Synchrony Financial

NYSE:SYF

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and welcome to the Synchrony Financial Second Quarter 2020 Earnings Conference. My name is Brandon and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

And I will now turn it over to Greg Ketron. You may begin sir.

[Greg Ketron, Director, IR]

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 the 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.

On the call this morning are Margaret Keane, Brian Wenzel, and Brian Doubles.

I will now turn the call over to Margaret.

[Margaret Keane, Chief Executive Officer]

Thanks Greg. Good morning, everyone. When we last spoke the world was facing a global crisis and broad economic disruption. Sadly, while we saw some bright spots and again reopening here in the U.S. we’ve seen a resurgence of the COVID-19 virus causing continued disruption to our lives, businesses and economy.

In addition, following more senseless loss of life within the black community, our country is awakening to the need to meaningfully address racial injustice and equality. Both challenges are difficult, emotional and take hard work to address. I am proud of how Synchrony continues to successfully manage through these extraordinarily challenging times.

Our decisions are guided by putting people first. With COVID, we are focused on the health and safety of our employees and their families, providing support for our customers, and helping our partners get back up and running.

In the fight for equality, we are implementing new actions to increase diverse employee talent at all levels, grow business relationships with diversified and small businesses, investing in diverse markets, and working with our partners, customers and employees to address deeply rooted gender and racial inequality.

With our values as our guide, we are resolute in addressing these challenges and emerging a better company and country.

Now I will turn to the second quarter results on Slide 3. Earnings were $48 million or $0.06 per diluted share. This included an increase in provision for credit losses as a result of the CECL implementation this year, which was $483 million or $365 million after tax and reduced EPS by $0.63.

The pandemic has impacted results this quarter. Brian will provide details on the trends later in the call and I will provide a high-level overview here.

On a core basis which excludes Walmart and Yamaha portfolio, the impact of COVID-19 drove a 3% decrease in loan receivables, a 7% decrease in interest and fees a 13% decrease in purchase volume and a 5% decrease in average active accounts. The efficiency ratio was 36.3% for the quarter.

As a result of our liquidity and funding strategy, in response to the COVID-19 impact in our balance sheet, deposits were down $1.5 billion or 2% versus last year. This includes a strategic decision to slow overall deposit growth, given the excess liquidity we have. We have held direct deposits at last year’s level of $53 billion.

Our direct deposit platform remains an important funding source and we will continue to focus assets to make our bank attractive to depositors. As we navigate the day-to-day of this new environment in which we all find ourselves, we are also acutely focused on the future of our business.

During the quarter, we expanded several programs and added new partnerships, which you can see on the slide. We also executed a successful launch of the new Verizon program. We are very proud of this program and we work closely with Verizon to create a unique, robust rewards program for their customers that use simple and easy tools to apply, buy and service the Verizon Visa cards.

This card includes a compelling value proposition giving consumer wireless customers the ability to save on their monthly Verizon bills through rewards or on everyday purchases and freedom to use those rewards for its Verizon purchases including bill payment and latest phones and accessories.

For that, the Verizon Visa card is truly responsive to what consumers right now, a contactless, frictionless and digital-first experience. We are alsoexcited about our new program with Venmo and continue to partner with them to launch their new programs, which we anticipate will occur later this year. During the quarter, we also returned $128 million in capital through common stock dividends.

We are pleased with the strength of our business and we are well positioned to continue to help our cardholders and partners navigate through these challenging times. 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.

I am going to turn the call over to Brian Doubles to discuss some of the key highlights in this area.

[Brian Doubles, President]

Thanks, Margaret. As we’ve discussed previously, the digital transformation has been well underway for a number of years now and in many cases the pandemic has accelerated these trends that were already in motion. It’ clear that many of these new trends and our consumer behaviors will be permanent and there will be a new normal, specifically as it relates to the digital shopping experience and consumers’ increasing demand for contactless commerce and payment options.

Studies indicate that consumers are changing their shopping behavior and contactless payments is becoming increasingly important as indicated by the data on the slide. The fact that consumers are seeking and rapidly adopting contactless solutions is creating greater demand for our partners to deliver safe and efficient contactless experiences.

We are well positioned to address these changing behaviors and have quickly responded to this need with dedicated resources and investments to support our partners and cardholders during this time of rapid change.

As you know, we have been investing in our digital assets and capabilities and we quickly recognized in the early days of the pandemic that we will need to move even quicker to help support our partners and help them accelerate their digital transformation.

We quickly reviewed every strategic project in the business and reallocated resources and agile teams to accelerate our efforts on key digital initiatives. We believe we are uniquely positioned to meet this moment and its lasting effects.

Data shows that the vast majority of consumers plan to stick with their digital behavior beyond the pandemic and we are prepared to help our partners position for the new reality of today and into the future. Driving digital sales penetration continues to be a key to our success with both existing partners and with our newer programs.

In retail cards, digital sales penetration was 48% in the second quarter and digital applications were approximately 70% of our total applications, 14 percentage points higher than last quarter. The mobile channel alone grew 43%, compared to the same quarter last year excluding Walmart.

Further, more than 60% of total payments made on our cardholders’ accounts are done digitally. We continue to provide partners and customers with increased digital options from applying on their own devices, provisioning a new card into their digital wallet, transacting with contactless cards and making payments, we believe customers will continue to adapt to what makes them more comfortable.

Many of our partners have been with us for decades. We have been there to help them grow their businesses and we are now here to help them adapt to the challenges in the new environment. We are accelerating our efforts to provide our partners and their customers with innovative services and products they can use during this time of disruption.

Our investments in our digital assets have proven extremely valuable in helping them to serve their customers and drive sales. This is a testament to our agile structure which is helping to deliver real-time solutions and our dedicated teams who are tirelessly working to support our partners and their customers.

And with that, I will turn the call over to Brian Wenzel.

[Brian Wenzel, EVP & Chief Financial Officer]

Thanks, Brian, and good morning, everyone. Allow me to briefly echo what Margaret said earlier about the dual crisis facing our nation. We are determined to keep our employees safe, and help our partners and customers be successful during this time. We’ve been more committed to driving meaningful change in the fight for racial equality inside our company and in the communities which we serve and live.

With a backdrop of unprecedented uncertainty and volatility, I had never been proud our company and our people, the values we live by and our commitment to inclusion that is the heart of who we are.

Now turning to our financial results for the second quarter. I'll start on Slide 5 of the presentation. First, I want to cover some of the trends we are seeing from the impact of COVID-19 from a purchase volume standpoint, and so as important to provide an update on performance of accounts who received forbearance.

Slide 5 shows year-over-year purchase volume growth for the total company for the quarter, as well as purchase volume by sales platform dating back to January. Purchase volume growth was strong for the total company and by platform with double-digit growth from January through mid-March.

In the second half of March, as government restrictions increased, travel, entertainment and event activity were significantly curtailed and a high number of non-essential retail stores closed. There was also a significant curtailment of elective healthcare services. As a result, purchase volume declined significantly, decreasing as much as 31% in the first half of April for the total company.

In looking at the full month of April by sales platform, retail card declined 21%, Payment Solutions declined 41% and CareCredit declined 60%. CareCredit was impacted the most with the significant decrease in spending for elective and planned procedures in dental and medical services during this period.

Retail card performed better due to higher concentration of the digital volume, as well as having programs that benefited from an increase in spending for essential products such as grocery, supplies and home-related expenditures.

As consumers became more comfortable on their stay at home orders and initial reopening phases in May and June occurred, we saw a recovery in purchase volume as we moved through the second quarter. In the second half of June, overall purchase volume increased 3% over the prior year and each of the three sales platforms saw a significant recovery in purchase volume from the April trough.

Looking to some of the other key business drivers for the quarter, new accounts declined 36%, and purchase volume by account declined 8% reflecting the impact of the crisis as well as underwriting actions we took as the pandemic’s impact progressed through the quarter.

We did see a 4% increase in the average balance per account due to a combination of portfolio mix from our digital and retail partners, as well as lower than usual volume in new accounts. While we are encouraged by these trends, there is a tremendous amount of uncertainty which lies ahead when the stimulus measures and industry-wide forbearance actions abate.

However, our business mix, including a strong digital component, as well as diversification in segments being positioned to benefit from spend in areas such as home-related expenditures, as well as veterinary services will likely dampen some of the effects of the economic downturn. The ultimate impact is still largely uncertain given the duration and magnitude of the pandemic is still largely unknown at this point.

Moving to Slide 6, we highlight the impact and performance of accounts that were granted forbearance compared to accounts not in forbearance. Through June 30, we’ve granted forbearance to a cumulative total of approximately 1.7 million accounts or a $3.2 billion in account balances at the time of forbearance.

We have seen nearly 70% of these accounts leave forbearance through June 30 bringing approximately 500,000 accounts or $1.1 billion in account balances remaining in forbearance.

Through mid-July, these numbers have been relatively stable. Of the accounts that are enrolled in forbearance, 92% were either current or less than 30 days past due, so a relatively small number of accounts for 30 plus days past due. When you look at some of the performance characteristics, you will see trends that are not surprising. Credit line utilization is higher and payment rates are lower.

In terms of impact on financial performance, in total, we have weighed $47 million in APs and $20 million in interest through the end of the second quarter. From a trend perspective, we are seeing a substantial decline in the number of accounts enrolling in forbearance from a peak in late March to early April, where we saw nearly 40,000 accounts enrolling per day, this dropped to less than 10,000 per day in June.

Looking at payment trends for June, nearly 70% of the accounts that are enrolled in forbearance were making payments. 8% of those accounts paid their balance in full and those 61% were making payments, bringing 31% of the enrolled accounts not making payments.

From a credit perspective, 56% of the enrollees had a FICO score of 660 or below at the time of enrollment. For accounts that have exited the forbearance program, their credit performance is slightly worse than other similar accounts. Accounts on forbearance have a three times increase in the entry rate into delinquency.

However, given the limited time the accounts have been on forbearance is not clear at this point how those accounts will ultimately perform in delinquency. It should be noted that while the performance is generally weaker than similar accounts, it has not had a material impact on our 30 plus delinquency measures, which improved during the second quarter.

I will cover our delinquency performance later in the presentation. We will continue to closely monitor the performance of accounts in forbearance, as well as the accounts that have exited forbearance and stay in rate to provide assistance to impact the cardholders.

Moving to the second quarter financial results on Slide 7. This morning, we reported second quarter earnings of $48 million or $0.06 per diluted share. This included an increase in provision for credit losses as a result of the implementation of CECL this year. The increase was $483 million or $365 million after tax, which reduced EPS by $0.63.

COVID-19 impacted our growth in several areas as noted on Slide 8. On a core basis, which excludes the Walmart and Yamaha portfolios, loan receivables were down 3% and interest and fees on loan were down 7%. On a core basis, purchase volume was down 13% and average active accounts were down 5% from last year.

On Slide 7 we have included dual and co-branded card purchase volumes and loan receivable balances to provide the level of diversification we have through these products. Dual and co-branded cards accounted for 34% of the purchase volume in the second quarter and declined 22% from the prior year. On a loan receivable basis, they accounted for 23% of the portfolio and declined 4% from the prior year.

As I noted earlier, the impact of COVID-19 accelerated as we moved through March and April, but we did see some encouraging signs in these metrics as we moved through May and June. We would also note that while we are seeing positive trending in these metrics, the duration and the magnitude of the pandemic is still largely unknown and remains difficult to provide a more precise forecast of the impact at this point.

RSAs decreased $86 million or 10% from last year. RSAs as a percentage of average receivables was 4.0% for the quarter, starting to reflect the impact of COVID-19 is having on the program performance. The provision for credit losses increased $475 million or 40% from last year.

The increase is primarily driven by the reserve increased for the projected impact of COVID-19-related losses and a prior year reserve reduction related to Walmart that totaled $247 million.

The reserve build for the second quarter was $627 million and largely due to the projected impact of COVID-19-related losses. Other income increased $5 million. Other expense was down $73 million or 7% primarily due to the cost reductions from the Walmart sale, the lower purchase volume and average active accounts experienced during the quarter and reductions in certain discretionary spend.

These decreases were partially offset by higher operational losses, expenses related to our COVID-19 response and charitable contributions.

Moving to our platform results on Slide 9. As I noted earlier, the sales platform were impacted by varying degrees due to COVID-19. In retail card, core loan receivables were down 4% with the COVID-19 impact being partially offset by strong growth in our digital programs. Other metrics were down, driven by the sales of Walmart portfolio and the impact from COVID-19.

Although Payment Solutions was impacted by COVID-19 strength in power sports resulted in core loan receivables growth of 1%. Interest and fees on loans decreased 8%, driven primarily by lower late fees. Purchase volumes decreased 19% and average active accounts decreased 3%. We signed a number of new programs and renewed key partnerships this quarter as noted on Slide 3.

We continue to drive growth organically through our partnerships and networks and added close to 4,000 new merchants during the quarter. These networks, along with other initiatives such as driving higher card reuse, which now stands at approximately 30% of purchase volume excluding oil and gas continue to build a solid base of business for the future.

CareCredit was impacted the most by COVID-19 in the second quarter, but as I noted earlier, we did see some encouraging sign in the trends as the quarter progressed as providers began to provide discretionary and planned services. Receivables declined 5% and we did see growth in veterinary specialties that partially offset the negative impact of COVID-19.

Interest and fees on loans decreased 4%, primarily driven by lower merchant discount, as a result of the decline in purchase volume, which was down 31%. Average active accounts decreased 2%. We continue to expand our CareCredit networks and the utility of our card as we added over 2,000 new provider locations to our network during this quarter.

The network expansion has helped to drive the reuse rate to 60% of purchased volume in the second quarter.

I’ll move to Slide 10 and cover our net interest income and margin trends. Net interest income decreased 18% from last year, primarily driven by an 18% decrease in interest and fees on loan receivables due to the sale of the Walmart portfolio, the impact of COVID-19 and lower benchmark rates. On a core basis, interest and fees on loan receivables decreased 7%.

The net interest margin was 13.53%, compared to last year’s margin of 15.75%, largely driven by the impact of COVID-19 on receivables and increasing liquidity, fee and interest waivers and lower benchmark rates.

The loan receivables mix, as a percent of total earnings assets mix declined from 83.9% to 78% driven by the higher liquidity during the quarter. This accounted for a 113 basis points of the net interest margin decline.

The impact of fee and interest waivers from forbearance that I noted earlier, accounted for 24 basis points of the net interest margin decline, a decline in loan receivables yield, primarily driven by lower benchmark rates and the sale of the Walmart portfolio.

This accounted for 101 basis points of the reduction in our net interest margin. The investment in securities yield declined as a result of lower benchmark rates and accounted for 32 basis points of net interest margin decline.

These impacts were partially offset by a 58 basis point decrease in total interest-bearing liabilities cost of 2.15%, primarily due to the lower benchmark rates and lower deposit pricing. This provided a 48 basis point benefit to our net interest margin.

Next, I will cover key credit trends on Slide 11. In terms of specific dynamics in the quarter, I’ll start with our delinquency trends. The 30 plus delinquency rate was 3.13%, compared to 4.43% last year and the 90 plus delinquency rate was 1.77%, compared to 2.16% last year.

If you exclude the impact of the Walmart portfolio, the 30 plus delinquency rate was down approximately 90 basis points and a 90 plus delinquency rate was down approximately 10 basis points, compared to last year.

Focusing on net charge-off trends. The net charge-off rate was 5.35%, compared to 6.01% last year. The reduction in the net charge-off rate was primarily driven by the Walmart sale and improving credit trends. Excluding the impact of the Walmart portfolio, the net charge-off rate was approximately 20 basis points lower than last year.

The allowance for credit losses as a percent of loan receivables was 12.52%, post CECL implementation. Excluding the effects of CECL, the allowance under the A000 method would have been 7.91%. The reserve build in the second quarter was $627 million under CECL and $144 million under the A000 method.

The overall reserve provisioning was higher than expected due to the impact of COVID-19, which accounted for most of the reserve build in the second quarter.

In summary, the second quarter trends continue to be solid, forbearance providing a degree of benefit in delinquency trends, we do expect the overall credit trends will be impacted by COVID-19 as we move forward.

Moving to Slide 12, I’ll cover expenses for the quarter. Overall, expenses were down $73 million or 7% from last year to slightly under $1 million for the quarter. The decline was driven mainly by the cost reductions from Walmart, the lower purchase volume and average active accounts experienced during the quarter and reductions in certain discretionary spend.

This was partially offset by higher expenses attributable to operational losses and certain expenditures related to our response to COVID-19. The efficiency ratio for the second quarter was 36.3% versus 31.3% last year. The ratio was negatively impacted by higher expenses attributable to operational losses, certain expenses related to our response to COVID-19 and charitable contributions.

Excluding those impacts, the efficiency ratio would have been 260 basis points lower or approximately 33.7%.

Moving to Slide 13. Given the reduction in our loan receivables and strength in our deposit platform, we continue to build liquidity during the second quarter. While we think it is prudent to have higher liquidity levels given the level of uncertainty and volatility, we are actively managing our funding profile to mitigate excess liquidity. As a result of this strategy, there is a shift in the mix of our funding during the quarter.

Our deposits declined $1.5 billion, compared to last year. We also reduced the size of our securitized and unsecured funding sources by $3.9 billion and $1.3 million respectively. This puts deposits at 80% of our funding compared to 75% last year with securitized and unsecured funding each comprising 10% of our funding sources at quarter end.

While we slowed overall deposit growth in the second quarter, given our excess liquidity, we held direct deposit at last year’s level of $53 billion. Total liquidity including undrawn credit facilities was $28.0 billion, which equated to 29% of our assets. This is up from 22% last year.

Before I provide details on our capital position, it should be noted that we're electing to take the benefit of the transition rules issued by the joint federal banking agencies in March, which has two primary benefits.

First, it delays the effects of a transition adjustment for an incremental two years; and second, allows for the portion of the current period provisioning under CECL to be deferred and amortized with the transition adjustment. With this framework, we ended the first quarter at 15.3% CET-1 under the CECL transition rules, 100 basis points above last year’s level of 14.3%.

The Tier-1 capital ratio is 16.3% under the CECL transition rules, compared to 14.3% last year reflecting the preferred stock issuance last November. The total capital ratio increased 200 basis points as well to 17.6% also reflecting the preferred issuance.

And the Tier-1 capital ratio, plus reserves ratio on a fully phased-in basis increased to 26.5%, compared to 20.8% last year, reflecting the increase in reserves as a result of implementing CECL and the preferred stock issuance.

During the quarter, we paid a common stock dividend of $0.22 per share. Last quarter, we announced that given the current economic uncertainty, and being as prudent as possible, we made the decision to halt further share repurchases, so we have greater visibility on the magnitude of the impact of COVID-19 will ultimately have on the economic environment. We will continue to evaluate this as we move forward.

Overall, we continue to execute on the strategy that we outlined previously. We are committed to maintaining a strong balance sheet with diversified funding sources, and operating with strong capital and liquidity levels.

In closing, given the number of uncertainties that exists regarding the severity and duration of the COVID-19 pandemic, and the countering impacts of actions such as the CARES Act, payment assistance for consumers, and other government and regulatory actions may have remains very difficult to assess the ultimate impact at this time to provide specifics around key outlook drivers.

As we did last quarter, I want to provide a framework to help you consider the impacts on our key outlook drivers. Regarding loan receivables growth, COVID-19 had a significant impact on purchase volume, particularly late in the first quarter and into the second quarter and then as businesses reopened, we saw positives turning and improvement in purchase volume.

As long as businesses remain open, we expect this trend to continue, but the increase in COVID-19 effects as we are seeing nationally and the responses to this will influence whether the recovery continues it may result in further volatility as we move forward. What continues to help our trends and resiliency is the growth in digital, diversity inside our platforms, and financing in essential areas such as home and healthcare.

We will continue leveraging our capabilities and expertise to help our partners and providers during this difficult period. This overall direction in purchase volume will be a key influence in our receivable growth rate.

Our net interest margin has been impacted by a number of factors including the buildup of liquidity on our balance sheet and reduction in the size of our receivables, the reduction in benchmark rates resulting from FED rate cuts on our receivables and investment security yields. And impact of forbearance in terms of interest and fee waivers for a temporary period of time.

As we move forward, we will continue to look at means to deploy our excess liquidity and impact of forbearance should it be. We do expect to benefit to net interest margin, and higher interest income and fees generated from an increase in the number of accounts that will evolve in our loan receivable portfolio and continued lower interest expense.

Finally, it should be noted we also share the impact on revenues and funding costs through the RSA. Regarding RSAs, in addition to sharing the net interest income impacts, we'll also see an impact from higher credit costs. The ultimate amount of the credit cost impact and timing will be determined somewhat by the expected deterioration in credit as stimulus actions and industry-wide forbearance assistance abates.

While we expect an increase in net charge-off rate as the year progresses, it should be noted that the overall portfolio quality and credit trends as we entered this pandemic are strong and continued to improve in the second quarter. Also, the tools and capabilities that we have highlighted previously will help us better navigate the economic impacts from COVID-19.

Finally, we also believe higher recoveries will ultimately materialize partially mitigating the impact of higher losses. While we continue to expect the reserve builds to be elevated as we move forward, until we gain more visibility into the duration and severity of the current pandemic, and the impacts from stimulus and industry-wide forbearance, we cannot provide more specific guidance. Once we have greater visibility, we'll be in a better position to define the expected net charge-off and reserve build expectations going forward.

Regarding the efficiency ratio, activity levels will impact revenue and expense levels and we will look to mitigate some of the impacts through expense reduction opportunities. We have undertaken a comprehensive review of our operating expense base and are formulating a set of actions to right-size our operating expense as a result of the reduction and mix in our loan receivable portfolio.

Fundamentally, the business remains strong and is resilient and we are going through this situation with a strong balance sheet, capital, and liquidity position.

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

[Margaret Keane, Chief Executive Officer]

Thanks, Brian. I'll provide a quick wrap up and then we'll open the call for Q&A. As we have said, the ultimate impact from this crisis remains difficult to quantify right now. So I will reiterate that we believe we have an advantageous position to navigate this unprecedented pandemic.

We are well positioned from a credit perspective given changes we have made since the financial crisis in addition to some of the more surgical modifications we’ve made in recent years and that we continue to make considering the current operating environment. We have a partner-centric business model and agile approach to all our operations and investments.

Our digital capabilities and asses has helped us win important digital partners and our another vital tool to help our partnership fall into online and mobile channels. We are focused on execution today with an eye towards the future, making investments, building capabilities, launching programs and making the fundamental changes necessary to emerge from this pandemic in a stronger position.

Thank you for participating on the call today. And I hope you and your family stay healthy and safe. I’ll now turn the call back to Greg to open the Q&A.

[Greg Ketron, Director, IR]

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, I'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call.

Operator, please start the Q&A session.

[Operator]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And from KBW, we have Sanjay Sakhrani. Please go ahead.

[Sanjay Sakhrani, KBW]

Thanks. Good morning. I am glad you guys are doing well. I guess, my first question is on pre-provision earnings. I know there is a lot of things that Brian Wenzel, you laid out, but as we think about loan growth understanding it’s a little bit of moving target, but the purchase volume stats are encouraging.

How should we think about pre-provision earnings going forward? Was the second quarter a trough, or do you think that there is more pressure ahead?

[Brian Wenzel, EVP & Chief Financial Officer]

Yes, great. Good morning, Sanjay. So, first, if you start out with volume, again, we saw positive trends as we move through the quarter from troughing in the early part of April through a plus 3% in end part of June, I’d say, as we moved into July, we are probably about a negative 2% which kind of reflects some of the uncertainty and volatility.

But I would say, right now, it’s generally in the plus or minus 2% to 3% and we think about that trend really as a bit uncertain as we move through the quarter and how the pandemic and the effects on the economy move forward.

Payment rate has continued to be strong, but obviously, as you think about that from a stimulus perspective and an industry-wide forbearance perspective, they may burn off here which will ultimately hopefully bring down the payment rate.

So, as we think about receivable growth, it is a little bit uncertain as we have multiple factors going different ways. If you think about the margin of the business, really we think this is probably a trough as receivables have moved down close to $5 billion sequentially quarter-to-quarter. We try to burn off as much as that liquidity as we can. We’ll continue to try to burn that off.

So the impact that we saw in the quarter which was just from the higher liquidity, the 113 basis points, that should begin to burn off here in the third quarter and again as we move through into the fourth quarter and it’s really next year, the forbearance impact of 24 basis points shouldn’t for the most part be burned off here in the third quarter now.

So, I think from a margin perspective, we’ve kind of hit that bottom and we’ll trend up from there. With regard to credit, obviously, we’ve been strong in credit. Delinquencies are 90 basis points better ex Walmart. They haven’t really been impacted on forbearance and we could talk about that later, but forbearance hasn’t had that impact. It’s really when we start to see those trends move through.

So I think from a charge-off perspective, we don’t expect to see charge-offs really rise here, maybe in the latter part of 2020, but more into the first half of 2021. The expenses, we are going to again continue to really take an active approach to manage some of the discretionary expenses.

As I outlined in our prepared remarks, we are taking a comprehensive review of expenses and really looking more structural things in order to get more cost out really to reflect the change in the platforms as a percent of mix, in our portfolio mix.

So we would expect to come back with the source of actions that we can really undertake in the latter part 2020 into 2021 to reduce the expenses and get that efficiency ratio back to where it would normally run. So, again, I think there is some positives here coming out, but more certainly, the uncertainty relative to purchase volume and really payment behavior patterns are the key for us in the back half of the year.

[Sanjay Sakhrani, KBW]

Got it. And then, my follow-up questions on the reserve builds. I think I heard you, Brian, say that, it’s a little bit of a moving target still in terms of the credit quality migration going forward. But, as we think about reserve builds under a macro assumption that you’ve used, do you feel like you are comfortable with the build that you’ve done and provide nothing changes on that macro assumption.

You don’t expect future reserve builds? Maybe you could just talk about that macro assumption too. Thanks.

[Brian Wenzel, EVP & Chief Financial Officer]

Sure. Sure. Let me start with the macro assumptions, Sanjay. So we – we run multiple economic scenarios and really formulate a base case and then we have a couple of downside scenarios and what I’d say is an upside scenario. So, to just ground ourselves, when we looked at the first quarter, we used a model that essentially had unemployment peaking in the second quarter around 10%.

But again, as I said the important parts are really where you exit 2021 and 2022 where we had our employment really at the end of 27% and then 4.5% in 2022. Obviously, if you look at assumption today, they have deteriorated from that March 31st date. So what we have done is, we stepped off and we took the Moody’s baseline model as our starting point.

Even though they did some revisions in June and July that were slightly positive that we stay with the Moody’s baseline. And then effectively, what we did is, we modeled on to that unemployment. We essentially redistributed unemployment to take into account, forbearance to take in account stimulus.

So, at the end of the year, when you think about our unemployment exiting 2020 it’s 11.5%, 9.3% in 2021 and 6.4% in 2022 and we don’t really get back to an unemployment rate under 5% until 2023. So, I think as you think about how we thought about the macroeconomic environment, we thought about a slower recovery with potentially a greater impact on unemployment.

The key thing for us will be how that unemployment really develops and whether or not you see a greater, what I would call higher income unemployment come into the mix later in the year as you move maybe out some lower income people. So that will be a variable.

As you think about the reserve build, then it really comes down to – for us, a platform mix, because obviously, we have platforms that attract the higher CECL reserve in CareCredit and Payment Solutions.

So, some of this is going to be mix related. So, under CECL, we expect the reserves to be elevated on a normal basis. So, again, I think we’ve taken the best guess in the macroeconomic environment as it stands today. But it’s really going to go back into delinquency formation, and loss formation as we exit 2020.

[Sanjay Sakhrani, KBW]

Alright. Thank you.

[Brian Wenzel, EVP & Chief Financial Officer]

Thanks, Sanjay. Have a good day.

[Operator]

From Credit Suisse, we have Moshe Orenbuch. Please go ahead.

[Moshe Orenbuch, Crédit Suisse]

Great. Thanks. And I was hoping maybe just starting you could just talk a little bit about, you had mentioned, Margaret, the partner-centric strategy and how that might impact the second half of the year?

You’ve launched the Verizon cards. You’ve got kind of Venmo and how should we think about what Brian was talking about in terms of kind of volume levels currently with that partner-centric activity in the second half?

[Margaret Keane, Chief Executive Officer]

Yes. So I’d say, there is really three parts, right. The retail card, Payment Solutions and CareCredit. I’d say, in each case, each platforms operating fairly well. We’ve really tried to stay highly engaged and close to our partners throughout this process. So, as we mentioned, we were able to launch Verizon which, I joke here around with the first launch in a pandemic. That launch went extraordinarily smooth in terms of the execution of the launch.

Now obviously, Verizon is still working through how they open all their stores. So, what Brian talked to earlier about our ability to be fully digital, I think it was a big win for us, because we’ve been able to launch and have a successful launch and feel good about the program and its growth trajectory given the environment we are in right now.

I’d say on Venmo, there is a lot of work going on. Obviously, we’ve had to switch to everything being agile and virtual and that process has really been phenomenal and the teams are executing that plan and as you know, in both cases we are really trying to make this experience a fully digital, integrated experience for the consumer, which I think lessens the burden on brick and mortar as we continue to fluctuate between, what’s open and what’s closed.

So we feel positive about that. And in trying that, we are originating the right accounts. We’ve put a lot of work into the front-end of our business on fraud, because that is one area that, I think everyone in the business is seeing a lot of pressure on and we feel good about the tools and techniques that we’ve been able to put in place to really launch this program.

So, that’s really on the retail card side. I’d say on Payment Solutions and CareCredit, couple of things. We are working very closely with these partners. We actually held a number of seminars and halts particularly in our CareCredit business helping the offices reopen we’ve shared our plans. We had the folks that are working on the reopening of our offices, although we haven’t reopened any yet.

Part of the things that we have put in place, the procedures, and so, what we are trying to do is integrate in such a way that we are helping them deal with the pressure they have to deal with as they come back online, as well as ensuring that we are providing them with additional tools that they are going to need as they shift from totally brick and mortar to more online, particularly in our Payment Solution platform.

We have a whole team there working on a new digital POS for that platform which we think will be a big win as we end the year, beginning of next year. So, one of the things we’ve done is set back strategically and really look at what we were working on.

And really have doubled down really across the whole digital aspects of our business to ensure both digitally and from a data perspective we are helping those partners as they continue to reopen and deal with some of the ins and outs of closing and opening and making sure we can deliver from a digital perspective for their consumers. So, highly integrated, lots of conversations, and feeling really good about our performance so far.

[Brian Wenzel, EVP & Chief Financial Officer]

Yes, Moshe, the only thing I’d add in the CareCredit platform, we have exciting announcement of Advent Health.

So, when you look at the health systems component, not only do we have in our Kaiser Permanente, Cleveland Clinic, Advent, the ability to get into the path there and to really help our consumers as they manage their medical bills in this point time is terrific and we are building a really different type of network in that business and working closely with them in order to get that up and running with a handful of other really good health systems across the country.

[Margaret Keane, Chief Executive Officer]

I’d say, what’s been amazing as the teams were able to execute these deals in the middle of the pandemic when many of these institutions are having a lot of challenges themselves. So, that goes to the show the relationships that we’ve felt pretty in our credibility in the industry so far of us being able to engage at that level during this period.

[Moshe Orenbuch, Crédit Suisse]

Great. It sounds like you’ve become more important to them. Brian, just a quick follow-up on the reserving question from before. 12.5%, I mean, the average life of your portfolio was something in the – I don’t know if it’s shrunk in this period, but you used to think it was like 1.7 or 1.8 years. Can we infer anything in terms of where you might be thinking P plus rates would be in 2021 as a result of that 12.5% reserve?

[Brian Wenzel, EVP & Chief Financial Officer]

Yes, Moshe, I think, it is very difficult to kind of refer that rate, because we haven’t seen any of the trended data really come through and it’s going to really dictate where we see some of the pressure build and certainly when you think about our CareCredit and Payment Solutions, those are longer dated assets with promotional financing.

Obviously, we can control the origination on the front-end of that, but that book will take a longer period of time. I think the positive thing is that if you look at the retail card book, obviously, we guided it the Walmart portfolio which has a higher loss content and really have gotten into, what I’d say is some faster growing, more stable portfolio.

And I think when you look at the FICO mix, our FICO mix for the first quarter now, on a sub-660 basis is 300 basis points better at only 24% that total. So, we feel good about where we are. I think hopefully, we use the macroeconomic assumptions that are hopefully the worst case. But again, we will continue to monitor those as we move forward.

So, until we see some of that trended data and the delinquency formation happen, it is a little bit tough to give you that guidance for 2021 at this point.

[Moshe Orenbuch, Crédit Suisse]

Okay. Thank you very much.

[Brian Wenzel, EVP & Chief Financial Officer]

Thank you. Have a good day.

[Operator]

From Jefferies, we have John Hecht. Please go ahead.

[John Hecht, Jefferies]

Morning guys. Thanks for taking my questions. First one, Brian, I think you mentioned that, and tell me if I am wrong that the actual purchase volume on the digital channel in Q2 was up year-over-year. A, did I hear that right?

And second, maybe within that channel, can you talk about the key influencing factors, I mean, is most of this coming from e-commerce platforms like Amazon and PayPal or is that more distributed? Maybe just a little bit of color on that.

[Brian Doubles, President]

Yes. Sure. This is Brian Doubles. Why don’t I start on that? The online sales penetration rate in retail card was 48% and just to give you a little bit of historical perspective, that was running in the mid-20% range just a couple of years ago. So, we feel really good about that growth. The national average for e-commerce sales typically has been running in that 15% to 20% range.

So that gives you a good basis to comparison. So, I definitely feel like we are overindexing in that channel. I think it is broader certainly, this year than just Amazon and PayPal. When I think about the pandemic, really this is just accelerated a digital transformation that was already underway. So, as Margaret kind of highlighted, what we did very early in the process, is we went through every strategic project in the business.

And we said okay, how can we best support our partners by helping them accelerate their digital transformation. So we went project-by-project. We redeployed agile teams. We worked with all of our partners, big partners, small partners, providers and CareCredit to help figure out how we could best support them.

So, we put more resources, more investments, shifted things around to things like digital apply, digital buy, accelerating a lot of projects that were already in place. So, it is more broad based and then just the fact that we’ve been trying to engage more and win more programs in the digital-only space. We are really helping our omni-channel partners transform their businesses and figure out how we can best support them in that transformation.

[John Hecht, Jefferies]

That’s very helpful. Thanks. And then, Brian Wenzel, the – I guess, another follow-up question on the provisioning. I am just trying to kind of determine if we can understand, maybe your perception of the different risk factors tied to those seeking deferrals versus those who haven’t.

And with that, is there a way that you could discuss the provision this quarter, maybe how much of it was a specific provision for the cohort that had sought deferrals versus a general provision, just tied to uncertainty and risk in the overall environment?

[Brian Wenzel, EVP & Chief Financial Officer]

Yes. Great, John. So, let me start with the forbearance impact. I think tried to give you some color really with regard to the accounts that went into forbearance. So the accounts entering only 8% were delinquent at the time they went into forbearance and while they had higher credit line utilization and payment rate, what we have seen is, as they come off forbearance, and they performed a little bit worse since then their kind of cohorts in the portfolio, but not dramatically worse.

So, they have roughly a three times entry into delinquency. But when you look at the accounts that come off forbearance and look at the amount that’s already in our delinquency, less than six basis points is in delinquency today relating to accounts that were in forbearance and if you took that whole 8% and roll that through, it’s less than 20 basis points.

So forbearance has not had an impact for the $2 billion that has rolled out at this point. Obviously, we’ll have to see how that develops. We are in the early stages with those accounts, really performing off of the program. But we are encouraged by the number of people that, the 8% that’s paid in full and the 61% that are continuing to make payments. So, I think forbearance for us clearly has benefited our cardholders.

What’s unknown to us is, is the forbearance they are receiving in total from industry-wide participants. So that will be an effect. So, as you think about the reserve provisioning in the quarter, the vast majority of this is the deterioration of the macroeconomic assumptions that we put into our model. There were some qualitative that we put out for forbearance, but it’s not a large part of the reserve builds.

[John Hecht, Jefferies]

Okay. Really appreciate the details. Thanks guys.

[Brian Wenzel, EVP & Chief Financial Officer]

Thanks, John. Have a good day.

[Margaret Keane, Chief Executive Officer]

Good day.

[Operator]

From Morgan Stanley, we have Betsy Graseck. Please go ahead.

[Betsy Graseck, Morgan Stanley]

Hi. Good morning.

[Brian Wenzel, EVP & Chief Financial Officer]

Good morning, Betsy.

[Betsy Graseck, Morgan Stanley]

Hi. Just a question on RSA, as we’re thinking about the back half of the year. I think in the past you had given some expectations for how we should be thinking about the RSA in the second half versus the first half. And wondering if you could comment a little bit on what you see the drivers there as we go into 2H?

[Brian Wenzel, EVP & Chief Financial Officer]

Sure, Betsy. So, obviously, we haven’t provided any specific guidance, mainly because some of the unknown is really related to credit. But as I think about a framework how should think about the RSA back half of this year and really into 2021, the first is the program performance.

So, how the long receivables really developed here and more importantly, how the net interest margin kind of comes back and how it develops as you begin to see delinquency developing obviously our partner share in that that revenue side of the equation. Obviously, credit cost will factor in more likely in 2021.

So you will see probably an increased benefit continue in the back half of the year from a net credit write-off perspective through the RSA. As you think about the reserve provisioning, which is probably the larger wildcard here, unfortunately, what you see is, first of all a platform mix issue, right, so.

So far we have booked probably more of the CECL benefit really sitting in CareCredit and Payment Solutions given they attract a higher CECL reserve provisioning given the length and nature of those assets.

Inside the retail card portfolio, it’s ultimately going to come down to the mix of partners that flow in there. As we know, you have some partners that share in the reserves, some partners that don’t share in the reserve. And unfortunately as we sit here today, we are just making estimates with regard to how the delinquency formation works and how that will go into the loss content as we build into 2021.

So they are some variable pieces here. So, I think there is a little bit of timing where the impact to the RSA may be delayed. But we really have to see where those two move from a reserve perspective, but again, we hope to be moving forward on a NIM perspective and charge-offs to put a little upward pressure on the RSA from just a performance before you think about reserves.

[Betsy Graseck, Morgan Stanley]

Okay. Got it. And then, Margaret, you did a really interesting podcast at the end of May with ICE, and there as well as detailing of how you are thinking on that. And I was just wondering at one point, the question was, how does the pandemic impacts Synchrony and as a part of the answer, you’re talking about being a smaller company.

But I wonder if either there was more detail there around that that you could explain? Or if your view has changed given that maybe between now and the end of May things weren’t as tough, so.

[Margaret Keane, Chief Executive Officer]

Yes, I think I was really referring to the fact that, we definitely have seen our assets shrink a bit and as a result of that, it’s what Brian talked about, we are going to have to do a reset of expenses and align ourselves. So that we keep the return of the business in the area that we like.

I think, it’s - like any difficult situation, I think people rise the occasion and we are able to really just step back and say, okay, coming out of this, how do we want to make sure we are set up for the future.

And I think the fact that we’ve been around for 90 years and spent a lot, we are positioned that way. But I think particularly as we move more digital, we are going to have to make sure our resources are aligned to align with that digital transformation that we continue to make.

And so, I think we are really looking at all the levers inside our business to ensure things don’t get away from us and that we are really coming out of this in a way that we have the right partners, the right program, the right digital experience and capabilities building out our data that we’ve been continuing to do. And then in trying that, the returns on our business continue to deliver for our shareholders.

[Brian Wenzel, EVP & Chief Financial Officer]

But the thing I would add and just not to get lost in this, when you think about the sequential decline in average loan receivables, it sound over – almost $5.7 billion.

So, clearly, we are trying to make sure that we understand where the depth of that could be in that that we react and I think when you think about the efficiency ratio in the quarter, when you strip out more of the – some of the operational losses in COVID-19 response, we are at a 33 I think .6% efficiency ratio.

So, we want to get that back in line with where we can continue to deliver a higher ROA business. So that’s really what I think is driving it. And hopefully, here we’ll have to see how the sales play out as we move through the back half of the year.

[Betsy Graseck, Morgan Stanley]

Okay. Thank you.

[Brian Wenzel, EVP & Chief Financial Officer]

Thank you, Betsy. Have a good day.

[Operator]

From Wells Fargo, we have Don Fandetti. Please go ahead.

[Don Fandetti, Wells Fargo]

Hi. Good morning. So, Margaret, I guess, is it fair to say you continue to sort of see credit coming in better than expected. It surprised me how resilient that consumer has been and I know we can’t infer too much from your reserve, but, if NCOs are peaking in the first half of 2021, they would suggest an NCO loss rate that’s not significantly higher than where you are in certainly a lot lower than the credit crisis. Do you think it’s stimulus is what’s really doing it and what are your thoughts in the near-term?

[Margaret Keane, Chief Executive Officer]

Look, I think, one thing we all know is the consumer going into this was pretty strong, right. So, and I think what we are seeing and we are even seeing this in deposits rate, consumers have more cash, they are hoarding more cash and they are paying their bills. Now, I think the big caveat in all of this, Don, is really what happens with when the stimulus ends which is they won’t have incentive if they don’t come up with a new plan.

What is that new stimulus and then how quickly do people get back to work? And I think, that’s the fact that where I have to say I’ve been around the business for forty years. I don’t think any of us would have expected to see what is happening - happening in terms of delinquencies. I think we are kind of a bit surprised and thought there would definitely be more pressure there.

So I think we have to really see the third and fourth quarter to really understand what’s the next phase of stimulus? How does that play out? And I do think we are anticipating more job loss. I think what we’ve seen so far is, the things that are connected to travel, entertainment, restaurants, things like that, but I think, every company is stepping back and looking at their own cost structures and how does that play into it.

So, I think we are trying to be cautious about this, because if you just look at how we are doing today, we should be padding ourselves on the back of saying all things look great.

But I think the reality is there is more to come and we just have to be ready for that and that’s really what we are trying to ensure we are doing both from an underwriting perspective, and trying we are reserving properly and then the third area of really taking a hard look at expenses to make sure we are positioned right as we come out of this.

[Don Fandetti, Wells Fargo]

Got it. Thank you.

[Margaret Keane, Chief Executive Officer]

I don’t know, Brian, if you’d add anything?

[Brian Wenzel, EVP & Chief Financial Officer]

Yes, the only thing I would add, Don, the book is fundamentally different than it was a year ago, more certainly if you work backwards in time with Walmart kind of coming out, when you think about the portfolio, the fact today that we’ll only have 24% of the book below 660 down 300 basis points from the first quarter.

Clearly, the effects of stimulus and forbearance – industry wide forbearance has driven our payment rate. Our payment rate was 15.60 for the quarter up 83 basis points year-over-year. So, people are paying down the debt.

The good news is, because we’ve migrated credit, we are seeing better performance and ultimately, Margaret hit on the point is, as unemployment does develops and you get back to what our estimate will be towards the end of the year is there a fundamental rotation in there that will give you a different outcome.

We are anticipating that. I think we are executing our credit enhancements around that. But again, we’ll have to see how that develops. But I think it goes to a testament to how we modified the book from GFC. And then, really the tools, the data elements are a reason to managing the book today that hopefully drives credit in a fundamentally positive way as we move into this recession.

[Don Fandetti, Wells Fargo]

Thank you.

[Operator]

From JPMorgan, we have Rich Shane. Please go ahead.

[Rich Shane, JPMorgan]

Hey guys. Thanks for taking my question this morning. Look, I want to follow-up on a theme that I think we’ve explored a little bit here. But when we look at the reserve increase versus the change in economic outlook, it almost feels like the correlation is a little bit lower than it’s been historically.

And again, I think you guys have touched upon some of the factors there forbearance, policy initiatives which have dampened that relationship. I am curious if you think that ultimately the risk the duration of the cycle that could drive that correlation back to the historical norm?

[Brian Wenzel, EVP & Chief Financial Officer]

Yes. Thanks, Rick. As you think about it, I think the historical norm does have Walmart and it does have some other things. So, you have to almost adjust that the start of it, the strength of the consumer and the change in the underlying portfolio as you look forward. So, most certainly, we are very sensitive to the duration of the impact of it’s more prolonged than we think than most certainly it would be.

But when we look at our stress result team, if you go back to where we published back in 2018, they are better ex Walmart. So, I do think that and I think when you think about this quarter, the fact that we’ve had such a large decrease in our receivables, there is a pretty big volume after. So the rate part of the provision is up significantly in the quarter.

So – but again, it’s going to be – you hit on it. It’s going to be really how that curve develops out and whether or not just the fundamental mix shift inside the unemployment where we are thinking.

[Rich Shane, JPMorgan]

Got it. And then I appreciate. That – you are right. There is a pretty significant idiosyncratic shift in the portfolio without Walmart that have to be accounted for, as well. Thank you guys.

[Brian Wenzel, EVP & Chief Financial Officer]

Thanks, Rick. Have a good day.

[Margaret Keane, Chief Executive Officer]

Thank you.

[Brian Wenzel, EVP & Chief Financial Officer]

Brandon, and we have time for one more question.

[Operator]

And from Bank of America, we have Mihir Bhatia. Please go ahead.

[MihirBhatia]

Hi. Good morning and thank you for taking my questions. Wanted to quickly just follow-up on the reserve build discussion. You’ve talked on this call about the potential for the unemployment pool to change a bit where you have maybe some higher income consumers lose jobs going forward.

And I just wanted to clarify, does the reserve build already account for this change? Or is this something that you are keeping an eye on that you – that could happen and you will then need to build reserves for it. I understand the magnitude might be different, but just trying to understand what is already reserved for versus what won’t be.

[Brian Wenzel, EVP & Chief Financial Officer]

Yes. It’s a great question and I think we’ve tried to model some of that, but ultimately, because we are seeing a strengthening of credit as we move forward and really a strengthening of credit even inside of the credit grades. It’s difficult to ultimately predict that. So we’ve put some level of estimate in. It’s just subject to a lot of uncertainty.

Now there is a lot of – as we all read, the indications that there are going to be large number of lay-offs n some of these higher income jobs, but until we actually see that, and what builds in our portfolio, it is somewhat difficult. But we put some estimate in for how we think the portfolio performs as we move forward. But that is just a risk factor ultimately how it develops.

[MihirBhatia]

Understood. Thanks. And just one other last question. Just could you maybe just discuss some of the newer programs you’ve launched? And you have one thing of the Synchrony HOME program, the CarCare or maybe in the GP card, how have they performed through the crisis?

And to the extent you are willing to share just in terms of the volume of credit trends and how that compares to the rest of the portfolio or even your expectations, does that change your appetite for wanting to grow those? Just trying to understand how you are thinking about your programs and now that you had a crisis?

[Margaret Keane, Chief Executive Officer]

Yes. Now, I think, I’d say, all of them are performing well. We – they perform no differently than the overall book. I would say, particularly we are seeing a lot of strength in HOME. I am sure many of you have seen that Home seems to be where people are spending their money. And so, we are definitely seeing good take up and people buying furniture, home improvement and alike.

So, both our Home Card and our partners that deal in the Home are definitely seeing a lot of strength. CarCare is a little different in that. The actual car part is fine, but when gas isn’t down, but that’s starting to pick up as people start driving more. But it’s still not to a level of where people were driving pre-pandemic.

But I’d day, overall from a credit perspective and origination perspective, and utilization perspective, we feel really good about all of those programs and we’ll continue to look to grow them.

[MihirBhatia]

Okay. Thank you.

[Brian Wenzel, EVP & Chief Financial Officer]

Thank you. Have a good day.

[MihirBhatia]

You too.

[Greg Ketron, Director, IR]

Okay. Thanks 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.

[Operator]

Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.