Synchrony Financial (SYF) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the Synchrony Financial Fourth Quarter 2019 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. I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations. Greg, you may begin.

Thanks, operator. Good morning, everyone, and welcome to our quarterly Earnings Conference Call. Thanks for joining us. 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 webcast are located on our website. Now it's my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone, and thanks for joining us today. 2019 marked another year of significant transformation for Synchrony. Across all of our sales platforms, we renewed more than 50 existing partnerships, while also signing 30 new business deals. We expanded our CareCredit card network and our auto and home networks. We significantly enhanced the digital experience for cardholders and substantially grew our direct-to-consumer deposit platform. During our five years as a public company, we have made significant investments in people and technology, and that has propelled the company forward and enabled the development of innovative offerings for our partners and enhanced our capabilities and user experiences for our cardholders. In the fourth quarter, earnings were $731 million or $1.15 per diluted share, which included the remaining reduction in the reserve related to the sale of the Walmart consumer portfolio in October. The reduction totaled $38 million or $28 million aftertax and provided an EPS benefit of $0.05 to the quarter, as outlined in Slide 3 of the presentation. Loan receivables were down 6%. However, on a core basis, which excludes Walmart and the Yamaha portfolio that we moved to loans held for sale in the fourth quarter, loan receivables were up 5%. On a core basis, the loan receivable growth drove 5% growth in interest and fees. Purchase volume was up 7% and average active accounts increased 3%. The efficiency ratio was 34.8%, including a restructuring charge of $21 million for employee costs, which had a 60 basis point impact on the efficiency ratio this quarter, as we continue to drive cost efficiency for the company. We grew deposits $1.1 billion or 2% over last year, and much of this growth has come through direct deposits, which grew 10%. Our direct deposit platform remains an important funding source for our growth, and we continue to invest in our bank to help attract new deposits and retain existing customers. While organic growth continues to present the largest opportunity for us, and we have demonstrated our ability to not only grow our existing programs, but also launch new programs with fast-growing partners in new markets. In our Retail Card sales platform, we announced a new partnership with Verizon, where we will be the exclusive issuer of Verizon's co-branded consumer credit card. Together, we are launching the first credit card designed specifically for Verizon's customers. We are thrilled to be working with Verizon, as they continue to bring innovation to their customers, and this is a great growth opportunity for us, as we continue to diversify our portfolio. The new Verizon credit card is expected to launch during the first half of this year. We established new payment solution relationships with Mor Furniture for Less, Grand Home Furnishings, Travis Industries and Leisure Pro; and renewed key relationships with Rooms To Go, BuyMax Alliance, CFMOTO and Continental Tires. We remain focused on growing our network to create broader acceptance and utility for our cards, and we have had many recent successes on that front in our CareCredit network. In the fourth quarter, CareCredit established a new relationship with Kaiser Permanente. We've been focused on adding health systems to our CareCredit network, and with the addition of Kaiser Permanente, we now have five health systems under contract. During the quarter, we also renewed a key CareCredit relationship with Demant, a global market leader in hearing health. We continue to remain highly focused on digital innovation, accelerating our data analytics capabilities and creating frictionless customer experiences, which are key to the success of our programs and winning new partnerships. Driving digital sales penetration is key to our success. In Retail Card, digital sales penetration was 39% in the fourth quarter. We are happy to report that we have reached a new high on digital applications, which were 52% of our total applications in the fourth quarter. The mobile channel alone grew over 40% compared to the same quarter last year, excluding Walmart. Our capital allocation strategy drives strong growth at attractive risk-adjusted returns, while maintaining a strong balance sheet and the ability to return capital to shareholders. During the quarter, we repurchased $1.4 billion of Synchrony Financial common stock and paid $141 million in dividends. We concluded 2019 having made significant advances in our capabilities and winning key partnerships that will generate long-term value for the company. We have a clear vision for our future and what we need to do to get there. Later in the call, Brian Doubles will outline our strategic priorities as we move into 2020. I will take a moment to highlight our platform results on Slide 4. In Retail Card, loans were down 12%, but increased 4% on a core basis, with solid growth, driven by our digital partners. Other metrics were down, driven by the sale of the Walmart portfolio. We are excited about our new partnership with Verizon, in addition to the other partnerships we announced in 2019, and look forward to launching these new programs this year. Payment Solutions delivered a strong quarter with broad-based growth across the sales platform, and particular strength in home furnishings and home specialty, that resulted in loan receivables growth of 4% or 7% on a core basis. Interest and fees on loans increased 4%, primarily driven by the loan receivables growth. Purchase volume was up 6%, and average active accounts increased 3%. We signed a number of new programs and renewed key partnerships this quarter. We continued to drive growth organically through our partnerships and card networks. These networks, along with other initiatives such as driving higher card reuse, which now stands at approximately 31% of purchase volume, excluding oil and gas, have helped to drive solid results and position the Payment Solutions platform for future growth. CareCredit also delivered another strong quarter. Receivables growth of 8% was led by our dental and veterinary specialties. Interest and fees on loans increased 9%, primarily driven by the loan receivables growth. Purchase volume was up 12%, and average active accounts increased 5%. We continued to expand our network and the utility of our card, most recently through our partnership with Kaiser Permanente, which helped to drive the reuse rate to 54% of purchase volume in the fourth quarter. Throughout the year, we drove strong growth across our sales platforms. We extended and expanded relationships, signed exciting new partnerships, launched new programs, increased the utility of our cards and networks and grew our Payment Solutions platform to over $20 billion and our CareCredit network to over $10 billion in receivables. Our efforts and achievements provide a strong foundation for the future. With that, I'll turn the call over to Brian Wenzel to review our financial performance for the quarter and year and our outlook for 2020.

Thanks, Margaret, and good morning, everyone. I'll start on Slide 5 of the presentation. This morning, we reported fourth quarter earnings of $731 million or $1.15 per diluted share. This included the remaining reduction in the reserve related to the sale of the Walmart consumer portfolio in October. As Margaret noted earlier, the reduction totaled $38 million or $28 million aftertax and provided an EPS benefit of $0.05 to the quarter. We generated solid year-over-year growth in several areas, as noted on Slide 6. Excluding Walmart and the Yamaha portfolio, which was moved to loans held for sale in the fourth quarter, loan receivables were up 5% on a core basis. Interest and fees on loan receivables were also up 5% on a core basis over last year, driven by the growth in receivables. On a core basis, purchase volume growth was 7%, and average active accounts increased 3% over last year. Overall, we're pleased with the underlying growth we generated across the business as well as the risk-adjusted returns on this growth. RSAs increased $174 million or 20% from last year. Improved program performance and growth primarily drove the increase. The increase also included the RSA impact, resulting from the $17 million release of reserves due to the reclassification of loan receivables to held for sale for Yamaha. RSAs as a percent of average receivables was 4.8% for the quarter. The RSA percent was impacted by the sale of the Walmart portfolio, which operated an RSA percent below the company average, in addition to the factors driving the increase in RSAs. The provision for loan losses decreased $348 million or 24% from last year. The reduction was mainly driven by the lower core reserve build and a reduction in net charge-offs. The core reserve build for the fourth quarter was $50 million. Other income increased $40 million over last year mainly due to lower loyalty costs, as a result of the Walmart program conversion. Other expenses were basically flat to last year, but included a restructuring charge of $21 million included in employee costs. So overall, the company continued to generate solid results in the fourth quarter. I'll move to Slide 7 to cover our net interest income and margin trends. Net interest income decreased 7% from last year, primarily driven by a 6% decrease in interest and fees on loan receivables due to the sale of the Walmart portfolio. On a core basis, interest and fees on loan receivables increased 5%. The net interest margin was 15.01% compared to last year's margin of 16.06%. The main factors driving the margin performance were: a decline in loan receivables mix as a percent of total earning assets, the mix declined from 83.5% to 80.2%, driven by holding excess liquidity of approximately $3 billion resulting from the proceeds of the sales of the Walmart portfolio; a 33 basis point decrease in the loan receivables yield to 20.87%, primarily driven by the sale of the Walmart portfolio; and a 10 basis point increase in total interest-bearing liabilities cost to 2.58%, primarily due to the higher benchmark rates. Later in the call, I'll provide more insight on the direction of net interest margin for 2020, including the impact from the sale of the Walmart portfolio. Next, I'll cover our key credit trends on Slide 8. In terms of specific dynamics in the quarter, I'll start with our delinquency trends. The 30-plus delinquency rate was 4.44% compared to 4.76% last year, and the 90-plus delinquency rate was 2.15% compared to 2.29% last year. If you exclude the impact of the PayPal Credit program and the Walmart portfolio, the 30-plus delinquency rate and the 90-plus delinquency rate were flat compared to the last year, reflecting continued stable credit trends. Focusing on net charge-off trends. The net charge-off rate was 5.15% compared to 5.54% last year. The reduction in the net charge-off rate was primarily driven by Walmart and improving credit trends. This was partially offset by the purchase accounting impact in 2018 related to the PayPal Credit program. Excluding the impact of the PayPal Credit program and the Walmart portfolio, the net charge-off rate was approximately 15 basis points lower than last year. The allowance for loan losses as a percent of loan receivables was 6.42%. The core reserve build in the fourth quarter was $50 million, excluding the impact of the final reduction in the reserve related to the Walmart portfolio, which was $38 million; and a release of the reserves of $17 million for the Yamaha portfolio, which was reclassified to held for sale in the fourth quarter. The Yamaha release had no impact on net earnings due to the RSA offset, I discussed earlier. In summary, the core credit trends have leveled off and are slightly better than our expectations. We expect the core trends to show stability as we move forward, assuming stable economic conditions. We continue to see good opportunities for growth at attractive risk-adjusted returns. Later, I will provide an outlook on credit expectations for the year, including the impact of adopting CECL. Moving to Slide 9, I'll cover our expenses for the quarter. Overall expenses came in at $1.1 billion, basically flat compared to last year. This includes a restructuring charge of $21 million, included in employee cost in the fourth quarter. While we did see an increase in expenses driven by growth, this was offset by cost reductions from Walmart. We achieved our cost reductions goal for Walmart, and those cost reductions will be in the expense run rate for 2020. The efficiency ratio for the fourth quarter increased to 34.8%. The increase was primarily driven by Walmart, which operated at a lower efficiency ratio than the company average; higher RSAS, including the impact from the Yamaha portfolio; and also included the restructuring charge. Moving to Slide 10. Over the last year, we've grown our deposits $1.1 billion or 2%. This puts deposits at 77% of our funding compared to 73% last year. While we slowed overall deposit growth in the second half of 2019 in anticipation of the proceeds from the Walmart sale, we did continue to grow lower-cost direct deposits at a strong 10% pace in the fourth quarter. Focusing on capital and liquidity. We ended the quarter at 14.1% CET1 under the fully phased-in Basel III rules, a slight increase over last year. In November, we completed our first preferred stock issuance, totaling $750 million at a fixed rate of 5.625%. The issuance had strong demand and was significantly oversubscribed. During the quarter, we continue to execute on our capital plan we announced in May. We paid a common stock dividend of $0.22 per share and repurchased $1.4 billion or 38.4 million shares of common stock during the fourth quarter. At the end of the fourth quarter, we have approximately $1.3 billion of remaining share repurchase capacity of the $4 billion board authorized plan, which runs through June 30, 2020. Total liquidity, including undrawn credit facilities, was $23.4 billion, which equated to 22.3% of our total assets. This is up from 18% last year, reflecting the approximate $3 billion of excess liquidity we're holding from the proceeds from the sale of the Walmart portfolio. Overall, we continue to execute on the strategy that we outlined previously. We're committed to maintaining a very strong balance sheet, with diversified funding sources and strong capital and liquidity levels. We expect to continue deploying capital through growth and further execution of our capital plan in the form of dividends and share repurchases. Next, on Slide 11, I'll recap our 2019 performance compared to the outlook we provided last January. Starting with loan receivables, our core growth of 5% was in line with our outlook range of 5% to 7%. Organic growth remained the primary driver of the solid results. Strong value props on our cards, effective marketing strategies, continued investments in technology, digital assets and data analytic capabilities are enhancing our ability to drive organic growth as well as win new programs. We continue to see strong growth of 7% to 8% in our Payment Solutions and CareCredit sales platforms. Net interest margin was 15.78% for the year, in line with the 15.75% to 16% range we expected. We did see the margin impact resulting from the sale of the Walmart portfolio in the fourth quarter and the impact will continue into 2020, which I will cover in our 2020 outlook. RSAs as a percent of average receivables came in higher than our outlook last January. RSAs were 4.4% for the year compared to our outlook of 4.0% to 4.2%. The higher RSA percent was mainly driven by improved program and credit performance in 2019 and included the RSA impact resulting from the release of reserves related to Yamaha. Our net charge-off rate of 5.6% was below our 5.7% to 5.9% outlook range for the year. Credit trends moderately improved in 2019, slightly better than our expectations. The sale of the Walmart portfolio also had a positive impact on the net charge-off rate in the fourth quarter, and that will continue into 2020. The efficiency ratio for the year was 31.9%, slightly above our expectations. This was mainly due to higher RSAs that resulted from improved program and credit performance during 2019 and also included the restructuring charge we recognized during the fourth quarter. Finally, excluding the impact of the reductions in the Walmart reserve, we generated a return on assets of 2.7% versus our expectations of approximately 2.5%. On Slide 12, I'll recap the estimated impact of adopting CECL. The adoption of CECL was effective on January 1. So no impact on 2019. The initial adjustment is recorded to retain earnings and does not impact net earnings or EPS. The initial impact on the allowance for loan losses from the adoption of CECL on January 1, was an increase of approximately $3 billion or 54% of the year-end balance, in line with our expectations. The reduction to retained earnings from the after-tax impact is approximately $2.3 billion as well as creating a deferred tax asset of approximately $700 million. On a regulatory basis, we elected to phase-in the approximate $2.3 billion impact on a capital at 25% per year in each year from 2020 to 2023. On a CET1 transition basis, this will impact the ratio by approximately 60 basis points per year during the phase-in period. We want to continue to emphasize our view that CECL is an accounting versus an economic change. CECL does not affect the cash flows generated by the company, how we view the lifetime value of an account, or the IRR of marketing investments. We are providing the 2020 outlook, which includes the anticipated impact of CECL. And have highlighted those specific measures where we expect to see the impact from CECL to provide comparability on how our expectations align with 2019. Beginning with the first quarter, we expect to provide similar visibility to help with comparison to the prior year where the historical loss method was utilized. Moving on to our 2020 outlook on Slide 13. Our macro assumptions for 2020 includes stable key benchmark and unemployment rates throughout the year. Our outlook for receivables growth is in the 5% to 7% range. As Margaret noted, we have new programs such as Venmo and Verizon, that'll be launching throughout the year. As a result, we expect receivables growth to accelerate in the second half of the year. We expect the purchase volume will run at our historical rate of 2 to 3x broader retail sales. And for online and mobile to continue its strong growth. We believe our net interest margin will run in the 15.25% to 15.50% range for the year, lower than where margin has run historically, at normal seasonality we see quarter-to-quarter. One factor driving the lower margin expectation is the excess liquidity of approximately $3 billion that we will be carrying on our balance sheet from the proceeds of the Walmart sale. We expect the excess liquidity will be deployed through growth, as the year progresses. However, it will impact our margin by an estimated 20 basis points in 2020. The other factor is the impact of not having the higher yields the Walmart portfolio contributed. Regarding the net interest margin performance throughout the year, we expect it to run closer to 15% in the first half of the year, then trend back closer to the 15.50% during the second half of the year as we deploy the excess liquidity. We expect that RSAs as a percent of average receivables will be in the 4.3% to 4.5% range for 2020. The single largest driver of the expected increase in the RSA outlook is the sale of the Walmart portfolio, which operated at a lower RSA percent than our overall rate. The outlook is more in line with our historical run rate and reflects continued strong performance of our programs. While there will be no RSA offset on the initial CECL adjustment to reserves, the ongoing impact of CECL will be included in the RSA, which will provide a partial offset to the reserve increase. That offset is muted in the first half of 2020 and then more fully realized in the second half of the year, in accordance with the calculations of the RSA and our program agreements. In terms of credit, we expect the net charge-off rate for 2020 will be in the 5.4% to 5.6% range versus the 5.6% in 2019. The sale of the Walmart portfolio has a positive impact on the net charge-off rate. Regarding loan loss reserve builds, we expect the total reserve build for the year under CECL will be in the $800 million to $900 million range versus $500 million to $600 million if we continue reserving under the same methodology as 2019. This represents approximately a $300 million increase in reserve provisioning due to the implementation of CECL. There are factors that can impact these ranges, such as changes in economic trends, consumer behavior, portfolio and product mix and the underlying assumptions used in determining the allowance for loan losses. We expect to operate the business with an efficiency ratio of approximately 32%, in line with 2019. Also impacting the efficiency ratio will be the technology and people investments necessary to launch the new programs we have noted. These are upfront investments we must make to broaden our capabilities and build the infrastructure around the programs ahead of the actual launch. The total estimated impact on 2020 EPS from launching these programs is approximately $0.20 of EPS dilution, which includes investments ahead of the launch, operating costs and reserves related to the growth of these new programs. While starting up these programs has a dilutive effect on EPS in 2020, we're excited about the future potential they provide. The preferred stock dividends will start this year and will be paid quarterly beginning in mid-February. The dividends for the full year will amount to $42 million or a $0.07 reduction in EPS. Finally, consistent with our track record, excluding the impact of CECL, we expect to generate a return on assets of approximately 2.5% in 2020, which includes the dilution related to launching the new programs. As part of this outlook, I want to provide a view on certain key earnings drivers for the first quarter. We expect the net interest margin to remain near 15% in the first quarter due to the factors I noted previously. Typically, we see the net charge-off rate trends seasonally higher in the first quarter compared to the fourth quarter due to the seasonal decline in receivables. The increase has historically been in the range of 50 basis points, and we expect the trend in the first quarter to be similar. We expect that RSAs, as a percent of average receivables will be in the 4.4% to 4.6% range, with and without CECL impact. Regarding reserve builds. We expect the build to be $75 million to $100 million with CECL and $50 million to $75 million excluding the impact of CECL. We expect the efficiency ratio to be approximately 33% for the first quarter, then the ratio to trend down as the year progresses. With that, I'll turn it over to Brian Doubles to highlight the strategies that will help drive future results.

Thanks, Brian. I'll close with a recap of our strategic priorities, which are focused on driving long-term value creation, while diversifying for the future. A top priority, as always, is the growth of our core partnerships. Opportunities to grow will continue to be evaluated through the lens of the risk-adjusted returns they produce. To strengthen our relationships, we will seek to continue to deliver innovative new products and capabilities that add value to cardholders and the programs and drive card usage and brand loyalty. We will also continue to launch new programs, where we believe the partnership can deliver the opportunity for growth at attractive risk-adjusted returns. We will also seek to diversify through targeted strategies in Payment Solutions, CareCredit and our Synchrony-branded products. This will help us to achieve a more diverse revenue base through the acceleration of growth in small programs and new products. We will focus on growing Payment Solutions through enhanced point-of-sale capabilities and innovative product offerings. In CareCredit, we will continue to work on broader acceptance and further expansion of the network with an emphasis on health systems, like our recently announced partnership with Kaiser Permanente. This is an area where we see a significant opportunity. We will also continue to invest in our Synchrony-branded products, the auto and home networks and the Synchrony Mastercard. Lastly, we will leverage our recent acquisitions to develop and grow new revenue sources in e-gifting and pets. Technology and data analytics remain a key focus, as we strive to provide best-in-class customer experiences. We believe this customer-first approach will be an increasingly important growth driver. We will continue the expansion of advanced data analytics, leveraging customer-level performance dynamics and further develop capabilities to deliver frictionless customer experiences. We are also focused on alternative data and machine learning to further drive innovation, advanced underwriting and authentication. These investments are critical to driving growth in our existing programs as well as securing renewals and winning new programs like Venmo and Verizon. It remains a key priority to operate our business with a strong balance sheet and financial profile. We have proven our ability to do this, and it will remain a top priority for us in the future. We expect to maintain strong capital and liquidity to support our operations, business growth, credit ratings and regulatory targets. Finally, we will continue to utilize our strong capital position to support growth, launch new programs, invest in products and capabilities and return capital to shareholders through dividends and share repurchases. We believe we are well positioned for long-term growth, and we look forward to driving results for our partners, cardholders and shareholders in 2020 and beyond. I will now turn it over to Greg to begin the Q&A portion of our call.

That concludes our comments on the quarter. We will now begin the Q&A session. [Operator Instructions]. Operator, please start the Q&A session.

[Operator Instructions]. Our first question comes from Ryan Nash with Goldman Sachs.

So I wanted to start off with a question on the net interest margin. So it had been running in the, call it, 15.75% to 16% range since you went public and deployed all your liquidity. Now just to think about the moving pieces, you're saying 15% for the first quarter, which means you need to be 15.5% plus for the rest of the year to reach the middle of the guide. So I know it's hard to forecast very far out given all the moving pieces, but should we think about 15.50% plus as a more normal margin range, once we get beyond this liquidity impact? And then second, are there any other levers, particularly on the funding side, you could have to drive this back closer to that historical range?

Yes. Thanks, Ryan. So yes, we're trending towards the 15% in the front half of the year, really as we work through the $3 billion of excess liquidity we have from Walmart coming off the fourth quarter. We obviously are trying to work the funding profile and manage that to deploy that liquidity as fast as possible, including through organic growth, really in the first couple of quarters of 2020. As we guided, the back half of the year should trend towards that 15.5%. So when you think about it, year-over-year, there's really the 2 major impacts, right? The first one is burning off this excess liquidity. The second is the impact of the Walmart portfolio, which operated at a higher margin than the company average and other portfolios. So obviously, Walmart was out for a part of the fourth quarter. So when you have those events, we should trend back towards that 15.5% in the back part of the year.

Okay, got it. And maybe just to squeeze in a question on costs. So I thought I heard you say that you achieved all of the Walmart cost savings in the run rate. I just wanted to double check if that was the case? And can you maybe just help us understand the moving pieces on the expense growth going forward. I know Brian Doubles talked about some of them. But Margaret, maybe you could expand on what are some of the big strategic investments that you're making? And would you view this as a year of accelerating cost growth, and we could potentially get back to something lower beyond this year?

Yes. So I'll hand the first part and then give it over to Margaret. So as you think about the cost, again, we're guiding to approximately 32%, which is just 20 basis points higher than the full year average of 31.8%. Yes, we did get the cost reductions that we anticipated for Walmart out and they'll be fully baked into the run rate as we move forward. The impact slightly on the efficiency ratio, again, is Walmart-related because of the high revenue that came off of that portfolio and what it's generated, it ran a much lower efficiency ratio as a portfolio than the company average. So that's the slight tick up that you'll see there.

Yes. And I think, Ryan, on investments, it's really a couple of things. So first is really the investment we're making in Venmo and Verizon. Both of these programs are going to really be fully digitized in-app experiences. And so we've added a number of agile teams to really develop a number of APIs to really deliver for those partners. We have the launch on. We have people that we need to add. So those are really a big part of the strategic initiative in terms of those two programs. More broadly, we're continuing to invest in a couple of key areas. We talked a little bit about CareCredit. We're adding resources and technology enhancements there, particularly as we go into health systems, which we believe is a really great investment and one where we'll get a great return over time. And just broadly, I would say, from a technology perspective, we continue on this journey of really driving digitization and frictionless customer experiences. I'd say the other area we're very focused on is really what I would call the customer journey. So I think we've done a really good job on the front end, meaning how you apply and buy and using your mobile capabilities. But we're really looking at how do we get more efficiency out of our back office, in terms of using digitization to really excel that experience for the customer. So it is a bit of investment. I think the biggest kind of add to the year is really, though, the Verizon and Venmo investment we're making. And in our mind, those are two great opportunities for us for future growth. And we think that, that investment is really going to be the right investments to make for the company.

Got it. And thanks for all the color on CECL.

Our next question comes from Moshe Orenbuch with Crédit Suisse.

I was hoping that -- and I kind of hate to ask a question like this kind of precise, but you did $4.03 billion of net interest income in the fourth quarter. Usually, you have a little bit of a seasonal decline in Q1 and then start growing. Given that you do expect the margin to be higher and assets to grow and Walmart was almost entirely out of Q4, is it reasonable that other than normal seasonal impacts that we should expect to see growth in NII from the Q4 level?

Yes. Thanks, Moshe. Yes, as you think about the fourth quarter, Walmart was in for approximately, call it, 15, 20 days. So that impact, when you think about the quarter, there will be a slight dilution as it relates to that. And then really, it's the excess liquidity, that we're carrying in that's impacting along with normal seasonality, when you think sequentially quarter-over-quarter.

Right. But that excess liquidity isn't impacting dollars of net interest income in a material way, right?

Yes, it's also impact -- yes, it is impacting on dollars.

Okay. Second question, just on the expenses. You talked about the charge and then -- that was in the Q4 and then some investments. Maybe just -- because you did say that you're going to have an improvement over time kind of back on the efficiency side, maybe just -- can you talk a little bit about the approach that you're taking to those investments. How you would see them paying back over what period of time. And how we should think about that?

Yes. So if you think about the investments -- Margaret highlighted, so as you think about the investments in Verizon and Venmo, there's different pieces of it, right? We have to pre-stage people, right? So we have teams been up and standing up here to get these programs ready. We'll have certain launch costs, as you think about research that's done on the consumer the value proposition, et cetera, that phases in. As Margaret talked about, we're then standing up the IT and infrastructure. These are sizable opportunities. And we need to be at full scale relative to the launches, both Verizon in the first half and Venmo in the second half. And given the nature of these two opportunities, there are specific things around data lake, around how we're doing digital servicing, as Margaret talked about, API. So that cost builds up, right, as we move through the year. So that piece is the incremental. We run with, hopefully, a very good cost discipline in the business. We got the cost reduction we wanted from Walmart. We're continuing to try to drive out and drive efficiencies in the business and the processes, whether it sits in the enterprise operations side or across all our core functions. And we look at the business from multiple different lenses and how we manage expenses, and we'll be fairly disciplined as we move through 2020.

Our next question is from Sanjay Sakhrani with KBW.

Appreciate all the CECL commentary. So when we think about the loan growth expectations, that we have in 2020 and the growth that we saw this year. Correct me if I'm wrong, but it seems like the core portfolio is growing mid-single digits, which is lower than what we have seen in the past. Can you guys talk about sort of how that will migrate over time? Because you do have a set of more higher-growth merchants now in the portfolio. And then maybe, how -- yes, I guess, how it would migrate higher over the next several years would be the question there?

Yes. Thanks, Sanjay. So as you think about growth, we're projecting 5% to 7% this year. We're coming off 5% last year. If you think about from the 17% to 19% range, our average growth was 4% to 7% ex the PayPal acquisition. So we're growing in line with that. Again, Verizon and Venmo will come in, they'll phase in. Again, they're de novo programs with one launching in the first half, one launching in the second half. So we're not providing long-term guidance relative to the growth rate, but obviously, they are start-up programs, and that trajectory -- we'll obviously provide guidance, as we move into 2021. So we're inside historical norms. If you look inside the portfolio, there are moving pieces. Yes, we have some fast-growing portfolios, but we also have some pockets that are not growing as fast, as I'm sure you can recognize, and they work in concert. So again, we're comfortable with the 5% to 7% range we have this year. It's within guidance. And then clearly, we'll look at the trajectory of the new programs that we're launching this year.

Okay. And I guess, two sort of data point-related follow-ups. The preferred stock issuance, what drove that? Was it just diversifying funding sources? And then the charge-off rate, the relative charge-off rate to this year's guidance, if we were to take out Walmart in 2019, do we have the metric around that, like what that charge-off rate would have been?

Yes. With regard to your first question, we've talked long term about our capital strategy and really moving our capital levels, CET1, et cetera, in line with peers. Along this journey, we started out with an 18% CET1, we're down to 14% now. Part of that long-term capital strategy has been diversification to match our peers. So it was always part of the strategy, it was included in our capital plan that we filed with the regulators and it was approved by our Board earlier this year. So it was part of our diversification efforts really to lower the overall cost of equity. So it was important for us to get it done. The timing of which -- the market was very attractive. We got a 5.625% rate for the preferred, a significant amount of institutional and retail investors. So it was significantly oversubscribed. We obviously wanted to access the market and wanted to do it before 2020 and any potential disruptions that may come to the market from unforeseen events. So that's really the rationale behind why we did it. So -- and your second question was on -- just remind me.

Yes. The charge off, rate? Like, do we have the equivalent of that charge-off rate ex Walmart for 2019.

Yes. We're not going to provide it, Sanjay, ex Walmart. But what I'd say is this is, we gave you an indication probably 18 months ago about what that rate was. What's happened since then, obviously, the portfolio has deteriorated from $10 billion to the roughly $8.2 billion that we sold it at. As well as the fact that the credit refinements that we put in place several years ago really helped to start reducing that. So the impact this year was not as significant, right, as what we'd indicated 18 months ago.

Our next question is from Don Fandetti with Wells Fargo.

Can you talk a little bit more about the interplay of CECL and the RSA? I mean, just on the surface, the increase in provision seems like a pretty sizable amount, but I guess, there's an offset. Can you just talk more about that? I know you touched on it earlier.

Yes. Thanks, Don. Yes. So as you think about the RSA, obviously, we've been talking to our partners for several months about that change and how it impacts the RSAs. I just want to be clear, we are passing -- for those RSAs that participate in reserves, the RSA -- the full amount of CECL will be reflected in the RSA. We did not amend any of our agreements to either exclude or reduce the amount of reserve provisioning that those agreements associated with. So I just want to be clear on that. As you think about CECL and the impact to the RSA, I think it needed to be important to ground things. The primary platform that uses RSAs is the Retail Card platform. That platform actually has a lower provisioning relative to CECL, given its products and how it interacts. The Payment Solutions and CareCredit business, given the longer duration promotional activity that happens there, actually attracts a larger CECL increase as you move through. Also impacting that, there's a slight lag that happens the way with which the calculations work, as it passes through. So again, you'll see that in the full run rate of the year, particularly in the back half of the year, as we move forward.

Okay. And then just quickly on underwriting. Are you making any changes to your underwriting right now? Or are you sort of in a steady state? And are you seeing any competitors loosen up just given the sort of better economic outlook?

Yes. We have not loosened up. What I would say is we've been pretty consistent in our underwriting. Obviously, we're always making slight changes. I think one of the things we've talked about in the past is, we've done a lot of investing in how we're creating our models and the data that we're using, both externally and internally. And so I think we're much more strategic in how we look at underwriting. And that's really helped us, I think, continue to see the good performance we're seeing in delinquencies and charge-offs. So we're being pretty consistent. I think this is the time, where you want to just continue to be very consistent and possible, as you think about where we are in the cycle.

We have our next question from Ryan Cary with Bank of America.

I think most of the discussion around loan growth acceleration in 2020 is resulting from the new program launches like Venmo and Verizon. But could there be any benefit from PayPal as the conversion is now behind you? And has there been discussion about moving out to more of an integration phase? Or is this more likely to benefit -- is longer -- more likely to take a little bit longer term to ramp?

No. I think -- look, I think PayPal is a fast-growing portfolio for us. It's performing the way we thought it would perform. I think what we talked about last year was getting the portfolio converted, which happened in June. It was a fairly big and sophisticated conversion. What we're really focused on now with the PayPal team is really looking at how we accelerate growth. I think Venmo's a little different in the sense that it's a start-up. So it will take us a little longer to get that growth going. But I'd say, overall, we're pretty pleased about the growth that we're seeing. It's the kind of growth we want to see. And I think, as we add some of these new, more digitally driven partners, you'll -- that'll continue to play into our portfolio. I do want to make one point that despite maybe some of the retails struggling a little more, one of the things I think we're definitely winning on is on the mobile side, and we're definitely seeing growth in mobile. And I think, as we went through holiday, that was a big part of our win, I think, with our partners, and our partners are continuing to depend on us to really deliver capability to them to really drive growth digitally. So I think that's something that we're going to continue to focus on as well.

Yes, let me just maybe just add one point of clarity. As you think about the primary amount of the growth for the year, when you think about the 5% to 7%, is coming off the existing book. So while we're launching Verizon and Venmo, given the timing of it during the first half and second half, when you're thinking about that growth in end of period, it's not going to be a big movement this year. It's something, as we think about in future years, that's going to be an accelerator. So just to make sure, we're clear that the existing portfolio is driving that growth.

Okay, okay. And just wanted to ask one on the GPR card. I think you've guided a number of direct mailings in the quarter. I'm just curious about the resulting adoption and uptake and how that compared to your expectations? Do you expect to accelerate direct marketing on the GPR card for next year?

Yes. So look, we continue to see really good trends on the card. I'd say they're generally better than our expectations on both of the campaigns that we've done. We're seeing good activation, good usage, nice retention of the balances. But as I said last quarter, we're being very disciplined around profitability and returns. So -- and then short term, we've got modest growth expectations. We're being very thoughtful. Look, we realize it's a very competitive market, and we're trying to target profitable accounts. So we really -- we like the space, we like what we're seeing so far, but we're going to be disciplined on how we approach this.

We have our next question from Betsy Graseck with Morgan Stanley.

I wanted to dig in a little bit on RSA and just to make sure I understand. I know you gave the range for the full year, 4.3 to 4.5, but then you talked about how beginning of the year it'll be lower and then end of the year it'll be higher. Is that within the range that you're identifying? Or is this range the average for the full year and the quarterlies could be beyond the range?

Yes. The to 4.3 to 4.5 is the average for the full year, Betsy. So again, we gave you some projections in the first half. The real moving piece here, obviously, is the CECL impact, which is a little bit more muted the way the contractual calculations work. That then normalizes in the back half of the year. So -- but the 4.3 to 4.5 is the full year estimate.

Okay. So we could see the quarterlies be either side of that? Or within -- you're not really telling us, right? I just want to make sure.

Yes. Again, it's going to average out the 4.3 to 4.5, it could be at the lower end or it could be the higher end. Obviously, it's going to vary relative to the program performance and the credit performance of the portfolio. So it could vary. But again, I think across the full year, it will get back.

Okay. And then separately, just on Verizon, an interesting new partner. Maybe Margaret, you could speak a little bit to the set of services and products, that you're going to be offering them, that was attractive to them, as to why they picked you? And then could you speak a little bit more to what kind of market opportunity you think is out there, given what Verizon represents?

Yes. So first, we're going to be doing their co-branded card. It'll be branded Verizon. We'll -- we're working very closely with them to really make sure this is a state-of-the-art, digitally driven card. We're pretty excited about some of the things we're working on. We're not going to communicate the value prop and things like that because that's going to happen when we do a launch. Look, they have about 119 retail phone connections. So this is a pretty big opportunity for us, and we're excited about the partnership. They're highly engaged. I'd say we won the deal because of some of the investments we've been making. I think we turned the corner on the question mark in my mind of are we digitally savvy. And I think based on the winners that we -- the programs we won this year, I think we're winning because of these investments that we've made and the investments that we're going to continue to make. So very excited about Verizon.

119 million customers, that's what you're talking about?

No, we -- like phone connections. It's actually phone lines.

Got it. Okay.

Somebody calculate it.

Our next question is from Rick Shane with JPMorgan.

Margaret and Brian, you both referenced the data analytics and machine learning that you're investing in. And also commented that you've already started to strategically apply those insights. I am curious what you're seeing right now in terms of consumer behavior. There's a lot of talk about bifurcation amongst consumers. And given the breadth of your portfolio, I am wondering what you guys are seeing and how you are applying that strategically?

I'm not sure what you mean by bifurcation, meaning good customers and bad customers from a credit perspective? Or...

Well, no, more economically, that there's such a divergence in the economy. And I'm curious if you are seeing greater or lesser opportunity, particularly in the middle and lower income brackets.

No, I don't think we -- our underwriting standards are based on the consumer's capability to pay for the credit card. So that's core to how we underwrite. I think the things that we're looking to further enhances leveraging data from our partners. For instance, I'd say more in how we set a credit line upfront. So if the partner shares with us that this particular consumer shops vary heavily, we might give a higher credit line than we normally would, based on that data. I think one of the important aspects of our business different than maybe the general purpose credit card spaces, you can apply and buy right away. So we got to be very disciplined from a line size perspective when we give an initial line. And that's where I think we're really learning and really driving some good customer experience because we're sharing the data between us and the partner. I think the other area is helping us on fraud and true name and using identity and things like that, that are really helping us. So for instance, we've leveraged Payphone as an example, where now on our mobile app, you only have to fill out three lines. And that's really helping us do a better job at identifying that customer. And again, a lot of this has to do with because we're an apply-and-buy company, we have to be very diligent in identifying that as the right customer that's applying.

Yes. Rick, maybe one thing just to add to that. I think it's -- what we've seen so far is now that our partners are sharing things, like spend levels, number of visits to the store, average basket size, payment behavior. Those metrics, which result in what we call an engagement index, really cuts across income levels. And so we're finding that to be a very powerful predictor in terms of how those accounts are going to perform, how they're going to behave from a spend perspective, but also a loss perspective and fraud as well. So it's benefiting us in a number of different areas.

Great. Okay. That detail is very helpful.

And we have our next question from Bill Carcache with Nomura.

Margaret and Brian Doubles, I wanted to ask you a question about whether you could give us a sense of your interest level in Synchrony's exposure to potentially merchant receivables and essentially making loans to merchants back by their sales. Is there any potential growth opportunity there, that you see for Synchrony? Is it something you haven't given much thought to, but would consider? Any color you can give us on that would be great.

Yes. That's not a space that we're -- I would say, we are considering. I think we have laid out our strategy, as Brian focused on, I think we're going to stick to the things we really know and grow that way. I don't know if you...

Yes. I mean, look, we're a consumer lender. That's what we're good at. We're going to stick to our knitting there. And we see a ton of great growth opportunities in our existing business, which we outlined. So I think never say never, but it's not on the strategic map right now. I think we've got a ton of great growth opportunity in all three of our platforms. We like what we're seeing in the direct-to-consumer space. So we're going full throttle in those areas, and we'll revisit at some point in the future. But right now, a lot of growth opportunity in the core.

Understood. And so then perhaps sticking with the consumer. Is there any interest level and perhaps taking a look at international consumer at some point? Or again, is the growth opportunity enough in the U.S. that you see that's probably not something that you would consider near term again? Any color you can give on that would be helpful as well.

Yes. Bill, look, it's something we've considered. We've talked about it to the leadership team and with the Board. Again, I think we see enough opportunity right now in our current market in the U.S. that we don't feel the need to go international, but never say never. The business does work in certain markets overseas. We've seen that. We'll continue to assess it, but nothing in the short term.

Vanessa, we have time for one more question.

Our final question comes from John Hecht with Jefferies.

I guess, final question here is, maybe talk about the pipeline of different opportunities. I mean, I guess, from a broad perspective, it seems like the more recent partner wins have been more technologically based with Verizon, PayPal, Venmo and so forth? And is there any changing dynamics with who you're going after? And is there any changing dynamics with respect to the competitive environment?

Yes, I'll start with the second part. I think the competitive environment is pretty -- has been pretty consistent. I don't think anyone's doing anything too crazy out there. So I think we feel pretty good about where we're placed in the competitive environment. I think, look, we still want to win core retail deals. So this -- and if you look at our Payment Solutions business, a lot of what we won was the core of that business. I think these opportunities, that have come along or have been, I think, somewhat unique in terms of them coming into the marketplace. There's just not a lot of big retail deals that are out there right now, in terms of existing portfolios. We continue to see a number of smaller midsized deals that we have in our pipeline. I would say all three platforms have a pretty good pipeline of opportunity, and we're very focused on that. So I think you'll see us -- down the road, you'll see more retail deals. It's not like we're walking away from that space. I just think this is what was in the market and the opportunity for us to, in some cases, differentiate our portfolio a little bit.

Okay. Thanks, everyone, for joining us this morning. The Investor Relations team will be available to answer any further questions you may have, and we hope you have a great day.

Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.