?

Well, I think – if you think about the loan growth we are driving, it’s been pretty consistent. If you just look at the straight receivable yield, it’s pretty flat year-over-year, that was down 21 basis points. And that – again that’s primarily driven by higher payment rates that we are seeing across the portfolio and then more growth in Payment Solutions. So I wouldn’t attribute really any of it to the competitive environment. If you look at loyalty cost and you really have to look at loyalty costs in conjunction with the RSA and some of the marketing spend. We are going to continue to launch attractive value proposition to drive growth. I wouldn’t think about it direct tie-in with deposits. We are kind of – we look at them separately. We are trying to fund the balance sheet in a very cost effective way and deposits are very cost effective for us. We are going to continue to drive deposits. And then we are making different decisions when we look at the retail programs and how to drive growth. So, our yields should continue to be pretty stable, but for the two dynamics that I mentioned earlier, really strong growth in Payment Solutions and slightly higher payment rates.

Okay. And the just a follow-up on the credit questions that you got earlier, it sounded to me like 1Q result in NCS was more seasonal, I know we saw in the master trust data March improved versus February. So, my takeaway is that seasonality should drive down the NCS as we move into second and third quarter. I don’t know if you would agree with that. And maybe you could speak to the fact that delinquencies have been coming down in the 30-day and 90-day buckets and what the implications are for the forward look from your perspective?

Yes. If you remember back in January, we tried to be pretty clear that we didn’t expect the favorability we saw kind of in the first half of 2015 to continue when we gave you how to think about the provision. And if you look at – so, if you look at the net charge-offs in the quarter, I just go back in the first quarter of 2014, net charge-offs were 4.86%. In the first quarter of 2015, they were 4.53% and we are at 4.7% this quarter, so smacked out in the middle of that range that we gave you back in January. So, I think that was pretty good guidance and we came in right in line with our expectations and that’s why we gave you a range for the year. We said credit will be stable, but it will be stable to like a 2-year range in that 4.3% to 4.5% kind of level. And reserves will grow in line with receivables and that’s absolutely what we saw this quarter and you are seeing very stable reserve coverage metrics.

Okay, thank you.

Yes.

Thank you. Our next question comes from Moshe Orenbuch with Credit Suisse.

Great. Thanks. Brian, you talked about the breakdown of kind of existing accounts versus kind of new accounts in the spending. I guess maybe to be a little bit more basic, the 17% obviously benefited this quarter by the leap year and there might have been some funky things a year ago. What do you think the underlying actual growth rate is and maybe talk a little bit about your share at retailers and how that’s moving?

Yes, sure. So, if you adjust for day count, purchase volume will move from 17% to 15% growth. Year-over-year, platform revenue will move from 13% to 12%. So, that’s the impact I think even adjusting for day count, we had really strong growth in the quarter. The purchase volume per average active was up, so consumer spending more average balance per active account was up as well. So, we are still seeing good revolve on the accounts. Overall, very positive trends. I think the thing to think about as you try and figure out the back half of the year starting in the second quarter, the comps will get a little bit tougher for us. We have got the BP portfolio, Guitar Center we also had the Amazon 5% value prop. So, you got to factor those in as you think about the second half of the year, but we are really pleased with how we started. We didn’t get a ton of help from retail sales. They were pretty much more the same, more of what we have been seeing. So, we are definitely taking share. We are definitely outperforming. If you look at the total credit card balances over the past 5 years, it’s about $900 billion of balances and they have been growing it about 3%. Our growth over that same time period is 9%. And so there is no question that we are taking share in the market.

Great. And you had mentioned Citgo, are there other programs that are going to be kind of ramping in the second half?

No, I think that’s the one. And again it’s a relatively modest deal. So, we will have probably a tougher comp from BP and Guitar Center. Citgo won’t totally offset that. So, the comp will get tougher, but the core organic growth is really strong and we obviously hope to have some more program wins in the back half of the year and we will announce those when we get them done.

Maybe from a big picture perspective, you talked a little bit about the Walmart program and the sharing of the RSA, so maybe you just talk philosophically about that kind of a relationship versus program relationship with how it might be different in addition to just the shares in RSA?

Yes, I think probably the key thing or the difference between the co-brand and the pure like Walmart example is really the engagement that you really get at the top. And I think in all of our big programs, the most important thing is for us to really connect with the strategy that, that particular retailer or partner is really trying to drive. And so the engagement both from an analytics and marketing perspective is just so high. You don’t necessarily always get that same connection when you are doing the co-brand. So, I think that makes a big difference. I think the other thing that all retailers are really facing is how do they reach out to their target markets. And I think the fact that we had this 29% online growth overall year-over-year is certainly a way for us to really continue to connect with the partners, because the reality is consumers are shopping differently. So, I think really be engaged at the strategy level with the retailer is probably one of the, I think bigger differences between what we are doing on that side versus generic co-brand.

Thanks so much.

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

Thank you. Good morning. I had a follow-up question, Brian, on the seasonality that you talked about on Slide 8. So, it looks like the allowance, the reserve rate is essentially peaks in the first quarter and we saw that in ‘15 and then it kind of gradually decreases again before peaking in the first quarter of the next year. And as we have been looking at year-over-year trends that reserve rate has actually been following every single one of the periods that are shown here. And similarly first quarter ‘16 fell over first quarter ‘15. But at some point, should we expect the year-over-year to reflect an increase similar to kind of what the charge-off rates up above. We had been seeing year-over-year declines. Now this quarter we saw year-over-year increase. So, when should we for modeling purposes expect that to happen for the reserve rate as well?

Yes. Well, if you go back to what we said in January, we pretty much indicated that we thought the coverage metrics would be stable. So, if you go back and compare against the prior year, we are seeing that stability. So, even though we saw 9 basis points of improvement or I guess the lowering of the reserve coverage from the first quarter ‘15 to the first quarter ‘16, from our perspective that’s like dead stable. That’s very consistent. And so I think you are going to start to see that normalization as you go and compare the prior quarter from the prior year. So, I think you are seeing it now. I would tell you to look at both the reserve coverage as a percent of the receivables as well as look at the reserves as a percent of or against last 12 months in net charge-offs. And if you triangulate those two, we think they will be pretty stable for the balance of the year.

Great, thanks. And if I may an industry level question for you, Margaret, so there has been, I guess a lot of focus on the friction in the payments ecosystem that certain players like PayPal have created by getting customers to fund their PayPal accounts with their bank accounts effectively disintermediating Visa and MasterCard and their issuing bank partners. And if you extend that thought process part of the Synchrony value proposition to its retail partners is not charging interchange on their private label transactions. And in the sense, one could argue that private label is effectively disintermediating general purpose cards, but there doesn’t – and of course, we have seen some private label market share gains over the last decade or so, but there doesn’t seem to be as much friction between Synchrony and Visa MasterCard and their issuing bank partners. So, I was hoping maybe you could just speak to the health of your relationship with the payment networks and then maybe also just touch on some of those dynamics.

Sure. I think we are working very closely with all those guys. I think at the end of the day, how a consumer is going to decide how they make their payment is going to be up to them, right? So, I think the position we have taken is that all of the players that you talked about are really partners of ours, including PayPal by the way, where we offer our credit programs. So for us, it’s really about getting our cards in the wallet, whatever that wallet is, to be top of wallet and to get consumer to use it more. And I think the connection we have with merchants I think is very different than many of the players out there. And I think that’s the value we bring even to some of the partners you talked about, like Visa or MasterCard and PayPal, right? So, we have that very tight connection with the merchant. And so we see this all as upside for us and continue to see that whole payment landscape as an opportunity for us to be in the forefront and continue to invest and we will continue to invest to be leaders in that.

That’s very helpful. Thank you.

Thanks.

Thank you. Our next question is from David Ho with Deutsche Bank.

Thanks. Good morning. Just circling back on the credit, Margaret, have we seen some – within the industry some pressure from merchants, retailers to basically increase the funnel, widen that out a little bit to drive volumes and maybe a little tick up in non-prime credit duration for those customers, down in the lower FICO spectrums, can you remind us how you guys tend to offset this with existing partners or with new RFPs or de novo and are you seeing that pressure to be a little looser on credit?

We are not seeing that. Our partners are not asking us to go deeper. I think we have been very consistent since the crisis in our underwriting. We have not changed underwriting. Our portfolio has remained fairly consistent since 2011. So I think this is where the goal should be not going necessarily deeper, but ensuring that you are bringing the value and sales in an up way through marketing, through being innovative, through driving channel integration and really working it that way. We control underwriting. It’s something that we feel we have to do when we to our contracts. So that’s something that I think is really important from a safety and soundness perspective from our bank. And we work with the retailers. There is many other ways to grow programs without having to necessarily always dig deeper. And I don’t know Brian, if you had mentioned really how the portfolio...

Yes. I mean the underwriting profile is very consistent with where it’s been and the average FICO by account is 711, exactly flat to last year. 78% of the new accounts since 2010 our prime credits above 660 FICO. And that’s flat to last year as well. So the overall credit profile continues to be very stable.

That’s helpful. And separately on Amazon, obviously you have gotten some really nice digital online growth. Now, are you seeing that volume come in as transactors versus revolvers and the reason I ask is obviously it’s a private label program, so you don’t earn any interchange, but you are obviously paying fairly high rewards. So part of that does get offset in the RSA realized, but are you getting the revolved activity that you were expecting in that relationship?

Yes. When we – obviously, when we launched that new value proposition, we did a lot of modeling initially because we knew that through the door population and people applying for the accounts was going to change. And so that’s part of the reason why, if you remember, when we launched it, we launched it with a soft launch because we wanted to monitor the mix of consumers and we wanted to make sure that we were sizing lines appropriately, that it was a good experience for the prime customer that we are generating increment sales for Amazon. And so we have a lot of things that we are measuring. But one of the big ones for the credit program was revolver versus transactors. And we have monitored. It’s coming in pretty close to what we forecast. So far, very much in line with our expectations. And obviously, the point you made is a good one which is part of why you see loyalty expense growing a little bit faster than interchange because that’s the program where we do have a very attractive value proposition, but we don’t charge interchange to Amazon. So there is an offset in the RSA. It’s all part of that restructuring of that agreement and part of the extension that we do at Amazon when we launch the new value proposition.

Sure. And one more follow-up on that if I may, are you seeing a general trend broadly that merchants are more willing to fund a larger portion of the value from the high rewards earned now that they have seen – that they have gotten some good engagement and account activity?

I think that varies retailer by retailer, but I think if you take the whole formula of what we do, the retailer is always looking to fund greater loyalty to their brand and their card. And we have retailers who take some of the earnings off the RSA and plough it right back into additional offers. So it varies across. I think the reality is right now everyone is – Brian mentioned it early, retailer sales have not been necessarily stellar. So our retailers and our partners are really looking to us to work with them to really make sure we are continuing to get right offers out there. But the retailers are high. The more engaged the retailer is, usually the better the program performance is.

It’s not really a new phenomenon. You have to remember, we did low as 5% off a few years back. I think you are seeing more of this now, but it’s a mix as well. It’s maybe doing a little bit less one-off promotions, doing more on an everyday value prop. Again, this is where we are using our data analytics to really determine what is the best value proposition to get the consumer to come and to spend more. And so we are always looking at optimizing that mix between the one-off promotion and the everyday value prop.

Thank you.

Thank you. Our next question comes from Mark DeVries with Barclays.

I just wanted to start with a quick follow-up on Amazon, are you any closer now to a harder rollout on that program?

Mark, we are in full rollout now. That really happened over holiday. The marketing around it is targeted marketing and Amazon controls a lot of that. But the program is performing very well in line with our expectations and we are pleased with the marketing and the advertising around it.

Okay. Are you seeing volumes accelerate as a result of that?

We continue to see good volumes on the Amazon program. Obviously, can’t get real specific around it, but we are really excited when we launched it and it’s performing in line with our expectations.

Okay, great. And I was hoping turning to the Walmart 3-2-1, I was hoping you could comment at least a high level on kind of your level of optimism that, that could really enhance your tender share there because this is a pretty substantial enhancement of the rewards prop relative to the old card, which is pretty modest. We have always – I am sorry go ahead.

No, I would say that’s why we are pretty excited. We have been working with Walmart since 1999 and most of the value prop on the card has been kind of more pulsing promotional types of things like $0.05 or $0.10 off gas or something like that or some of the types of offerings. So to get a consistent value prop, that’s – everyday use is really a big deal, because that’s when the consistency and the usage of the card goes up. And obviously, Walmart is a big retailer, so we are pretty excited about it.

Yes, fair enough. So given the massive size of them, could you give us some sense of what even just a modest increase in tender share can mean to loan growth?

Well, it’s hard for us to get specific around an individual program. Mark, you can take a look at what Walmart sales are in the U.S. and you can calculate your own percentage, but its Walmart continues to be a significant growth opportunity for us.

Okay, great. And then just one last question if I may, given you are only one quarter in, but we had 13% loan growth and guidance is for 7% to 9% receivable growth, does that just feel a little bit conservative here or even if you take away – you lap the comps on BP, Guitar Center, you are still probably 11% or so, you would have to see a pretty material slowing in growth through the end of the year just to get to the high end of the range and that’s what the backdrop of like some really solid momentum around things like Amazon and Walmart just hoping you could comment on that?

Yes, sure. Obviously, we had a very strong quarter. We are really pleased with the overall growth. The only thing I would point out is the back half the comps get tougher. If the trends continue, we can be a little bit better. We re really pleased, when we look across the portfolio, all three platforms growing really well, all the underlying dynamics in line or better than what we expected. So we are really pleased with how we started the year. We are not going to update guidance. And I would just remind you that the comps get a little bit tougher. But as you pointed out, the start of the year has been really strong.

Okay. Thanks.

Vanessa, we have time for one more question.

Thank you. Our last question comes from Don Fandetti with Citigroup.

Margaret, you guys have been in a pretty good position in terms of most of your deals being locked up until 2019, when should we start thinking about the risk of early renewals, because if we look at some of the deals that have traded recently, knowing that some of them have been more inter-banked, the ROAs are a lot lower. And so how would you handle that and could retailers come to you and say look, we would like to renew earlier, there is better pricing, could you comment on that?

Yes. So I think you have to put this in the context of kind of the overall portfolio and how we manage it. And we are always looking to extend relationships. We never let the relationship go to the end of the term before we start having dialogue. In most cases, something comes up like a new value prop launch that’s very significant or they want to roll out a Dual Card or something like that. So I would just say that this is a constant part of how we manage the overall portfolio and we are always engaging with partners to ensure that we renew them before the end of the term. I think we will have to see how the competitive environment plays out. I think this is where we have to do a really good job delivering for our customers and really ensuring that we actually give them no recent RFP and try to engage with them as early as possible. And we have had great success with that over the long-term relationships that we have had.

Okay, great. That’s all I have.

Okay. I just want to clarify one point. I mentioned the 29%. I just want to make sure people know. Its online sales were up 29% year-over-year. And if you compare that to what’s happening overall in the industry, that’s about 14% to 15%, so it’s online sales. I don’t want to confuse anyone there, because I might have got misinterpreted, so just want to clarify.