Synchrony Financial

NYSE:SYF

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the Synchrony Financial First Quarter 2019 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations.

[Greg Ketron, Director of Investor Relations]

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 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.

[Margaret Keane, President & Chief Executive Officer]

Thanks Greg. Good morning everyone and thanks for joining us today. I'll begin on slide 3. The momentum we generated over the last several quarters continued in the first quarter of 2019. We maintained our strong performance across several key areas of the business, which helped drive earnings of $1.1 billion, or $1.56 per share. Included in our results is the reserve release related to the Walmart portfolio being moved to loans held-for-sale, which positively impacted results by $0.56. Brian will discuss this in more detail later in the call.

Loan receivables grew 3%. On a core basis, which excludes the Walmart portfolio, loan receivables grew 17%. We generated solid net interest income and purchase volume growth of 10% and average active accounts were up 8%. We also recently renewed and extended key relationships and added some exciting new partnerships.

In our Payment Solutions sales platform, we recently extended our exclusive consumer financing program with P.C. Richard & Son, a leading family-owned and operated appliance and electronics company. P.C. Richard & Son is a valued partner and this extension will build on our long-term partnership in which we have provided credit card and promotional financing options for their customers. The partnership will continue to leverage our marketing analytics and mobile technologies to further enhance the customer experience.

We are partnering on marketing and loyalty programs and a branded mobile app for purchasing and payments, in which customers can shop, receive special offers and promotions and service their credit card. We are excited to continue to build on this long and successful partnership.

We also announced a multi-year extension with Rheem to continue providing a financing program for the purchase of HVAC and water heating products and services. Rheem offers a wide range of residential and commercial products including air conditioners, furnaces, water heaters and more. We have been providing financing options for Rheem customers for 15 years and look forward to continuing to deliver value to Rheem and their customers.

Additionally, in our Payment Solutions platform, we recently signed a multi-year extension of our Suzuki installment powersports and marine program. Qualifying buyers will continue to have access to special financing options and exclusive offers for Suzuki products through its dealer network in the United States.

Powersports is an important category for us and Suzuki is one of our longest running programs in this category, so we are pleased to announce this extension. One of our strategic priorities is to grow our network to create broader acceptance and utility for our cards.

To that end, we recently announced that we expanded acceptance categories for our Synchrony Car Care network to cover even more auto-related needs. Cardholders now have the ability to use this comprehensive Car Care solution at more than 500,000 locations across 25 categories, including gas, auto parts and service, car washes, parking, ridesharing and more. The card also now offers six-month promotional financing on purchases greater than $199. Synchrony Car Care is a valuable financial resource for consumers that want to manage their auto spending needs with one convenient payment method.

In addition, our Synchrony HOME credit card is now accepted at over one million locations nationwide. The card offers valuable rewards including 2% cash back on purchases under $299. And for purchases up $299 or more, cardholders can now receive six months promotional financing. This is in addition to 12 months to 60 months of promotional financing on qualifying purchases at thousands of participating locations. We are pleased to expand the value propositions on this card, giving cardholders the flexibility they want for larger ticket home purchases.

We are also expanding our CareCredit network via a new partnership with Simplee. Through this new partnership, CareCredit will now be part of the Simplee financial experience platform, a digital self-service experience that incorporates advanced data analytics and machine learning to provide patients personalized estimates and payment options. We are happy to be part of the innovative Simplee network.

Another strategic priority for us is to expand and diversify our business. An example of this is extending product offerings through the entry into adjacent and complementary businesses. Our recent acquisition of Pets Best represents our entry into the pet insurance business as a managing general agent.

This acquisition will allow us to offer a comprehensive suite of payment options for veterinarians and pet owners to help families get the care they need for their pet. This complementary acquisition builds on our decades of expertise in the veterinary market. We are excited about adding the Pets Best products to our offerings. This is a type of acquisition we seek, one that makes sense for our customers and partners and enables us to expand our network and product offerings.

As you know adding utility ultimately translates to increased usage and we have made considerable progress on that front. For example, for CareCredit, the reuse rate in the first quarter was 54%.

Equally important as utilization is ease of use of our cards. Concurrent with the rise of e-commerce and digital shopping experiences, we have been making investments to ensure our cardholders have access to their cards rewards and account information across whatever channel they choose to use.

The digital sales penetration for our Retail Card consumers has been growing. Digital sales penetration was 37% in the first quarter. Overall, 48% of our application are happening online, with the mobile channel alone growing 37% over the same quarter of last year.

Overall, this was a strong quarter for us. We continue to generate organic growth, renewing partner relationships, develop valuable strategic partnerships and invest in innovative digital technology and seamless customer experiences. These areas of focus are helping to drive our performance and remain critical for our future success.

I'll spend a few moments on our sales platform results on slide five and then turn it over to Brian to detail our financial results for the quarter.

In Retail Card, strong results were driven by our PayPal Credit program acquisition, which was largely offset by the reclassification of the Walmart portfolio. Loans were up 1%, but excluding the Walmart portfolio, they were up 22%. Interest and fees on loans increased 15% over last year and purchase volume grew 11%. Average active accounts were up 10%.

Payment Solutions also delivered another solid quarter. We generated broad-based growth across the sales platform, with particular strength in home furnishings and luxury products that resulted in loan receivable growth of 8%. Interest and fees on loans increased 7%, primarily driven by the loan receivables growth. Purchase volume was up 4% and average active accounts increased 3%.

CareCredit also continued to generate solid growth. Receivables growth of 7% was led by our dental and veterinary specialties. Interest and fees on loans also increased 6%, primarily driven by the loan receivables growth. Purchase volume was up 8% and average active accounts increased 4%.

We continued to deliver solid growth across all three of our sales platforms, as we continue to extend relationships, increase card utility and provide value add solutions to our partners and cardholders.

With that, I'll turn the call over to Brian.

[Brian Doubles]

Thanks, Margaret. I'll start on slide six of the presentation. This morning we reported first quarter earnings of $1.1 billion or $1.56 per diluted share. This included the reserve release related to the Walmart portfolio being moved to loans held-for-sale during the quarter. The release totaled $522 million or $395 million after tax and provide an EPS benefit of $0.56 to the quarter.

We generated strong year-over-year growth in a number of areas. Excluding the Walmart portfolio, loan receivables were up 17%. Interest and fees on loan receivables were up 12% over last year, reflecting the addition of the PayPal Credit program last year. We also continued to deliver solid organic growth. Overall, we're pleased with the growth we generated across the business, as well as the risk-adjusted returns on this growth.

Purchase volume growth was 10% and average active accounts increased 8% over last year. The positive trends continued in average balances, with growth in average balance per average active account up 5% compared to last year. RSAs increased $234 million or 33% from last year. Lower core reserve build growth, as well as improved program performance drove the increase.

RSAs as a percentage of average receivables was 4.3% for the quarter, in line with our expectations. We continue to expect RSAs as a percentage of average receivables to be in the 4.0% to 4.2% range for 2019, which I will cover in more detail later.

The provision for loan losses decreased $503 million or 37% from last year, mainly driven by the reserve release related to the Walmart portfolio. I will cover the asset quality metrics in more detail later in the presentation.

Other expenses increased $55 million or 6% versus last year, driven primarily by expenses related to the addition of the PayPal Credit program and business growth. The growth rate did slow compared to prior quarters, and we have begun to execute certain cost actions ahead of the Walmart program conveyance later this year. The expense growth rate will continue to be impacted by the addition of the PayPal Credit program, until we are comparing against quarters with PayPal in the run rate, beginning with the third quarter of this year.

We will also continue to make strategic investments in our sales platforms and our direct deposit program, enhancements to our digital and mobile capabilities, and investments to automate and streamline the back office. So overall the company continued to generate strong results in the first quarter.

I'll move to slide 7 and cover our net interest income and margin trends. Net interest income was up 10% driven primarily by the addition of the PayPal Credit program and loan receivables growth. The net interest margin was 16.08% compared to last year's margin of 16.05%. The margin was mainly in line with our expectations. We benefited from a higher mix of receivables versus liquidity on average compared to last year as we deployed excess liquidity to support the PayPal Credit program acquisition and receivables growth.

Also impacting the margin was a decline in loan receivables yield and an increase in interest-bearing liability costs. The loan receivables yield was 21.14%, a decline of 25 basis points versus last year, mainly due to the impact of adding the PayPal Credit program. The increase in total interest-bearing liabilities cost was 54 basis points to 2.64% reflecting the higher benchmark rates.

So overall, the margin was in line with our expectations. We believe our margin will continue to run in the 15.75% to 16% range for the year with normal seasonality including a slight decline in the second quarter as well as some potential fluctuation around the Walmart portfolio sale later this year.

Next, I'll cover our key credit trends on slide 8. In terms of specific dynamics in the quarter, I'll start with the delinquency trends. The 30-plus delinquency rate was 4.92% compared to 4.52% last year, and the 90-plus delinquency rate was 2.51% versus 2.28% last year. The increase in the delinquency rates was primarily due to the reclassification of approximately $8 billion in Walmart loan receivables to held for sale. Only the Walmart loan receivables that we expect to charge-off prior to the expected portfolio of sale remain in period-end loan receivables, which is nearly $700 million.

Given that we continue to report the delinquencies on the nearly $700 million in period-end loan receivables and a high percentage of these receivables are delinquent and represent the majority of the delinquent accounts in the Walmart portfolio in total. The exclusion of the $8 billion in held for sale from period-end loan receivables skewed the reported rates higher.

Also impacting the delinquency rates is the addition of the PayPal Credit program. If you exclude the impact of the Walmart portfolio and the PayPal Credit program the 30-plus delinquency rate improved by approximately 10 basis points and the 90-plus delinquency rate improved by approximately five basis points, reflecting the impact of our underwriting refinements that have resulted in stable to improving credit trends.

Moving on to net charge-offs. The net charge-off rate was 6.06% compared to 6.14% last year. While credit trends continued to improve, this was partially offset by the impact from the addition of the PayPal Credit program. Excluding the PayPal Credit program and the Walmart portfolio impact the net charge-off rate was down by approximately 30 basis points compared to last year. The allowance for loan losses as a percent of receivables was 7.39% and the core reserve build from the fourth quarter excluding the reserve release related to the Walmart portfolio was $37 million.

As I noted earlier, the core reserve build was lower than our expectations, due to the improving credit trends resulting from the underwriting refinements we made. Looking forward, we expect the core reserve build for the second quarter will be largely driven by growth and will be in the $100 million to $150 million range. We still expect the additional reductions in reserves related to the Walmart portfolio will average in the $200 million to $250 million range in the second and third quarters. We still anticipate the sale to occur in the late third or early fourth quarter of this year.

We also expect net charge-offs to be 20 to 30 basis points higher in the second quarter compared to the first quarter due to the timing of recoveries and as we begin to see the full impact from the addition of the PayPal Credit program. The recovery rate as a percentage of average receivables was 1.27% in the first quarter and we have been running closer to 1% in prior quarters.

Regarding the PayPal Credit program, we are now largely through most of the credit-related purchase accounting benefit that resulted from acquiring the portfolio last year. This is in line with our expectations and included in our 2019 net charge-off outlook. We continue to expect net charge-offs for 2019 will be in the 5.7% to 5.9% range with the slight increase year-over-year entirely driven by the impact from the PayPal Credit portfolio, partially offset by the sale of the Walmart portfolio later this year. Excluding the effects of PayPal and Walmart the net charge-off rate is expected to be flat to 2018.

In summary, credit trends have leveled-off and are showing improvement in line with our expectations and we expect the trends to continue to show stability as we move forward assuming stable economic conditions. We continue to see good opportunities for continued growth at attractive risk-adjusted returns.

Moving to slide 9, I'll cover our expenses for the quarter. Overall, expenses came in at $1 billion, up 6% over last year, and were primarily driven by the acquisition of the PayPal Credit program and growth.

As I noted earlier, the growth rate did slow compared to prior periods, and we have begun to execute on certain cost actions ahead of the Walmart program conveyance later this year and we will continue to execute on this as the year progresses. The efficiency ratio was 31% for the quarter, the same level as last year and in line with our expectations.

Moving to slide 10. The key highlights are, we have maintained our funding mix and strong capital and liquidity levels while deploying capital through growth and on-boarding the PayPal Credit program.

We also made progress this year on deploying capital through the execution of the capital plan we announced last May, which increased our dividends and the size of our share repurchases. We are committed to maintaining a strong balance sheet with a robust capital and liquidity profile.

Over the last year, we've grown our deposits $7.5 billion or 13%, primarily through our direct deposit program. This puts deposits at 75% of our funding compared to 73% last year. 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 capabilities. Longer term, we continue to expect to grow deposits in line with our receivables growth. Overall, we are pleased with our ability to attract and retain our deposit customers.

In March, we issued $1.25 billion in senior unsecured notes, with $600 million having a five-year maturity and $650 million having a 10-year maturity. The issuances had strong demand and were significantly oversubscribed.

Turning to capital and liquidity. We ended the quarter at 14.5% CET1 under the fully phased-in Basel III rules. This compares to 16.8% on a fully phased-in basis last year, reflecting the impact of capital deployment through the acquisition of the PayPal Credit portfolio growth and continued execution of our capital plan.

During the quarter, we continued to execute on the capital plan we announced last May. We paid a common stock dividend of $0.21 per share and repurchased 966 million of common stock during the first quarter. This represented 30.9 million shares repurchased during the quarter and completes the 2.2 billion share repurchase program our board approved last May.

Regarding our 2019 capital plan. Our plan was reviewed and approved by our Board of Directors and we submitted the plan to our regulators in late March. This is similar to the timeline in previous years. While I cannot be specific as to our capital plans at this point, it does include capital deployment from the anticipated capital freed up from the reserve releases and sale of the Walmart portfolio, as well as our regular ongoing capital plan that would include continued deployment of capital through both dividends and share buybacks, in addition to supporting our growth.

Total liquidity, including undrawn credit facilities, was $23.4 billion, which equated to 22.2% of our total assets. This is down from nearly 26% last year, reflecting the deployment of some of our liquidity to support the PayPal credit program acquisition.

Overall, we continue to execute on the strategy that we outlined previously. We are committed to maintaining a very strong balance sheet with diversified funding sources and strong capital and liquidity levels. And we expect to continue deploying capital through growth and further execution of our capital plan in the form of dividends and share repurchases.

Before I conclude I wanted to recap our current view for the second quarter and the year. Overall, the margin performed in line with our expectations for the first quarter. We believe our margin will continue to run in the 15.75% to 16% range for the year with the normal seasonality, including a slight decline in the second quarter, as well as some potential fluctuation around the Walmart portfolio sale later this year.

RSAs as a percentage of average receivables was 4.3% for the quarter, in line with our expectations. Lower core reserve build growth, as well as improved program performance were drivers in the quarter. As we expect the reserve builds to align more with growth in future quarters, this will have a moderating impact on the RSA percentage. We continue to expect the RSA percentage to be in the 4% to 4.2% range for 2019.

Regarding credit. We expect the core reserve build for the second quarter will be largely driven by growth and will be in the $100 million to $150 million range. We still expect the additional reductions in reserves related to the Walmart portfolio will average in the $200 million to $250 million range in the second and third quarters. We still anticipate the sale to occur in the late third or early fourth quarter of this year.

We also expect net charge-offs to be 20 to 30 basis points higher in the second quarter compared to the first quarter, due to the timing of recoveries and as we began to see the full impact from the addition of the PayPal Credit program. This is in line with our expectations and included in our 2019 net charge-off outlook.

We continue to expect net charge-offs for 2019 will be in the 5.7% to 5.9% range with a slight increase compared to 2018, entirely driven by the impact from the PayPal Credit portfolio, partially offset by the sale of the Walmart portfolio later this year. Excluding the effects of PayPal and Walmart, the NCO rate is expected to be flat to 2018.

Turning to expenses. We continue to generate positive operating leverage and still expect the efficiency ratio to be around 31% for the full year. In summary, the business continues to generate strong growth with attractive long-term returns.

With that, I'll turn it back over to Margaret.

[Margaret Keane, President & Chief Executive Officer]

Thanks, Brian. I'll provide a quick wrap-up and then will open the call for Q&A. We generated strong results this quarter as our focus on organic growth, program renewals, strategic partnerships, forward-thinking technology investments and actionable data analytics continue to be key factors in our success.

We are pleased with the significant number of renewals and extensions we have generated over the last several quarters. We are making investments that create value for our partners and a better more seamless experience for our cardholders.

And we're maintaining our focus on delivering value for our shareholders. To that end, we returned $1.1 billion in capital through 966 million of share repurchases and a $0.21 per share quarterly dividend. Additionally, we remain focused on deploying capital through continued organic growth and program acquisitions.

I'll now turn the call back to Greg to open up the Q&A.

[Greg Ketron, Director of Investor Relations]

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session, so that we can accommodate as many of you as possible. [Operator Instructions] Operator, please start the Q&A session.

[Operator]

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Sanjay Sakhrani with KBW.

[Sanjay Sakhrani, KBW]

Thanks. Good morning. I was hoping to just drill down on the RSA trend a little bit, which is a little bit higher than our expectations. And obviously Brian, you guys kept the guidance range unchanged. I was just hoping you could give us a sense of the sequencing of that RSA because it's been a little uneven in the past. And just to be clear, the reserve release for Walmart doesn't flow through the RSA, right? And then secondly, just on the disclosure change between oil and gas to the Payment Solutions segment, could you just talk about what drove that? Thanks.

[Brian Doubles]

Yes. Sure Sanjay. So let me take your middle question first and just confirm what you said that the Walmart reserve release did not run through the RSA. So that was not a driver in terms of the quarter and what we recorded. The largest driver of that year-over-year increase in the RSA was really the lower core reserve build. We also saw a better overall performance in many of our programs, so that also pushed the rate up compared to the prior year. So program mix was a driver.

And then, as you think about the balance of the year, now that our expectation is that core reserve build goes back into what we would consider a normal growth-driven reserve build in that $100 million to $150 million range, so that will bring that RSA percentage back down. We still expect the RSA to hit a seasonal high point in the third quarter, so no real change to that expectation. And then when you look at the balance of the year, we still expect it to be in the 4.0% to 4.2% range, so no change to what we communicated back in January.

And then just on the movement on the oil and gas portfolios from retail credit to Payment Solutions. So really the idea there was now that the auto network, we're seeing really good growth there. Those cards can be used for gas now, but there is some real synergies in putting those programs together just strategically. And so that was really the rationale for the move. It did depress the purchase volume numbers in Payment Solutions a little bit year-over-year, so we reported 4% growth in purchase volume in Payment Solutions. If you adjust that for oil and gas purchase, volume would have been up 8%, so very much in line with receivables.

[Sanjay Sakhrani, KBW]

Thanks.

[Operator]

And thank you. We have our next question from Mark DeVries with Barclays.

[Terry Ma, Barclays]

Hey good morning, this is Terry Ma in for Mark. I just wanted to get some color on how the PayPal growth has been trending. You mentioned receivables growth has been up 28% ex Walmart so just hoping you could disaggregate this so we could get a sense of how growth would trend toward the back half of the year?

[Margaret Keane, President & Chief Executive Officer]

Yes. So I would say that the PayPal program is performing as we had expected it to perform. We said we've had great partnership with them. We are very integrated. We're really working on growing the program. But we had growth across some of our portfolios not just PayPal. So I'd say the core of the business is actually performing really well. I don't know Brian if you'd add anything to that.

[Brian Doubles]

The only thing I would add is you're seeing outsized growth in the first half year related to PayPal just because we didn't have it the first half last year. That will be comping against similar periods with PayPal in the second half of the year and that's why we expect the growth rate to come down into that 5% to 7% range. But as Margaret said, we're still seeing really good growth on PayPal.

[Terry Ma, Barclays]

Okay got it. Thanks. And just as a follow-up. How much OpEx takeout can we expect related to Walmart over the next few quarters?

[Brian Doubles]

Yes I would say we're on track with what we communicated back when we made the announcement on Walmart. So we got very detailed plans. We're executing those across the business. If you just look at expenses more broadly, they were up 6% compared to the prior year. But that was really entirely driven by the PayPal Credit portfolio and the fact that we brought that on.

If you exclude PayPal the program -- and exclude PayPal, the expenses were flat year-over-year. So that really is reflective of the fact that we're able to do some restructuring on certain areas of the business ahead of the Walmart portfolio sale later this year. So I think we feel pretty good about the cost takeout. The majority of the costs related to Walmart will come out after the portfolio moves later this year. Obviously, we're very focused on continuing to support that program. We're focused on ensuring a smooth transition. So the majority of those costs stay in place until the portfolio moves. So you really see the full benefit of the cost takeout in 2020.

[Terry Ma, Barclays]

Okay, got it. Thank you.

[Operator]

And we have our next question from Rick Shane with JPMorgan.

[Rick Shane, JPMorgan]

Hey guys, thanks for taking my questions this morning. I just wanted to dive in a little bit deeper on the PayPal portfolio versus the existing portfolio. Is there anything different that we should be thinking about behaviorally in terms of seasonality spending pay downs as we move through the year? And is there any different mix between fixed and floating rate loans versus the existing portfolio we should consider in terms of asset sensitivity?

[Brian Doubles]

Yeah, Rick I wouldn't build anything in specific to PayPal. I mean we've -- just go through account what we have said in the past on PayPal. Obviously it runs at a slightly higher delinquency net charge-off profile. We did build in some APR increases to address that. And net-net you get back to a very similar return to that program relative to the rest of the portfolio. Seasonality and things like that look pretty similar. So there's nothing I would highlight specific to PayPal you should think about differently.

[Rick Shane, JPMorgan]

Great. That’s it for me. Thank you guys.

[Brian Doubles]

Thanks, Rick.

[Operator]

And our next question comes from Chris Brendler with Buckingham.

[Chris Brendler, Buckingham]

Hi, thanks. Good morning and thanks for taking my question. I had a question on PayPal as well. Can you give us a sense; I really appreciate the additional disclosure on the impact of Walmart and PayPal on your credit metrics. But just qualitatively or maybe even more quantitatively, how's the PayPal portfolio performed since you acquired it in July?

And then are you also trying to say that PayPal is still servicing those loans? So do you expect that servicing to transfer near term? And would that have a beneficial impact on the credit metrics in that portfolio once you transfer to your own servicing platform? Thanks.

[Margaret Keane, President & Chief Executive Officer]

Yeah. So, first I'd say it's performing exactly like we thought it would perform and so both in terms of growth, in terms of delinquency, in terms of overall performance. So again we feel pretty happy about how the overall portfolio is performing. They are servicing the accounts now until we convert to our system, which will happen in June. And once that conversion happens it will be on our system.

I don't anticipate a big shift in the performance of the portfolio because they're following our direction in terms of how to do it today and they're pretty good at what they do anyway. So I don't really see anything there. I think, obviously, we probably could get a little bit of cost leverage out of the cost part of this just because of our scale.

[Chris Brendler, Buckingham]

Okay, great. One quick follow-up on Pets Best. Can you -- is that going to be a material impact to CareCredit revenue? I assume it's not a lending operation and insurance part is very interesting to me and just wanted to know how big it is in terms of…

[Margaret Keane, President & Chief Executive Officer]

Yeah. It's not going to have -- it won't have a big impact on the…

[Brian Doubles]

In the short term.

[Margaret Keane, President & Chief Executive Officer]

…in the short term.

[Chris Brendler, Buckingham]

Great. Thanks, guys.

[Margaret Keane, President & Chief Executive Officer]

Thank you.

[Brian Doubles]

Thank you.

[Operator]

We have our next question from Matthew O'Neill with Autonomous Research.

[Matthew O’Neill]

Yes, hi. Thanks for taking my questions. I was hoping you could give an update or some more details around the PayPal, sort of, APR repricing maybe the extent to which the newer APRs are finding their way into the overall book, and maybe what size the co-brand is versus the original Bill Me Later program.

[Brian Doubles]

Yeah. So, we rolled those APR changes out earlier and they're going to bleed in over, I would say the balance of this year but into probably the first half of next year before we really feel the benefit of those.

So right now if you look at the yield on the overall company, it was down a little over 20 basis points year-over-year. If you exclude PayPal, which does run at a lower yield than the overall business, yields would have actually been up slightly year-over-year. So that APR lift hasn't worked its way through the yield yet. You'll really see that towards the end of this year and into 2020.

[Matthew O’Neill]

Thanks. That was helpful.

[Brian Doubles]

And what was the second part of your question, Matt?

[Matthew O’Neill]

That was it on PayPal. I did have an unrelated follow-up, however, on CECL. If you guys had any updated views on that as far as the discussion with the regulators. And maybe from a holistic perspective, are you guys looking at, or are the regulators looking at it inclusive of RSA and the implicit risk sharing? Or is it very focused on you guys alone?

[Brian Doubles]

Yeah. That is great question. So we haven't put a range out there. Obviously, CECL will result in an increase to the level of the reserves just given we move from that incurred model to a lifetime coverage. We are currently running in parallel. We are working through some of the big areas of implementation like the life of a revolving product the payment allocation methodologies and things like that.

There's some discussion out there that reserves are going to double for all credit card portfolio that is not our expectation. So, I would expect we'll probably put out a range most likely in the third quarter after we've run in parallel for a period of time.

And then as you correctly highlighted the big open question on all this is how do the regulators view our capital going forward. In theory, the more reserves you set aside, you should need less capital for unexpected losses. But we're working through that with the regulators right now.

In terms of the RSAs, we actually -- we factor in the RSAs in all of our stress tests they're built into our models. So, we do get credit for that buffering effect that the RSAs have in a stress scenario. So, we do factor that in. It is part of our stress testing models and our capital plans.

[Matthew O'Neill, Autonomous Research]

Great. Thank you very much. Appreciate it.

[Brian Doubles]

Great. Thanks.

[Operator]

And thank you. Our next question comes from Dominick Gabriele with Oppenheimer.

[Dominick Gabriele, Oppenheimer]

Hi, thanks so much for taking my questions. Can you just touch on the balances -- the balancing act between trying to drive deposit as a percent of your total funding and with the rates paid for those additional balances?

And kind of what we've seen are some of the competitors have actually cut deposit rates on some of their products. So, what does that mean if you think about your funding costs going forward into 2019? Thank you.

[Brian Doubles]

Yes. So, I would say a couple of things. First, when we look at our deposit beta it's actually been a little bit better than we expected through the rate cycle so far. So, our beta has been around 50%. That includes the period last year where we were pre-funding PayPal. During that time period, we were very competitive on rates.

Just given some of the trends we are seeing so far this year as well as the fact that we don't have to pre-fund a large portfolio, we're actually hoping we won't need to be as competitive on rate this year. We've actually seen really strong deposit growth so far this year and we haven't moved our rates at all.

So, look I think we expect to pay slightly higher betas than the norm. But with all that said it doesn't change our view that deposits are still our most attractive source of funds for the business.

[Dominick Gabriele, Oppenheimer]

Absolutely. And then if I can ask one more. Can you talk about CareCredit and you've had some nice steady growth there in receivables year-over-year. And then how Walgreens and some of these new partnerships could potentially continue to accelerate that growth in CareCredit? Thanks so much.

[Margaret Keane, President & Chief Executive Officer]

Yes sure. So, we see CareCredit as a big opportunity for us. Obviously, health care payments and general continue to go up for consumers and CareCredit really gives you the opportunity to segment those costs. And so what we've really been building out is a couple of things.

One, continuing to grow the core by winning new partnerships; two, expanding the utility of the card so things like Walgreens is an example of that where we allow customers to buy outside of the -- the office they bought in but use that card in a Walgreens. And we are seeing really nice traction there. And then the third area we're really looking at is expanding into other verticals that we are not in today. So, last year alone we expanded into 25 different health care verticals.

The one thing I would say is we never really want to be in a position where we are making some kind of credit decision related to health care life and death situations or anything like that. This is really all about those procedures that are elective procedures where consumers want to segregate that part of their expense.

And so I would say we expect to continue to see really nice growth in CareCredit and we are looking at ways to really accelerate that growth in the verticals we are in today and verticals we're looking to expand into. So, pretty excited.

[Dominick Gabriele, Oppenheimer]

Thanks so much. I really appreciate it.

[Operator]

And we have our next question from David Scharf with JMP Securities.

[David Scharf, JMP Securities]

Hi good morning. Thanks for taking my question. Maybe a different angle on trying to get a sense for organic portfolio growth outside of PayPal. Just wondering on a no-name basis, when we look at the top five retail programs outside of PayPal, are any of those experiencing year-over-year declines in ending receivables?

[Margaret Keane, President & Chief Executive Officer]

No. I don't believe any of them are. I think it's important to note that even if a retailer's sales are off, in most cases our credit card program is two times -- two to three times what the retailer sales are because our customer base that have the cards are the most loyal customers. And as retailers look to bring sales back into the store, obviously the card becomes a really big driver of that performance. So we have not seen deterioration in that way.

[Brian Doubles]

Yes. The only thing I would add is look you can always have -- quarter-to-quarter, you can have some movement in any of these partnerships. But to Margaret's point, if you look over the long term whether its one year or two years, we are taking -- we're gaining penetration in all of our big programs and we feel pretty good about our position.

[Margaret Keane, President & Chief Executive Officer]

I think the other piece that's important to note is the digital aspect. As we continue to build out the digital capabilities with our partners and that becomes an even bigger part of the channel, we are able to offset maybe some of the in-store traffic falloff with the omni-channel approach. And we know that if a customer buys mobilely and in store, they're the best customer. They tend to come back over and over. So we continue to use that data analytics to help our partners really grow those sales and continue to expand our digital capability.

[David Scharf, JMP Securities]

Got it. And you -- that response actually prefaced my follow-up which was whether or not there are any sort of wallet share type of metrics that you're able to share with us in terms of through the...

[Margaret Keane, President & Chief Executive Officer]

I can kind of give you overall -- yes I can give you overall like mobile growth. So we said this quarter, we grew 37% on application growth versus the same quarter of last year. 48% of our applications are now occurring digitally, which is continues to grow and be a big part. So one of the things we see is customers before they even go to shop or actually applying through their mobile app or online to get the cards, obviously the value props are really important in this too in terms of how we work with our partners to get those value props in place. And in Retail Card, we had -- 37% of the sales were online sales. So again, this is a channel that continues to grow. We continue to grow really nicely in the digital sales. So again, we're pretty happy about the performance and expect that to continue to grow.

[David Scharf, JMP Securities]

Great. Thank you.

[Operator]

Thank you. Our last question comes from John Hecht with Jefferies. Please go ahead, John.

[John Hecht, Jefferies]

Sorry guys. Thanks guys. One side of question on PayPal. Is the amount of deferred interest for the net portfolio any different than the rest of the portfolio?

[Brian Doubles]

It works similarly to the rest of the portfolio, John.

[John Hecht, Jefferies]

Okay. And then most of my questions have been asked and answered, but I guess the final one I'd have or secondary one I'd have Brian is, when do you think you'll be able to talk publicly about the capital plans? I mean what -- when do you think that the regulators will be able to approve your plan and you'll get to the Board of Directors process and so forth?

[Brian Doubles]

Yes. So like I said, we reviewed and the Board approved our plan. We submitted that to the regulators late March. So that's very much in line with what we did last year. So if you look at the last two years, we announced something around mid-May, so that would be our hope. Obviously, we don't control that entire process. But at least on our side, what we've done is try to follow a very similar process with both the Board and our regulators. So we're hopeful that we have a similar result this year in terms of timing.

[John Hecht, Jefferies]

Appreciate that. Thanks.

[Brian Doubles]

Thanks, John.

[Greg Ketron, Director of Investor Relations]

Thanks everyone for joining us this morning and your interest in Synchrony Financial. The Investor Relations team will be available to answer any further questions you may have. We hope you have a great day.

[Operator]

And thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.