Synchrony Financial

NYSE:SYF

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the Synchrony Financial Fourth Quarter 2020 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 Kathryn Miller, Senior Vice President, Director of Investor Relations. You may begin.

[Kathryn Miller, SVP, Director IR]

Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website.

Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.

During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit, nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

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

I will now turn the call over to Margaret.

[Margaret Keane, Chief Executive Officer]

Thanks, Kathryn, and good morning, everyone. 2020 was a challenging year marked by a global pandemic, economic disruption and unrest due to racial injustice. It was a true test to our resilience, our agility and our strength as a business. We're proud of the way Synchrony managed through these challenges. Though there have been significant developments that provide hope that the pandemic will begin to moderate, the virus resurgence and resulting regional shutdown and continued impact on unemployment is something we are still managing through. And though the pandemic continues to impact results, we are encouraged by some of the trends that have developed. Later in the call Brian Wenzel will detail these impacts on the quarter’s results and provide a view on how we think this year might develop. I will provide a high level overview here.

Let's first focus on our quarterly results, including some of our recent successes, which are outlined on slides 3 and 4. Earnings were $738 million, or $1.24 per diluted share, an increase of $0.09 over the last year. Loan receivables were down 6% to $81.9 billion and average active accounts decreased 10% from last year, with new accounts down 19%. Purchase volume per account increased 10% over the last year to $602, and average active balance per account increased 4% to just under $1,200. Net interest margin was down 37 basis points to 14.64%. And the efficiency ratio was 37.1% for the quarter. Net charge-offs hit a new low at 3.16%. As a result of our liquidity and funding strategy, in response to COVID-19 impacts on our balance sheet, deposits were down $2.3 billion or 4% versus last year. This includes a strategic decision to slow overall deposit growth given the excess liquidity we have. Total deposits comprise 80% of our funding, and our direct deposit platform remains an important funding source.

Our ability to service and provide digital tools to customers makes our bank attractive to depositors and we will continue to build out additional capabilities. During the quarter we returned $128 million in the quarter through common stock dividends. We also announced that the Board authorized $1.6 billion in share repurchases for 2021 beginning in the first quarter. We have a solid pipeline across our platforms, a mix of start-up and existing programs. But we are being very disciplined around risk and return given the uncertainty in the current environment. And while this return landscape is shifting, we believe similar opportunities will continue as evidenced by recent wins. I will touch upon a few highlights.

We announced that we will become the issuer of Walgreens cobranded credit card program in the U.S., the first such credit program in the retail health sector. The card will allow customers to earn rewards for purchases anywhere MasterCard is accepted. We expect to launch the new program in the second half of 2021. This new agreement builds upon the company's existing strategic partnership. CareCredit is already accepted at more than 9,000 Walgreens and Duane Reade stores. We are committed to providing Walgreen customers and patients with unparalleled experiences, a best-in-class loyalty program and the ability to manage their health and wellness spending.

In addition, we renewed our strategic partnership with Mattress Firm. We provide flexible financing solutions, and innovative business tools that empower Mattress Firm to meet their customers at critical moments in the purchasing journey, which is increasingly online. Our digital tools and industry leading credit programs team, including marketing and analytic retail experts have optimized every step of the omni-channel customer journey to deliver a competitive user experience. We look forward to many more years as a strategic partner of Mattress Firm. We also reached a definitive agreement to acquire a Allegro Credit, a leading provider point-of-sale consumer financing for audiology products and dental services. Allegro offers numerous customers loan options through its merchant partners with flexible payment terms at the point-of-sale. These products are designed to offer customers choice to purchase the products and services they need or want. The addition of Allegro Credit’s merchant network and customers complements our strategy of growing CareCredit, our leading health and wellness financing platform. The transaction is expected to close in the first quarter of 2021.

All together this quarter, we signed nine renewals and won seven new deals along with the acquisition. I cannot overstate the importance of digital innovation to the success of our programs. Consumers are rapidly adopting technologies that enable contactless commerce and expect engagement along their digital purchase journeys. We are leveraging our digital assets and continuously investing to ensure our partners are well positioned in this rapidly evolving dynamic.

These investments include the capabilities to empower staff and seamless integration with our partners’ digital assets, enable customer choice at the point-of-sale, enhance contactless experiences, facilitate a seamless and easy application process, bring the in-store experience to a customer's digital devices for applications and payments, and integrate our financing office throughout the entire digital shopping experience.

We also continue to expand our digital penetration of all aspects of our customer journey, apply, buy and service. Approximately 50% of our applications were done digitally during the fourth quarter and grew 18% in mobile channel application. In Retail Card 51% of our sales occurred online.

Finally, approximately 65% of our payments were made digitally. In short, we’re rising to the challenges presented by this difficult time. We have strengthened the strategic positioning of our business and expanded the opportunity set that lies before us. And we're investing in the right strategy that will enable near term successes, while also driving considerable shareholder value over the long-term.

With our future in mind, as you know, a few weeks ago, we announced some important changes to the leadership of this company. Effective April 1, I will transition to the role of Executive Chair of our Board of Directors and Brian Doubles will become Synchrony’s President and CEO. Synchrony means so much to me. And one of my goals as CEO was to set up based off a leadership transition with a successor who will advance on what we have built. Both the Board and I believe there was no one in the world better equipped to do that than Brian. Brian has helped to build Synchrony every step of the way. He has been my trusted partner for more than a decade, including through our IPO. When we started Synchrony back in 2014, we set out to build a great business with a great culture that delivers for our partners and customers every day. Together with our 16,500 employees, we are doing just that. With Synchrony in a position of strength now is the time to implement this transition, allowing Brian to continue the incredible progress that has been made and to drive the next stage of Synchrony’s exciting growth journey. I look forward to working with Brian through this transition and continuing to support Synchrony’s growth and future success as a decade chair.

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

[Brian Doubles, President]

I want to start by thanking Margaret for all that she has done for Synchrony and for me personally over the last decade. We truly would not be where we are or who we are today without her leadership and it's an absolute honor to succeed her and lead Synchrony into the future. I'm also grateful that we will continue to benefit from Margaret's expertise and leadership in her role as Executive Chair. And I'm excited to partner with her and the Board, our leadership team, and especially our employees as we continue to capitalize on our momentum. There's a lot to be excited about as we continue Synchrony’s journeys. We have a strong business, a winning culture, and a tremendous opportunity to build on the strong foundation.

As incoming CEO, I will continue to implement the strategies that we've developed over the last three years, which has enabled the momentum that our business has today. We will continue to leverage our competitive strength, deepen our market leadership, and invest in digital, data analytics and new product offerings to create a seamless customer experience. We will continue to grow our business and drive value for all of our stakeholders, our investors, our employees, our partners, and our customers.

On that note, I'd like to shift gears and turn to Slide 5 to talk about just one example of a strategy that we implemented to enhance the utility and value of our offerings, and which has become an important part of our business today, equal payment financing. Fundamental to our business is our objective to provide a full suite of products that can be tailored to serve the evolving needs of our customers and partners while earning appropriate economic returns.

Our partners’ most clinical needs are centered on their ability to offer a product that can seamlessly integrate with their digital assets and systems, deliver higher average order volumes and sales, increase conversion rates, and deepen customer loyalty.

By the same token, customers have their own unique set of needs, including financing solutions that fit within their budget, are transparent and easy and convenient to use and which offer them flexibility in their purchase and financing decisions. We have extensive experience and installment lending, which has informed our approach to equal payment financing. We think about these products in two categories. First, evolving products. We offer mid and long-term equal payment plans, with promotional periods anywhere from 12 to 152 months depending on the product category. We also offer short-term equal payment plans with promotional periods of 3 to 12 months.

Second, closed end products. We offer collateralized installment products for bigger ticket purchases with promotional periods from 12 to 180 months. And we also offer short and long-term installment loans through our SetPay product. These products run anywhere from three to 36 months. All these products are priced appropriately to meet our partner and customer objectives, with APR starting at zero percent and each of these products in turn offer distinct benefits and address the unique objectives of our partners and customers.

Revolving equal pay products for example, can be embedded inside of an existing revolving account, eliminating the need for a customer to open a new account. And given the nature of their functionality, we also provide repeat purchases, as well as higher engagement and loyalty to the partners’ plan. Meanwhile, closed end products tend to appeal to customers that prefer regular predictable payments. To put our overall equal payment financing strategy in perspective, we currently have $15 billion in equal payment balances, 56% of which have 0% APR financing. We have about 74,000 partners or locations offering our payment plan products. And we have an overall repeat purchase rate of approximately 30% within 24 months of the first purchase.

Synchrony's success in this and our other core strategies has been driven by our commitment to data-driven innovation, a deep understanding of our partners' objectives and customer needs and our ability to adapt as the competitive landscape and market conditions have evolved over time. Our organization is built around being nimble, responsive and results oriented. We leverage our decades of underwriting experience, our proprietary data analytics and our industry expertise in order to design and implement customized solutions that address our partners' needs while also delivering appropriate economic outcomes. This is what has driven Symphony's longstanding track record and deepened our market leadership over the years. We are excited to drive this momentum forward in 2021 simply by continuing to enhance the value we offer to all those we serve.

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

[Brian Wenzel]

Thanks, Brian, and good morning, everyone. Before I begin, I want to congratulate Margaret and Brian on their new roles and thank them for what they have done for Synchrony and for me personally. I speak for everyone in the company when I say we look forward to working closely with them in the next chapter for Synchrony. As we begin 2021, we're encouraged by the developments being made to fight the pandemic, and continue to be inspired by those in the frontlines. For our part, we remain dedicated to keeping our employees safe, in helping our partners, customers and communities during this difficult period, guided by our values and principles and with the partner centric focus, we are working to help our constituents navigate this environment with an eye towards the future and the opportunities ahead of us as we begin to overcome the pandemic.

During the fourth quarter, the pandemic continued to impact our growth on several areas, as noted on Slide 7. However, our business mix, which includes a significant digital component and certain industries benefiting from staying at home such as home related products and services, veterinary services, and electronics and appliances have outbalanced against some of the effects of the economic downturn. Purchase volume was essentially flat, down 1% versus last year and in line with our expectations for the quarter, despite some pressure from new shutdowns and restrictions as the pandemic progressed during the quarter. The continued pressure caused our average active accounts to be down 10% and a decrease in loan receivables of 6%. Payment rates continue to be elevated relative to normalized levels. Interest and fees on loans were down 11% from last year, consistent with the core decrease we experienced last quarter. Dual and co-branded cards account for 38% of our purchase line in the fourth quarter and declined 4% from the prior year. On a loan receivable basis, they account for 24% of the portfolio and declined 10% from the prior year.

While we're seeing positive trending in our growth metric as we enter the quarter, the acceleration of the pandemic resulted in regional shutdowns and diminished effects of the CARES Act stimulus slowed that early momentum. While our sales are stable, we are encouraged by recent developments, including the recently enacted stimulus, the proposed stimulus, a new administration and national rollout of a vaccine. We believe these factors will have a positive impact. It should provide momentum as we progress through 2021.

I'll provide a more comprehensive view on 2021 shortly. RSAs increased $18 million or 2% from last year. RSAs as a percentage of average receivables were 5.2% for the quarter. This was elevated from the historical average, primarily due to the significant improvement in net charge-offs and the elimination of Walmart, which operated at a lower than company average RSA percentage. The improvement in net charge-offs resulted in a decrease in the provision for credit losses of $354 million or 32% from last year. This was partially offset by a reserve build in the fourth quarter of $119 million.

Other income decreased $22 million, mainly due to higher loyalty costs. Other expense decreased $79 million or 7% from last year due to lower purchase volume and average active accounts, coupled with lower employee costs as we have begun to implement our strategic plan to reduce operating expenses.

Moving to our platform results on Slide 8. Our sales platforms continue to be impacted in varying degrees due to COVID-19, and their trajectories through this period have been different based on factors such as business and partner mix, digital concentration, provider access and availability of hardline goods. In Retail Card, loan receivables were down 8%, with the COVID-19 impact being partially offset by strong growth in digital programs. That resiliency is evident in the growth in purchase line, which was up 1% over last year. Other performance metrics were down due to the impact from COVID-19.

We're excited about the launch of our new value prop with Sam's Club. They are an important and valued partner, and we're excited about the changes in this program for Sam's Club members. The continued strength of Power Sports and Home Specialty in Payment Solutions helped offset some of the impact from COVID-19. Loan receivables declined 2%. Average active account and interest and fees on loans were down 9%, which was driven primarily by lower yield on loan receivables. Purchase line decreased 7% this quarter.

We signed several new programs and renewed several key partnerships this quarter. We continue to drive growth organically through our partnerships and networks and added over 2,800 new merchants during the quarter. We also continue to drive higher card reuse, which now stands at approximately 34% of purchase volume, excluding oil and gas. Our efforts and successes are expanding an already solid base for growth as we exit the pandemic. Although CareCredit was impacted the most by COVID-19 earlier this year, we began to see some improvement as the year progressed as providers continue to increase elective and planned services from the trough in the second quarter. That said, rising infection rates and increasing stay at home restriction did slow some of this progress.

Loan receivables declined 7%, with interest and fees on loans decreasing 4% primarily driven by lower merchant discount revenue as a result of decline in purchase volume, which was down 6%. Average active accounts decreased 10%. As Margaret noted earlier, we're excited about our partner activity within this platform including the acquisition of Allegro Credit, our Aspen Dental renewal and expansion and our new partnership with Community Veterinary Partners. During the quarter, we also continued to grow our CareCredit network and enhanced utility of our card. The expansion of our network and acceptance strategy has helped to drive reuse rate to 59% of purchase line in the fourth quarter. We are proud of these achievements, and particularly excited about the opportunities we see to drive future growth in this platform as the impact of the pandemic subsides.

I'll move to Slide 9 and cover our net interest income and margin trends. Net interest income decreased 9% from last year primarily driven by an 11% decrease in interest and fees on loan receivables due to the impact of COVID-19. Net interest margin was 14.64% compared to last year's margin of 15.01%, largely driven by the impact of COVID-19 on loan receivables, an increase in liquidity and lower benchmark rates. Specifically, the mix of loan receivables as a percent of total earning assets declined approximately 30 basis points from 80.2% to 79.9%, driven by higher liquidity held during the quarter. This accounted for a 5 basis points of the net interest margin decline. The loan receivables yield of 19.93% was down 94 basis points versus last year and was a driver of a 75 basis point reduction in our net interest margin. The liquidity yield declined as a result of lower benchmark rates and accounted for a 30 basis point reduction in our net interest margin. These impacts were partially offset by an 89 basis point decrease in the total interest-bearing liabilities cost to 1.69%, primarily due to lower benchmark rates and a higher proportion of deposit funding. This provides a 73 basis point increase in our net interest margin.

Next, I'll cover our key credit trends on Slide 10. In terms of specific dynamics in the quarter, I'll start with the delinquency trends. The 30-plus delinquency rate was 3.07% compared to 4.44% last year. The 90-plus delinquency rate was 1.40% compared to 2.15% last year. Higher payment trends have helped drive the improvement in delinquency rates.

Focusing on net charge-off trends. The net charge-off rate was 3.16% compared to 5.15% last year. The reduction in the net charge-off rate was primarily driven by improving delinquency trend as customer payment behavior improved throughout 2020. The allowance for credit losses as a percent of loan receivables was 12.54% with the increase to last year being primarily driven by the adoption of CECL in 2020 and the impact from COVID-19.

Moving to Slide 11, I will cover expenses for the quarter. Overall expenses were $1 billion for the quarter, down $79 million or 7% from last year. The decrease was driven by lower purchase volume and average active accounts as well as reduction in employee costs and operational losses. The efficiency ratio for the fourth quarter was 37.1% compared to 34.8% last year. The ratio was negatively impacted by lower revenue that resulted from lower receivables and lower interest and fee yield, which was partially offset by the reduction in employee costs and operational losses.

Moving to Slide 12. Given the reduction in our loan receivables and strength in our deposit platform, we continue to carry a higher level of liquidity. While we believe it's prudent to maintain a higher liquidity level during this uncertain and volatile period, we are actively managing our funding profile to mitigate excess liquidity where appropriate. As a result of this strategy, there is a shift in the mix of our funding during the quarter. Deposits declined $2.3 billion from last year. Our securitized and unsecured funding sources were down $2.6 billion and $1.5 billion, respectively. This resulted in deposits being 80% of our funding compared to 77% last year with securitized and unsecured funding, each comprising 10% of our funding sources at quarter end.

Total liquidity, including undrawn credit facilities, was $23.7 billion, which equated to 24.7% of our total assets, up from 22% last year. Before I provide details on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the joint federal banking agencies in March, which had 2 primary benefits. First, it delays the effects of the CECL transition adjustment for an incremental 2 years; and second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 15.9% CET1 under the CECL transition rules, 180 basis points above last year's level of 14.1%.

The Tier 1 capital ratio was 16.8% under the CECL transition rules compared to 15.0% last year. The total capital ratio increased 180 basis points as well to 18.1%. And the Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 27.0% compared to 21.4% last year, reflecting the increase in reserves as a result of implementing CECL. During the quarter, we paid a common stock dividend of $0.22 per share. For the full year, we returned approximately $1.5 billion to shareholders in the form of share repurchases and common stock dividends. As we finish 2020 and enter 2021, we have continued to assess the capital and liquidity strength of the company and the stability of our business at this point in the pandemic. With this backdrop, the Board has authorized $1.6 billion in share repurchases for 2021, beginning in the first quarter. Repurchases are subject to our capital plan, and regulatory restrictions as well as overall market conditions, including any potential deterioration from the ongoing pandemic.

Next, on Slide 13, we are providing a framework on key drivers for 2021. It goes without saying that the current environment will have periods of uncertainty and volatility until the pandemic is under control and resulting impact to the economic environment is more fully known. While our visibility is limited, we're providing this framework about how we are thinking about the year might unfold based on our best assessment as of today. These views assume that in the first half of the year, there is continuing pressure from the pandemic and a slow economic recovery. In the second half, we assume the pandemic is largely under control and economic recovery accelerates.

First quarter purchase volume is expected to be consistent with the trends that developed at the end of 2020. Second quarter comparisons will obviously reflect the economic trough experienced in second quarter '20. The second half of the year, we anticipate improving growth trends as the pandemic impact moderate and macroeconomic growth accelerates.

Regarding loan receivable growth. In the first half, we expect continued higher payment rates from the stimulus actions to impact loan growth. In the second half of the year, we believe payment rates will slow as stimulus abates, and we returned to more normalized payment behavior patterns, combined with the expected increase in purchase volume from an improving macroeconomic environment. These drivers will contribute to accelerating asset growth.

For net interest margin, overall, we expect continued improvement as we enter 2021. Regarding the improvement in the first half we anticipate that higher payment rates will contribute to continued excess liquidity impacting asset mix. In the second half, excess liquidity is reduced through asset growth and slowing payment rates, which drive normalized interest and fee yields leading to increasing NIM. With respect to our view on credit for the year, delinquencies are expected to increase with peak delinquencies occurring in third quarter 2021 and result in sequential quarter increases in net charge-offs. We would expect reserves to be largely driven by asset growth and the impacts from any changes in the credit macroeconomic scenario. We anticipate a reserve release during 2021 as the credit macroeconomic environment develops.

RSAs will remain elevated in the first half primarily reflecting the strong program performance, including revenue and net charge-offs. In the second half, we expect lower RSAs, generally reflecting the higher net charge-offs, partially offset by higher revenue. As we outlined previously, we've implemented cost reductions across the organization. We believe this will result in expense reductions of approximately $210 million during the year. Partially offsetting these cost reductions will be expense increases relating to growth in addition to the anticipated increase in delinquent accounts. We will continue to closely monitor how the pandemic develops and its impact to the macroeconomic environment and adjust as the landscape unfolds.

As we enter 2021, we remain optimistic in the strength and the strategic position of our business to meet the challenges and exit the pandemic period in a stronger position than when we entered. We will continue to make investments in our people, products, technology and platforms to drive long-term value and continue to ensure safety of our employees, while meeting the needs of our partners, merchants, providers and cardholders.

I will now turn the call over to the operator to begin the Q&A portion of our call.

[Operator]

[Operator Instructions]. We have our first question from Ryan Nash with Goldman Sachs.

[Ryan Nash, Goldman Sachs]

Margaret, first, just wanted to say that it's been a pleasure working with you over the last 7 years. I've really enjoyed the opportunity to learn from you and best of luck in your next role as Executive Chair.

[Margaret Keane, Chief Executive Officer]

Thank you so much, Ryan.

[Ryan Nash, Goldman Sachs]

So maybe I'll kick it off a question for Brian Wenzel. So Brian, the RSA to loans was over 5% in the quarter, just given the better-than-expected credit. And I was wondering if maybe you could just give us a framework how to think about the RSA for 2021? If your base case that you outlined on the slide plays out, can we expect it to kind of remain in this 5% RSA to loans range before eventually dipping later in the year?

[Brian Wenzel]

Thanks, Ryan. Obviously, the elevation that we've seen as we enter into 2021 was really driven by credit, which was 200 basis points better on net charge-offs. Slightly offset by -- or offset by some of the interest expense and NIM. But clearly, elevated. So I think as you slide into 2021, what you're going to see is as we continue to expect NIM to rise, there will be a benefit that will flow back through the RSA to the retailers pushing it upward. But then as credit normalizes, that will deflate it. So our expectation is it remains a little bit elevated. We would not expect that type of elevation at the end of the year as we exit out of 2021. And I think as you get into 2022 and beyond, it should be back into the normal type range that we've operated in pre-pandemic.

[Ryan Nash, Goldman Sachs]

Got it. And Brian Doubles, thank you for all the color on the equal payment strategy. Can you maybe just expand on the product offering and how you think it can evolve over time? So if I look, your products generally started around 3 months of financing. So I was wondering if there was potential, we could see some of these short-term products evolve into your own buy now pay later product? And second, just given some of the new players in the space are charging merchants pretty healthy fees for these products, can you maybe just talk about the pricing on merchant discount rates in some of your equal pay products? And can you maybe use pricing as a lever to drive volumes towards your offering and maybe away from some of these newer entrants?

[Brian Doubles, President]

Yes, Ryan, that's a great question. I think you really got to take a step back and say, look, our strategy is really to provide a full suite of products that fit both what our partners want, but also what consumers are looking for. And obviously, buy now pay later is a trend that's not going away. Installment loans, a trend that's not going away. If you take a step back and you think about our business, we have such a broad set of partners that you really just can't have a one size fits all strategy.

So as you know, Ryan, we sit down with each one of our partners, we sit down and say, okay, what are you trying to achieve? How can we help you drive sales, how can we help you communicate life cycle market to your customers? And that means that they will want to offer a variety of products. In some cases, a revolving product is going to make more sense. In some cases, an installment product is a better fit. If you think about bigger ticket products, that steers more towards longer-term installment, that can be on a revolving product or closed end. And then smaller ticket, the trend that we've seen recently is, that tends to steer more shorter-term and more shorter-term installment. And so again, it comes back to really what the partner wants at the end of the day.

Now you make a really good point. Obviously, merchant discount pricing plays into this. The shorter you go and if you're not charging interest on the account, then obviously, you charge a higher merchant discount. And so again, it comes down to what the partner wants and what the consumer wants at the end of the day. Look, I feel great about the product set that we have. The one thing that I would not underestimate, though, is the product is really just one piece of the equation. What we've been working on and what's really important is, how do you embed the product in the shopping journey. And so that -- the way that we integrate is more important than ever. So it really comes down to features and capabilities, even more than the products. At the end of the day, these products are not that complex. It's really about how do we integrate, how do we embed the financing offer throughout the shopping journey.

[Operator]

We have our next question from Sanjay Sakhrani with KBW.

[Sanjay Sakhrani, KBW]

My congratulations as well to all. I guess it's a little weird because the credit quality being so strong is affecting you guys a little bit more because you're sharing some of the upside there with the retailers. I'm just curious, as we have the stimulus benefit, like how much of the stimulus benefit is helping credit quality? And do you expect it to wear off at some point? Did you start to see it wear off a little bit in the fourth quarter? I'm just trying to figure out sort of how stimulus -- how long you think credit sort of remains this favorable at this point in time, understanding your forecast that things might revert to the mean?

[Brian Wenzel]

Yes. Thanks, Sanjay. So stimulus clearly has benefited. We've seen that throughout 2020, most certainly, we saw an influx of payments, right, when the most recent stimulus package hit. So payment rates actually elevated back higher in the early part of January. So clearly, stimulus is in effect, and you do see it wear off. Now what's interesting, more interesting about this latest stimulus is it's not surgical as much. It's going to a broad-based population. So the effectiveness as we continue to move on even with further stimulus, our portfolio shifted. We used to be 27% subprime, now we're 23% subprime. So the effects of that will not hold.

So we do assume that when the stimulus burns off here, most certainly from the one in December, but if there's another stimulus that does get enacted in the first quarter, that will burn off, and you'll see payment rates elevate back, and then you'll see delinquencies come back into the portfolio. Well, certainly, we're expecting, given the high level of unemployment that delinquencies will build pretty quickly here as we move out. But again, we haven't seen that to date in the credit metrics that you have seen. So there is a chance, though, that with the future stimulus and if you get the pandemic under control, with the vaccine that you may flatten the ultimate loss curve here and have a bridge, which is what we would hope for.

[Sanjay Sakhrani, KBW]

Got it. And maybe 1 for Brian Doubles, just on -- and Margaret, the Verizon and Venmo Card. I'm just curious, sort of -- I know they're an important part of the growth story at least over the intermediate period as we're waiting for offline to recover. I'm just curious if you're seeing progress and how they're doing relative to your expectations?

[Margaret Keane, Chief Executive Officer]

Yes. I'd say both are doing really well. Verizon, we launched back in the summer, and again, it was our first launch during the pandemic. I think as we started out more online and as the stores have opened up, we're definitely seeing real positive momentum there. People are liking the value prop. So we feel really positive about our Verizon relationship and where that could be. On Venmo, we did the soft launch in the fall, that's gone also very well, and consumers are really liking how the product operates within the Venmo app. I think there's a lot of technology that both parties built out to make that really an integrated experience for consumers, and we are getting a lot of positive momentum there. As we roll out to the broader population soon, we expect that to continue to be a big part of our growth story as we go forward with the company.

So 2 really exciting programs, 2 programs where technology and our investments have really paid off, and we look forward to continue to advance our investments in technology as we continue to integrate even further.

[Brian Doubles, President]

Yes. The only thing I would add to that is I wouldn't gloss over Walgreens. We're really excited about that relationship, and I put that in the same category as Venmo and Verizon in terms of the opportunity for us. Sanjay, 90 million Walgreen loyalty customers, we're really excited about what that relationship can do for us as well.

[Operator]

And we have our next question from Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch, Credit Suisse]

Great. And congratulations, both Mar Margaret and Brian. And maybe just a follow-up on that exact question. And clearly, each of these is kind of independently large customer bases and large opportunities. But maybe is there a way to kind of discuss how the combination of the type of customer that has the loyalty to that particular brand and the value proposition kind of translate into a credit offering. And in some way, kind of thinking about the 3 of them and perhaps even ranking them in terms of how you see them kind of contributing to growth at Synchrony?

[Margaret Keane, Chief Executive Officer]

Yes. I don't know if we could rank them yet because it's still early. But I'd say that our experience has always been that customers can compartmentalize them. So if you think about Venmo, I think that's going to become more of an everyday use card, particularly with folks that use that app all day long. And we think as it's integrated into that payment mechanism, and the ability to really split payments and actually experience that back and forth between how people spend. But I think the big opportunity on Venmo really is the fact that you can use that card now in broader merchants.

So I think as the QR code becomes more of a go-to type of technology, it's still not where it needs to be but we think that's really the other big opportunity with Venmo. So you have the in-app experience where people are working together to purchase things. But then in-store or the QR code opportunity presents a whole different -- I think, different set of experiences and maybe broaden stack customer base for us. So we're excited about that.

On the other 2, it really is the value prop that I think makes another big difference where for Walgreens, what we do know, and we know this through CareCredit that people do compartmentalize their healthcare spend. And as consumers are being asked to really bear a bigger burden on healthcare spends -- spend, we view this card to be a great way for us to enter into the broader space of healthcare. You know that's been part of our strategy. I should also say that it's building on the relationship we already had with Walgreens because we already had the card -- the CareCredit card accepted in Walgreens. Now this is really tying our card with their value prop, connecting the 2 together and really allowing customers who have healthcare needs and wellness needs to really leverage that and then get the rewards. And then again, we're going to work towards making all this digital. So it's a really seamless, frictionless experience for the consumer.

And then Verizon is really -- I think the value prop on Verizon in terms of how you use Verizon, I think all -- I joke all the time for those who -- I'm old, so I have kids who are old, they're still on my plan. You never really get the kids off the plan, by the way, leveraging that value prop and using that towards your bill, I think, is another really positive momentum that we're seeing. So we think all 3 of these programs have real growth potential. I think it really demonstrates for us our ability to really be agile in a very difficult environment to roll out during the pandemic and to really meet the needs of what I would say are really strong value props, leveraging technology.

[Moshe Orenbuch, Credit Suisse]

Got it. And I certainly know what you mean about the phone plan. As a follow-up question there. Given -- Brian Wenzel, given what you talked about in terms of the capital positioning, how strong it is. And I mean, simply, I mean, you guys earned over $1 billion this past year and the balance sheet shrunk. And so how do you relate the $1.6 billion of buyback authorization to that? I mean, it feels like that could get stronger over time and maybe just kind of talk about how that was developed?

[Brian Wenzel]

Yes. Thanks, Moshe. So it's important to note that the announcement that we made and the Board authorized is slightly different than we’ve historically done. This is for a calendar year. Obviously, the Fed has put some restrictions in for the first quarter, but we're going to go through our process. We've been going through a quarterly process from a governance perspective, looking at loss stresses, looking at the way our balance sheet will perform. And I think if you go back a quarter, we weren't sure we'd be in this position to start the year. We were thinking more back half of the year. But I think as we talked with the Board, we recognized the strength in the capital and liquidity of the company, we recognized the stability of the company as we progressed through the back half of 2020.

As we look into 2021, we -- again, it's uncertain. There's going to be volatility, but we're optimistic that the pandemic comes under control in the first half and that the macroeconomic piece picks up. So we thought it was prudent to start. We'll go through a process and submit our formal capital plan to the Fed at the end of March, beginning of April. And then we'll circle back with what that amount is. We think that's a prudent amount, right, given this is a transitional year, right, relative to the visibility and uncertainty. So obviously, we haven't changed our long-term view with regards to capital and where we want to get to. It's just really the pace. And so we're comfortable that this is a good place to start, and we can always revisit as we move through the year.

[Operator]

We have our next question from Mihir Bhatia with Bank of America.

[Mihir Bhatia, Bank of America]

And also, let me add my congratulations to both Margaret and Brian. Maybe we can -- I wanted to start with -- maybe just going back to your comments on Walgreens, I guess my first question just really to clarify, is it going to sit in CareCredit or is it going to be in your Retail Card sector? Because it looked like from your release, it was in CareCredit. And then my follow-up on that would just be, are there -- is there any implication of that? Because I think historically, your CareCredit has had no RSA or a lot lower RSA. And just in terms of the program, is there something we should be thinking about specific to Walgreens, which makes it different than a typical co-brand or Retail Card program?

[Margaret Keane, Chief Executive Officer]

Well, I'll start and then Brian can talk about the RSA. But look, I think one of the things that we have said for a while now is that we believe that we have a unique insight into the whole healthcare wellness space given our CareCredit platform. We've expanded that platform all through last year as we've expanded into hospital network through just our acquisition of Allegra Credit. We believe that consumers -- and by the way, it does sit in CareCredit. So I should clarify that. Does sit in CareCredit. We believe that the everyday spend around wellness is an area where consumers are looking for rewards. We believe Walgreens is a great partner because we were already in there accepting the Walgreen -- the CareCredit card. So we believe this space is a real ripe opportunity because of our unique knowledge and experience in this space for over 30 years, and we really see Walgreens as a way for us to really continue to expand and differentiate ourselves in the healthcare business.

I don't know, Brian, if you'd mentioned the RSA.

[Brian Doubles, President]

Yes. So the one thing I'd add on to Margaret's comments is when you think about the capabilities, we already have a CareCredit dual card that operates there. And we'll certainly -- while we're a big business, the ability for us to really take the tools, technology, talent that exists in that, manages the co-band relationships inside the Retail Card will most certainly partner with those folks combining the healthcare and knowledge of that. We have in other platforms, so in the payment solutions platform, we do have some limited RSA. So you would see some RSA here, but again, that's a $10 billion platform for us. So I wouldn't consider it to be material most certainly in the early part here. So -- but you will see some develop over time there.

[Mihir Bhatia, Bank of America]

Understood. And then if I -- just my other question was just going to be on capital and going back to some of your comments on deploying capital and getting your capital ratios closer to your peers, I feel like you had excess liquidity the entire time you've been public. So I guess, is there an opportunity or interest in deploying some of that capital via portfolio acquisitions or through other inorganic growth, whether it's M&A or something else that we should be thinking about? Or do you just feel like you have enough on your hands between Walgreens, Venmo, Verizon, the economy reopening, that near term, that's probably more what we should be focused on?

[Brian Wenzel]

Yes. Great question. When we think about the capital priorities of the company, the first priority for us is the organic growth that we have. So when you think about some of the longer standing existing programs, whether it's an Amazon or PayPal or TJX, Sam's, Lowe's, there's lots of opportunity to continue our penetration march there. These newer programs, Verizon, Venmo, Walgreens will most certainly -- we'd like to deploy capital into that. So that's our first priority to grow that piece. But we will have capital beyond that ability to grow the book. If you think about the capital generation of the business, you think about the resiliency and the return, you think about the resiliency of the RSA, we will have excess capital, which then our next priority is to maintain our dividend and provide that back to shareholders. And then beyond that, we believe there will be excess that will be deployed first in share repurchase to the extent that we find an acquisition that makes sense, whether it be a portfolio or businesses, we'll look to do that.

[Margaret Keane, Chief Executive Officer]

I think that was demonstrated this quarter by the acquisition of Allegro. So if the right opportunity comes along, that fits with our long-term strategy and is at the right return for us, we certainly are looking at those opportunities should they come forward.

[Brian Wenzel]

And that's the key point. Still in this part of the cycle, I'm not sure valuations have checked up enough where we would do something large. But to the extent that they do and an opportunity exists, we would gladly deploy that capital for the long-term value creation.

[Operator]

We have our next question from Don Fandetti with Wells Fargo.

[Don Fandetti, Wells Fargo]

Brian, we're getting more questions around regulation, and I just wanted to sort of get your perspective on how you're thinking about that risk? And is there any parts of your business that could become more of a focus from mostly the CFPB et cetera?

[Margaret Keane, Chief Executive Officer]

Yes, Don, I'll take that. It's -- we are -- I'm assuming this is in relation to the new administration. I would say we've been around for a really long time. We've had all administrations. We feel confident that even in the new administration, we'd be able to manage through any changes that they may make. I think we feel like we're well positioned. And look, I think the regulation and the focus is really always on this whole idea of being fair and transparent to consumers and I think that's our job. So we have the infrastructure in place, we have the people in place. We're trying to ensure we're doing all the right things from a consumer perspective and also working with our partners in this as well. So we're not overly concerned. I mean, look, there'll probably be more things coming out, but we'll adjust as we have to.

[Operator]

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

[Betsy Graseck, Morgan Stanley]

Margaret, it's been such a pleasure working with you. And I know you're still going to have like fantastic influence over at Synchrony in your new role. But thanks very much for all the time that you've given us over the years. And Brian, looking forward to even working with you closer.

[Brian Doubles, President]

Thanks, Betsy.

[Margaret Keane, Chief Executive Officer]

Thank you very much.

[Betsy Graseck, Morgan Stanley]

Okay. A couple of questions on SetPay. Just wanted to see if you could give us some color on the take-up rate at your partners and things like what percentage have been rolled out to? How much do you think you can push that in 2021, which is a period where I think you're going to see some of the pure-play guys really push hard to get into merchants? So want to get an understanding of that from you? And whether or not the partners that you have today with another being PL platform can add SetPay on top of that? Or do you have to wait for their programs to come up for RFP in a few years? Just some color there would be helpful.

[Brian Doubles, President]

Yes, sure, Betsy. It really does come down to the individual partner and what they're trying to achieve. And I think obviously, this is a hot topic. That's why we put a slide in the deck today just to kind of lay out in more detail how much of this business we actually do today. I don't think it's well-known that we have $15 billion of balances that are on equal pay products, both short and long-term. And I think it really does come down to partner choice. So as I said, we sit down with each one of our partners, in some cases, they love the idea of an equal pay product because that's what the consumer wants. That's what their customer wants, but they want to put it on a revolving product. And part of the reason for that is it gives them an ongoing relationship with the customer, right? It allows them to drive the repeat usage. It allows them to do the life cycle marketing. All of those things that are really important to our partners and that, frankly, they've been trying to drive for the last 5 or 6 years.

We always talk to you about how much reuse we get on the card. And that's a big priority for our partners is creating that lasting relationship with their customer. And then we also have some customers that, depending on their customer base and the types of products they sell, that they're actually interested in more of a short-term closed end installment product. And so we're able to provide that as well through SetPay, and we can do that very short-term, we can do it longer term. But it really is customized for the individual partner in terms of what they're trying to achieve.

The one thing I can tell you is we are seeing slightly higher growth rates on those installment products than we're seeing on the other products in the portfolio, which I think is good news. I mean, we absolutely have to stay ahead of that curve. It's rapidly evolving. But the product is just one piece of the equation. I touched on this earlier, what our partners really want to make sure we can do. And this is very different depending on the types of partners is how do we integrate into their digital point of sale. And if I look across the investments that we're making in the company, that's one of the biggest ones. So it's not enough just to have the product, actually having the product is the easier part in a lot of cases. But how do you integrate seamlessly inside of all of our partners' digital assets. So how do you do that online? How do you do it in their mobile app? And you can imagine, given the breadth of our partner base, we have to have solutions that customize for each of those individual partners. And so it really is more about the experience than the actual product at the end of the day. Did I answer your question?

[Betsy Graseck, Morgan Stanley]

Yes, I guess the -- my underlying question here is do you anticipate -- I understand that you have a significant amount of balances on this equal pay product today. SetPay is a slightly different tone to that, a slightly different offering. And I'm wondering if this is, in your opinion, 2021 is a year where that take up by your partners is going to be explosive or is this normal course for you? And there -- we really shouldn't expect to see that much difference in how your partners interact with you on the equal pay product?

[Brian Doubles, President]

I think you're definitely going to see higher growth rates in SetPay than you see kind of broadly across other products. With that said, I wouldn't consider it explosive growth because it really comes down to what the partner is trying to achieve at the end of the day. And we do have some partners that are very focused on a strategy where they like the equal pay product, but they'd like to see us sit on a revolving account where they can continue to drive the repeat usage and continue to have that ongoing relationship.

[Margaret Keane, Chief Executive Officer]

And I think the other piece is customer choice, right? What does the customer really want?

[Brian Doubles, President]

Yes. And for some…

[Margaret Keane, Chief Executive Officer]

Our job is to really offer the products and position them in the right way to the consumer so that they can have consumer choice. And I think one of the things we're very focused on is making sure that's integrated in our digital assets. So it's a choice for a customer.

[Brian Doubles, President]

Yes. At the end of the day, it comes down to what our partners want and what the consumers want. And again, given the breadth of our partners, we have to be able to provide a very full product suite revolving short-term, long-term installment, and we'll be able to do that. But it does come down to the partner and what the customer wants.

[Operator]

We have our next question from Bill Carcache with Wolfe Research.

[Bill Carcache, Wolfe Research]

I also add my congrats to you both, Margaret and Brian. You have a lot of great new programs that you're investing in as you look to the resumption of growth in new and active accounts coming out of this. But can you give a bit more color on how you're gauging what the right level of investment is, your guidance for operating expenses calls for higher investments, but maybe you can give a little bit more context, maybe in terms of an efficiency ratio?

[Brian Wenzel]

Yes. Thanks, Bill. So we've continued -- even during a pandemic, different than a lot of our peers, we did not slow down any of the investments, whether it was in technology or in resources we've allocated towards these growth initiatives, we reprioritized certain things inside of that, that were greater short-term opportunities. So we've maintained that so for us, we're going to continue to invest. I mean, 2020 was a big year for us when you think about the investment to stand up a Venmo and Verizon. And again, we're looking forward to a full Venmo launch here in 2021. So we've invested quite a bit.

Walgreens comes right behind this. We continue to drive core productivity in which we're continuing the investment. And again, the way we're positioning the company for the longer term, Bill, is to look at -- if I'm thinking out 2025, what is an above-average ROA, and we're going to drive that efficiency ratio back down into a range where it has been more historically but really delivers that ROA given the revenue mix and loss content that we see in that portfolio mix.

That being said, we are going to find ways in order to either increase the margin of the portfolios or to drive incremental costs out to maintain and perhaps expand that investment technology. That is something that we want to do and we feel we need to do for the medium and long-term.

[Bill Carcache, Wolfe Research]

That's super helpful. Separately, on capital, can you give a little bit of more color on how you guys are thinking about the CECL and CARES Act phase-ins on your ability to return excess capital? And I guess, just is there a possibility that we could see you guys increase that $1.6 billion authorization under a favorable macro scenario where you guys end up releasing a sizable amount of reserves as we progress through 2021?

[Brian Wenzel]

Yes. So let me unpack that. The first piece in all our modeling as we move through '20 and really '21, we've always modeled in the transition adjustment relative to CECL and, most certainly, that would come out of -- we view the capital generation in those years as we move out. This is roughly around, I think, 60 basis points assuming that the rules stay intact. We are continuing, to be honest with you, engage with dialogues with our stakeholders about a form of permanent capital relief because we obviously believe that when you look at our Tier 1 plus reserves at 27% that is very high, where we are and that we believe that there should be credit, whether it sits in Tier 2 or in Tier 1 relative to CECL. So that's always been a factor as part of our plans and shouldn't really impact it.

With regard to your second part of your question, that the improvement in the macroeconomic scenario, most certainly, we're not tied to the $1.6 billion. That's where we view it today. We're going to go through our capital planning process here in the first quarter and get our capital plan approved by the Board in March, submit it in April. And then hopefully, we'll come back to you in the second quarter with a fuller perspective. But there is a scenario where clearly we can return potentially more capital. I think right now, $1.6 billion is we're sitting January 29 and transition in a year that is a little bit uncertain is not a bad place to start the year at. So we're going to continue to monitor the same way of quarter out. We thought we weren't going to do anything until the back half of this year. So we'll continue to evaluate it, Bill.

[Kathryn Miller, SVP, Director IR]

Vanessa, we have 5 more people in the queue, but time for only 1 more question.

[Operator]

We have our last question from John Hecht with Jefferies.

[John Hecht, Jefferies]

Congratulations, Margaret and Brian, and welcome, Kathryn. A question -- another question on the RSA. I'm just wondering, I mean, because we can look back at historical average levels and understand it may be elevated because of the charge-off cycle. Number 1 is, is there anything different, like where that maybe our average RSA should sit over time? I don't look where it was, it sounds like there might be some modest change because of the Walmart transition. But is there anything else that would change the long-term kind of average RSA levels?

[Brian Wenzel]

Yes. Thanks, John. So the simple answer is no. I mean, Walmart, clearly, if you strip that out, we'll push the RSA higher because it operated at a lower RSA level than the company average. Absent that, there's nothing fundamental. I think what's challenging people, and I can appreciate it from an outside-in perspective is CECL has dramatically impacted the profitability of the company. And it's very difficult. We've lagged CECL, but when you don't see delinquency formation at a retail partner, it's difficult to go to them and say, okay, even though I haven't seen delinquencies, they're going to come at some point, here's $100 million, $200 million. So that is unfortunately pushing the RSA higher here. And then when you look at credit really outperforming the loss in NIM, we have a highest RSA. I think when you look at it over time, if you look at '20 and '21 combined together, it's going to get back down the average. And most certainly, as we exit the pandemic, there's nothing structurally that they should operate at different level ex the Walmart impact.

[John Hecht, Jefferies]

And my last question is -- and you've talked about some of the new products, and I fully appreciate the customer-centric focus of the new products. At what point do though the kind of mix of the new products start to impact, call it, the economics of your business? I mean, for instance, the closed end product might have a bigger merchant discount that would flow through a different -- I imagine a different line item in your P&L. So at what point should we envision changes in that mix? And what might that -- like what form might that take?

[Brian Doubles, President]

Yes. Thanks, John. I'll just start on that. I mean, look, as you know, we are pretty disciplined around pricing. And I think we try and maintain pricing that gives us an overall and attractive return either for the program or the product that we're underwriting. And so that will remain consistent. I think there are certainly trade-offs. And I think how you earn on these products is a little bit different. Obviously, shorter-dated promotions, you're maybe getting more merchant discount, you're getting less off of the APR or the consumer. But I wouldn't see having a material impact on our overall profitability return, longer term, you might just see the components change, which, as you know, both of those run through net interest income. So I don't think you wouldn't see it have a significant impact there. I don't know, Brian, if you'd add anything.

[Brian Wenzel]

Yes. The only -- I mean, John, we have $81 billion in assets. So I think to try to move metrics materially, this would have to be incredibly large. I mean, obviously, you see growth rates in much smaller competitors. But at $81 billion, it shouldn't have a material effect relative to most certainly short and medium-term with the way our P&L is constructive.

[Brian Doubles, President]

I think the best way to think about it is these are going to be really attractive avenues for growth for us longer term. This whole product strategy, we do a lot more of this business than I think people realize. I think we -- obviously, we're well-known for revolving credit, but we do a lot of installment. It's something we're very comfortable underwriting. We're very comfortable with pricing. And like I said, we're seeing a little bit better growth there than the other products that we have. So I think that's exciting at the end of the day. Again, it comes down to partner and customer choice, and we're in a position to be able to provide whatever that solution is for our partners that they want.

[Operator]

And thank you. This concludes our question-and-answer session. Thank you, ladies and gentlemen. This concludes our conference call. We thank you for your participation. You may now disconnect.