Synchrony Financial

NYSE:SYF

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the Synchrony Financial Fourth Quarter 2021 Earnings Conference Call. 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. Please note that this conference is being recorded. I will now turn the call over to Kathryn Miller. And Kathryn, you may begin.

[Kathryn Miller]

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 or 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 Brian Doubles, Synchrony's President and Chief Executive Officer and Brian Wenzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles.

[Brian Doubles, President and Chief Executive Officer]

Thanks Kathryn and good morning, everyone. We are really proud of our Synchrony team and the strong level of execution that enabled us to close the year out with such strong results, including several company records. Our core strategy to drive sustainable growth at attractive risk adjusted returns is founded on three primary objectives. First grow our existing partner programs and win new partners. Second diversify our programs, products and markets. And third, deliver best-in-class customer experiences.

During 2021, we added 36 partners and renewed another 38. We're excited about the prospects in both our existing portfolio and new partner pipeline to power, innovative financing experiences and serve the ever changing needs of our customers. As you know, we are constantly seeking opportunities to extend our leadership position and much of that will continue to be driven by the ongoing diversification and expansion of our distribution channels. To that end, we acquired Allegro Credit at the beginning of the year, a leading provider of point of sale consumer audiology products. This acquisition allowed us to deepen our foothold in the health and wellness space, reaching more providers and customers and empowering them with an expanded suite of financing products and services.

We also announced our strategic partnership with Clover, which will enable us to deliver our innovative products and experiences to more merchants and customers. As a reminder, our integration with Clover will enable small businesses to access Synchrony financing products and services, and accept private label credit card payments via the Clover point-of-sale and business management platform.

In addition, Synchrony continued to expand our two main consumer-facing marketplaces, mysynchrony.com and carecredit.com during the year. These marketplaces are broad and deep networks that provide consumers with a one-stop shop to find and shop with merchant partners and providers as well as submit applications and service their accounts. And through the broad reach, easy accessibility and strong utility of these networks, Synchrony is driving strong repeat sales. Combined annual visits across these networks surpassed $300 million by year-end, and we drove about 1 million referrals and received almost 19 million provider views through carecredit.com.

Repeat sales across our networks were 52% in the fourth quarter of 2021. An additional metric that we are focused on driving is sales per active account, which are about twice as high in our CareCredit, and home and auto networks compared to the average buy now pay later products that we see in the marketplace. This is a testament to the deep customer relationships that our network products foster. Synchrony's ability to leverage our networks and drive new customers and repeat sales to our partners at higher spend levels has been and will continue to be a meaningful competitive differentiator, an important growth driver for our business.

Another element of our continued diversification and expansion over the last year includes our health system initiative, through which we successfully signed seven new systems, bringing our total to 20. By integrating with health systems through technology platforms like Epic, Synchrony is able to meaningfully extend our customer and provider reach while also enhancing the utility of our CareCredit card. For example, the Epic MyChart user base spans about 150 million patients. And by making our patient financing app available within the Epic App Orchard, we're able to provide those patients with expanded access to financing options wherever the provider or health system is part of the CareCredit network across a broad range of needs from elective care to routine medical expenses and non-elective care needs.

In an environment where insurance coverage is increasingly limited, but health and wellness needs arising, we are empowering more patients and providers with greater choice, flexibility and utility as we expand our networks and integrate with more health systems. So overall, 2021 was the year in which we accelerated our business strategy. Through strategic partnerships like Clover, we can expand our reach by tens of thousands of new merchants. Through the expansion of our digital networks, we can reach hundreds of millions of consumers. And collectively, the health systems with which we have launched CareCredit and some capacity have over 40 million patient visits.

No matter how you look at it, Synchrony is at the center of a large cross-section of commerce in the U.S., regardless of whether the purchase takes place in person or digitally. We connect almost 70 million average active accounts through seamless omnichannel experiences to nearly 450,000 locations. And we power their everyday purchases, from furniture and home improvement to health care products and services, car care needs and clothing, jewelry and powersports. With customized financing options that optimize value and outcomes for both our customers and partners. The more consumers, merchants, providers and partners that Synchrony reaches the more diverse the demand for products, services and value propositions becomes, so we continue to diversify both our products and programs in 2021 with the launch of our industry-first program with Walgreens and the introduction of our SetPay Pay-in-4 product.

In addition, we continue to advance the growth of our Synchrony Mastercard, which represents an important opportunity within our product strategy to drive highly scalable growth and above average returns to our business over the long term. During the second half of the year, we broadened our Synchrony Mastercard acquisition efforts to include new digital channels, expanding our reach and accelerating our speed to market. With the real-time activity and data capture, along with our sophisticated dApply capabilities, which include advanced pre-fill and credit decisioning insights, we streamlined the application process and optimized the customer experience.

As a result, active accounts grew 11% in the second half compared to the first half of the year. And thanks to the compelling value propositions we offer, our sales per active account grew 18% on the same basis. Of course, as we continue to expand our wallet share, Synchrony is able to reach and serve more customers and provide them with more choices and greater value. And as we strive to provide easy and comprehensive access to a broader set of financial products and services, we are excited to launch PayPal Savings in the first quarter. Through this expanded partnership with PayPal, we will broaden the distribution of our savings product to reach a unique set of customers with key features and functionality, including instantaneous fund movement between PayPal balances, no withdrawal limits and a savings goal feature to empower customers to set and reach their financial goals.

Existing PayPal customers will be able to quickly and easily open their PayPal Savings account inside the new PayPal Super App. We're proud to partner in this transformative initiative and remain intensely focused on continuing to elevate the customer experiences we power across all our partnerships. It should come as no surprise that Synchrony's consistent investment in digital innovation has enabled each of our product and partner successes along our evolution. We are continuously enhancing the ways in which we deliver simple and seamless customer experiences, because the outcomes are far stronger for all of our stakeholders.

For example, during the past year, we upgraded close to 11 million accounts across 14 partners to our new alerts platform, which delivers customizable e-mail, text messages and push alerts with real-time and rich transaction data and notifications. We also rolled out some upgrades to SyPI our platform, including several new features like digital wallet provisioning and enhancements to push notifications and e-bill. Collectively, the availability of these features contributed to a 40% increase in unique visitors in 2021 and 56% growth in the number of payments we received in SyPI.

With the rollout of enhanced native acquisition capabilities via SyPI and our client mobile apps, we've grown new accounts for that channel by 67% year-over-year. And more specifically, by enabling wallet provisioning for cardholders to add their Synchrony account to their digital wallet, fourth quarter wallet providence grew 32% year-over-year and wallet sales volume increased 63%. So when you put it all together, the unique combination of our deep lending expertise, the industry's most complete product set and our advanced digital capabilities has enabled Synchrony to evolve into a leading financial ecosystem that delivers compelling outcomes for our partners and our customers.

There is no other industry provider that offers the full breadth and depth of digitally powered financing products, services and value propositions that Synchrony does today and this ability to connect our partners and customers through best-in-class omnichannel experiences is deeply resonating and driving record results for Synchrony and our stakeholders. In this past year, we achieved almost 25 million new account originations and record purchase volume of $166 billion and a 19% increase in spend per active account.

These milestones, combined with strong credit performance and our continued discipline around risk-adjusted returns and expense management, enabled Synchrony to deliver record financial results for the full year, including $4.2 billion of net earnings or $7.34 per diluted share, a 4.5% return on assets and a 39% return on tangible common equity. As a result, we were able to return $3.4 billion of capital to shareholders, including $2.9 billion of share repurchases and $500 million of regular dividends.

And with that, I'll turn the call over to Brian to discuss the fourth quarter performance, which reflected broad-based momentum across our business.

[Brian Wenzel]

Thanks, Brian, and good morning, everyone. Synchrony delivered another quarter of strong financial results, reflecting our differentiated business model and the strong partner and customer value propositions, which have been made possible as we execute on our strategic priorities.

Our net earnings were $813 million or $1.48 per diluted share. We generated a return on average assets of 3.4% and a return on tangible common equity of 28.7%. These strong net earnings and returns demonstrate the power and efficiency of our digitally enabled model, combined with the compelling value of our financial products and services we offer through our ecosystem. Not only were we able to support the strong seasonal customer-end with our diverse range of products, but we were able to do so while maintaining cost discipline and strong risk-adjusted returns. We achieved record purchase volume of $47 million in the fourth quarter, an increase of 18% compared to both last year and 2019, excluding Walmart.

Purchase volume was up double digits across four of our five platforms demonstrating clear broad-based strength through the range of diverse industry verticals we serve. Purchase volume per account also increased during the quarter, up 13% compared to last year and 22% compared to the fourth quarter of 2019, excluding Walmart. Dual and co-branded cards accounted for 42% of the purchase volume in the fourth quarter and increased 30% from the prior year.

On a loan receivable basis, including the loans receivable held for sale, dual and co-branded cards accounted for 25% of the portfolio and increased 10% from the prior year. Average active accounts increased 5% compared to last year and new accounts increased 20%, totaling more than 7 million new accounts in the fourth quarter and almost 25 million new accounts originated for the year. As you may recall, we reached an agreement for the sale of our GAAP portfolio, which represented $3.9 billion of loan receivables in our held-for-sale portfolio at year-end. Continuing our commitment to achieving appropriate risk-adjusted returns, we are discontinuing our partnership with BPAY, which resulted in the reclassification of approximately $500 million of loan receivables to held-for-sale in December.

Excluding the impact of our held-for-sale portfolios, loan receivables would have increased by 4% versus the prior year as the period strong purchase volume growth was largely offset by a persistently elevated payment rate. RSCs were $1.3 billion in the fourth quarter and 6.15% of average receivables. The $220 million year-over-year increase primarily reflected the impact of lower provision for credit losses and continued strong program performance, including receivables and purchase volume growth as well as the improvement in net interest income.

Focusing on our credit performance, provision for credit losses was $561 million. Included in this quarter's provision was a reserve build of $72 million, net of the reserve reductions from our held-for-sale portfolios of $98 million. Excluding the impact of our held-for-sale portfolios, the $170 million reserve build reflected the impact of loan receivable growth within the context of our unchanged set of macroeconomic assumptions and credit normalization outlook, which includes peak loss in the first half of 2023.

Other income increased $85 million, driven by a $93 million gain in a venture investment. While I will provide more details later on in our discussion, I want to highlight that the majority of the fourth quarter EPS benefit from this gain was offset by unrelated asset impairments and certain opportunistic marketing investments we executed in the fourth quarter. Moving to Slide 8 and our platform results, our home and auto, diversified and value, digital and health and wellness platforms each continue to experience double-digit year-over-year growth in purchase volume, reflecting strong diversified demand.

Our lifestyle platform also experienced robust demand as purchase volume increased 6% year-over-year, but faced a tough comparison to last year's strength in powersports volume. Loan receivable growth trends by platform generally reflected the more modest growth versus the prior year as higher purchase volume was partially offset by continued elevation in payment rates. Average active accounts trends range on a platform basis, up by as much as 9% in both diversified and value in digital. Home & Auto, Lifestyle and Health & Wellness average active accounts grew in the low single digits or relatively flat.

The average active account growth in diversified value largely reflected the stronger retailer performance. Digital active accounts were up versus the prior year due to greater engagement across our existing customer base and new programs. Interest of fee trends, while generally improved across the platforms, continue to be impacted by elevated payment rate.

I’ll move to Slide 9 to discuss net interest income and margin trends. The accumulated savings by consumers, combined with seasonally higher holiday transactor behavior, impacted payment rate during the fourth quarter. As we progress through the period, payment rate moderated somewhat from the third quarter levels but increased with the seasonal holiday spend we typically see in December.

Payment rate for the period was about 180 basis points higher than last year and 290 basis points higher than our five-year historical average. When tracking the account payment trends from the third to the fourth quarter, we see a slight mix shift away from above and full statement balance payments towards more minimum and below minimum payments. More specifically, the percent of account balance is paying their full saving balance decreased sequentially by approximately 20 basis points and the percent of accounts paying between their minimum payment and their full statement balance decreased sequentially by approximately 70 basis points.

The percentage of accounts paying their minimum payment or less than their minimum payment increased sequentially by approximately 90 basis points. We continue to expect payment rate to gradually normalize as customer spend remains robust, the consumer savings read is declining and industry-wide forbearance expires. While it is difficult to predict elevated consumer spending, lower consumer savings, inflationary pressures and return to full financial obligations has begun to impact accumulated savings levels by consumers, which we believe will lead to a moderation in payment rate.

Fourth quarter interest and fees were up approximately 2%, reflecting average loan receivable growth. Net interest income increased 5% from last year, reflecting the year-over-year improvement in interest and fees as well as lower interest expense for the period. The net interest margin was 15.77% compared to last year’s margin of 14.64%, a 113 basis point improvement year-over-year driven by the mix of interest-earning assets and favorable interest-bearing liabilities costs.

More specifically, the mix of loan receivables as a percent of total earning assets increased by 500 basis points from 79.9% to 84.9%, driven by average receivables growth and lower liquidity held during the quarter. This accounted for a 96 basis point increase in our net interest margin.

Interest-bearing liabilities costs were 1.18%, a year-over-year improvement of 51 basis points, primarily due to lower benchmark rates. This provided a 42 basis point increase in our net interest margin. The loan receivable yield was 19.61%, a year-over-year reduction of 32 basis points. This resulted in a 26 basis point reduction in our net interest margin.

Next, I’ll cover our key credit trends on Slide 10. Elevated payment rates continue to drive year-over-year improvement in our delinquency metrics. Our 30-plus delinquency rate was 2.62% compared to 3.07% last year, and our 90-plus delinquency rate was 1.17% compared to 1.40% last year. When removing the impact of the held-for-sale portfolios on our delinquency measures for the fourth quarter of this year and last year, the 30-plus delinquency metric would have been down approximately 60 basis points versus 45 and the 90-plus metric will be down approximately 30 basis points instead of 23.

Our portfolio of strong delinquency trends have continued to drive strong year-over-year improvement we’ve seen in our net charge-off rate, which was 2.37% compared to 3.16% last year, a 79 basis point improvement. Our allowance for credit losses as a percent of loan receivables was 10.76%, down 52 basis points from 11.28% in the third quarter.

Let’s move to Slide 11 and focus on expenses. Other expenses of $1.1 billion included the impact of $46 million of asset impairments and $29 million of certain incremental marketing investments. Excluding these impacts, other expenses increased 5% compared to the prior year.

Focusing on employee compensation, fourth quarter was impacted by two key factors: one, higher hourly wages as we raised the minimum wage to $20 during the third quarter; and second, higher incentive compensation as 2020 levels were negatively impacted by the pandemic. The efficiency ratio for the fourth quarter was 41.1% compared to 37.1% last year.

Excluding the impacts of the gain on our venture investment, the asset impairments and the incremental marketing investments, the efficiency ratio would be 39.7%. Even with these adjustments, our efficiency ratio remains elevated compared to our historical average due to lower revenue, which has resulted from the impact of higher paying rate and lower average receivables.

We will continue to take a disciplined approach to expense management while also maintaining the pace of strategic investments in the business. This continues to be a clear point of differentiation for Synchrony. As we demonstrated through our Investor Day, Symphony leverages our legacy of operating smaller dollar balances to acquire, originate and service our accounts more efficiently than other general purpose issuers. Our cost to acquire is half that of private label peers and 1/4 of the broader industry’s average.

It’s also important to remember that throughout the course of the pandemic, we have maintained a relatively steady level of marketing spend to stay engaged with our customers, much of which is largely contemplated within the RSA. As a result, Synchrony generally does not ramp up our marketing expenses in order to compete for new customers.

Similarly, we consistently prioritize investment in our business and technological innovation. The digitally enabled products and services that we offer and the seamless omnichannel experience a power for some of the most sophisticated technology partners in the world would not be possible without our tireless focus and steady investment in innovation year after year.

So while the return of our operating efficiency ratio to approximately 32% will primarily be driven by the normalization of payment rate and thus the recovery of revenue, we are confident in our ability to continue to achieve market-leading operating leverage as loan growth continues.

Now let’s move to Slide 12 and discuss another core strength of Synchrony’s, our funding, capital and liquidity. Given the reduction in loan receivables in 2020 and early 2021, coupled with the stickiness of our deposit base, we have generally been carrying a higher level of liquidity during the year. While we believe it’s prudent to maintain a higher liquidity level during periods of uncertainty, we’ve been actively managing our funding profile to mitigate excess liquidity and optimize our funding profile.

As a result of this strategy, there was a slight shift in our funding mix compared to last year. Our deposits declined by $512 million from last year, and our securitized and unsecured funding sources declined by $1.3 billion. This resulted in deposits being 81% of our funding compared to 80% last year with securitized funding comprising 10% of our funding sources and unsecured funding comprising 9% at quarter end. Total liquidity, including undrawn credit facilities, was $15.7 billion, which equated to 16.4% of our total assets, down from 24.7% 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, which has two primary benefits. First, it delayed the effects of CECL transition adjustment for an incremental two 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 with 15.6% CET1 under the CECL transition rules, 30 basis points lower than last year’s level of 15.9%. The Tier 1 capital ratio was 16.5% under the CECL transition rules compared to 16.8% last year. The total capital ratio decreased 30 basis points to 17.8% and the Tier 1 capital plus reserves ratio on a fully phased-in basis decreased to 24.4% compared to 27% last year.

During the first quarter of 2022, we will recognize the first portion of the CECL transition adjustment, which reduced our CET1 ratio by approximately 60 basis points. As a reminder, the impact of CECL has already been recognized in our income statement and balance sheet. This transitional adjustment pertains strictly to our regulatory capital metrics.

We continue to execute on our commitment of strong capital return to shareholders by returning $1.1 billion to shareholders in the fourth quarter through $982 million in share repurchases and $120 million in common stock dividends. For the year, we returned $3.4 billion, including $2.9 billion in share repurchases and $500 million in common stock dividends.

Given the strong performance of our business during the year, our Board approved an increase in our share repurchase authorization through June 2022 by an incremental $1 billion. As of December 31, we had $1.2 billion remaining in our share for purchase authorization. We have begun our normal capital planning process, and we’ll provide an update to our planned capital actions once approved.

Our business generates strong returns and considerable capital, reflecting our commitment to drive consistent growth and attractive risk-adjusted returns, the scalability of our technology platform and our continued cost discipline. We have considerable excess capital on our balance sheet to deploy either through growth or returns to shareholders. Accordingly, we will continue to take an aggressive but prudent approach to returning capital to our shareholders, guided by our business performance, market conditions and subject to our capital plan and any regulatory considerations.

Finally, let me focus on our outlook, which is summarized on Slide 13 of our presentation, assumes a stable to improving macroeconomic environment and a well-controlled pandemic. For the upcoming year, we expect consumer demand to remain robust, supporting broad-based purchase volume growth across the various industries and markets we serve.

As consumer savings begins to decline and payment rate moderates, we’d expect purchase volume growth to moderate somewhat. We expect our net interest margin to reflect the trends consistent with those during the second half of 2021 and should follow historical seasonality.

With the advance of our held-for-sale portfolios in late Q2, we anticipate some excess liquidity, creating a modest headwind to NIM in both the second and third quarters. And as we’ve done in the past, we will work to reduce this excess liquidity quickly.

As payment rates moderate and credit trends normalize through the gradual rise delinquency and loss, we expect higher interest and fee yields to be offset by higher reversals. Our current expectation is that delinquency will peak in the fourth quarter.

Given our reserve levels at year-end, we’d expect reserve builds in 2022 to be generally asset-driven and partially offset by the approximate $130 million of final reserve reductions associated with our held-for-sale portfolios. RSA expense will continue to reflect the strength of our program performance and purchase volume growth but should begin to moderate as net charge-offs rise.

In terms of operating expense, we generally expect quarterly expense to run in line with the fourth quarter 2021 levels, excluding the impact of asset impairments and certain marketing items we discussed earlier. And lastly, with regard to our held-for-sale portfolios, we anticipate conveyance to occur in the second quarter, producing a nonrecurring gain on sale of approximately $130 million. We expect to redeploy this gain through completely offsetting incremental investment in our business, thus the EPS neutral for the full year.

So putting it all together, Synchrony’s differentiated model is powering strong growth at attractive risk-adjusted returns through changing market conditions, and we’re emerging from the pandemic with considerable momentum.

As we continue to leverage our core strengths, our diversified portfolio, which provides resiliency and sustainable growth, our deep industry expertise, advanced data analytics and digitally enabled product suite, the combination of which enables strong risk-adjusted returns and our scalable technology platform, which powers efficient customer acquisition and servicing as well as swift partner integrations.

Synchrony will continue to engage more customers, drive greater lifetime value and deliver sustainable growth at peer-leading risk-adjusted returns. So as operating conditions continue to normalize, we remain confident in our ability to achieve the long-term operating metrics we laid out at Investor Day to continue to drive considerable value for all of our stakeholders.

I will now turn the call back over to Brian for his concluding thoughts.

[Brian Doubles, President and Chief Executive Officer]

Thanks, Brian. I could not be more proud of the Synchrony team and all that we have achieved this year for our partners, customers and stakeholders. Whether it’s been through investments in our digital innovations, strategic partner integrations, expansion into new distribution channels or the addition of new product offerings, Synchrony has continued to evolve and enhance the ways in which we connect our partners and customers through our financial ecosystem.

This has positioned us as a leader in the digital commerce revolution with very exciting opportunities ahead of us. We will continue to win new partners and renew existing ones. And at the same time, we’ll further diversify our programs, products and the markets we operate in. And of course, underpinning it all is our laser-like focus on our integrated product set and providing that best-in-class customer experience that drives value, loyalty and superior outcomes for our partners and customers.

Synchrony will continue to outperform over the long term, as we provide our partners and customers with the power of choice. As we deliver on our key strategic priorities, we will continue to drive consistent growth at attractive returns and unlock even greater value for our stakeholders.

And with that, I’ll turn the call back to Kathryn to open the Q&A.

[Kathryn Miller]

That concludes our prepared remarks. 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. [Operator Instructions] From KBW, we have Sanjay Sakhrani. Please go ahead.

[Sanjay Sakhrani, KBW]

Thanks. Good morning.

[Brian Doubles, President and Chief Executive Officer]

Hi, Sanjay.

[Sanjay Sakhrani, KBW]

I guess have a question for both. Hey, how's it going? A question for both Brian, on loan growth. I know payment rates are sort of weighing against the underlying loan growth expectations. But your long-term targets are sort of high single digits, low double digits. Some of your peers are at their average, if not above their average. Maybe you could talk about what’s driving sort of the weakness relative to your long-term expectations? And – or do you expect 2022 to get there? Thanks.

[Brian Wenzel]

Yes. Sanjay, maybe I’ll start and then ask Brian to comment. I would say, look, generally, we feel really good about the operating environment right now. We feel really good about where the consumer is. Last year was a record year in terms of purchase volume on our products. And if you look at that, one of the things that’s really encouraging is if you look at that by demographic, a lot of that is actually driven by Millennials and Gen Z.

Sales on our accounts with Millennials and Gen Z were up 42% compared to 2019. And if you look at Baby Boomers, that was up only 6%. So as you think about that mix shift, our products are definitely very attractive to that younger demographic. We also generated 25 million new accounts for the full year. So we actually feel really good about the growth prospects.

And as you said, the thing that’s a little bit difficult to call right now is the payment rate. But I think if we see payment rates just normalize a bit, they don’t need to go all the way back to pre-pandemic levels. If they just normalize a little bit here in 2022, we could definitely see loan growth in the high single digits for the full year. I don’t know, Brian, if you’d add anything to that?

[Brian Doubles, President and Chief Executive Officer]

Yes. What I – the color I’d add, Sanjay, is that when you look across purchase volume across all our segments, we’re seeing strength in all the platforms. So that diversification is pulling through. And I think when there’s a comparison to some of our peers, what gets lost here is the resiliency in our business, right? We do not have as much volume decline as others or asset decline as others last year. So we are being more consistent with that.

And listen, I definitely agree. As we entered into 2022, we came off a record purchase volume. I think as we think about the first month of the quarter, we’re seeing a strong mid-teens growth in purchase volume as that continues. And we do see – and I’m sure we’ll talk later in the call on payment rates, we are seeing some moderation. So I do think you can see that high single digits. And in certain scenarios, we have one scenario that says you can get me in double digits with regard to loan growth. So we feel really good about the model and where we’re entering 2022.

[Brian Wenzel]

The last thing I’ll add, Sanjay, just if you look at that across the platforms, it’s pretty broad-based. Purchase volume digital was up 22%. D&V [ph] up 26%. We got a ton of room to grow in health and wellness, their sales were up 14% in the fourth quarter. So again, pretty broad-based growth, and it’s nice to have turned the corner with all of our platforms having positive receivable growth year-over-year in the fourth quarter.

[Sanjay Sakhrani, KBW]

Okay. That’s wonderful. Maybe another revenue driver you guys sort of talk about the NIM, Brian Wenzel. And I know there’s a lot of liquidity and all this other stuff that affects that metric. But as we think about the yield, I see that last bullet says higher interest and fees offset by higher reversals. Is that one for one? Or do we expect the yield to improve over the course of this year?

[Brian Wenzel]

Yes. The way I would think about it, Sanjay, is as you see the payment rate decline, you’re going to see the yield go up on the book, right? The reversals that come ultimately will be with the charge-offs, which will trail that and it’s not one for one. It never has been. The impact on the NIM this year, it is benefiting from reversals, but not necessarily the key driver behind it. So it trails and it won’t be one for one.

[Operator]

From Credit Suisse, we have Moshe Orenbuch.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks. Brian Wenzel, I guess, you talked about the normalization of the efficiency ratio. In this environment, investors are paying a lot more attention to expenses and costs. And you said that you’d be driven by the revenue that has been kind of deferred, lost, suppressed. Can you talk about how you think about how large that is an over period of time that comes back?

[Brian Wenzel]

Yes. Great question, Moshe. First of all, I want to start with the expenses. We’re up – when you strip out the impairment and discrete items that we elected to execute based upon some gains we had in the quarter, our expenses are up 5% year-over-year. And if you think about that, just to start, a lot of it is employee-driven, right. We increased our hourly wage to employees. We also had some onetime adjustments relative to some critical roles in the organization when you think about data scientists, technology, et cetera.

So the base in the run rate as we see going forward is pretty stable. And as I said in my prepared remarks, first of all, we don’t have to inject a lot of money into this in order to drive our growth. So the expense base, as we step through each of the quarters, will be relatively consistent.

As you think about the efficiency ratio, clearly, the revenue and the yield is lower than we anticipated. So I think over the course of that, call it, the revenue normalization between 2022 and 2023, you will see come back and we see a pathway back to that 32%, 33%. But right now, we’re managing hopefully tightly to the dollar amount as we step through. Again, it’s mainly volume oriented now with more active accounts and higher volume that go through the associations or networks.

[Moshe Orenbuch, Credit Suisse]

So I guess just to be clear, your cost base is going to be closer to fixed as volume expands and maybe credit normalization causes the RSA to actually benefit revenue over the course of the next several quarters, is that what we should be thinking?

[Brian Wenzel]

I would say on a dollar basis that would generally be true. I think what we’re going to drive is there will be an increase in the variable components of that, but we’ll drive productivity to offset that and keep the expense base relatively flat. So I wouldn’t say there’s a shift to be fixed. It’s we’re going to drive productivity and get operating leverage.

[Moshe Orenbuch, Credit Suisse]

Right. We’re acting like fixed and fixed, yes. I got it. Okay. Thanks very much.

[Brian Wenzel]

Thanks, Moshe. Have a good day.

[Operator]

From Goldman Sachs, we have Ryan Nash. Please go ahead.

[Ryan Nash, Goldman Sachs]

Hey, good morning guys. Good morning, Kathryn.

[Brian Wenzel]

Hi, Ryan.

[Brian Doubles, President and Chief Executive Officer]

Good morning, Ryan.

[Ryan Nash, Goldman Sachs]

Brian, maybe as a follow-up to Moshe’s question. If I look at the expense guidance, I adjust for the $75 million. I think it points to about 7% to 8% expense growth. So I just wanted to clarify, for 2022, is the expectation that you’re going to generate positive operating leverage? Can you maybe put some parameters around how to think about expenses relative to the revenue backdrop? And then more specifically, the slides talk about you reinvesting the $130 million from the gain, is that included in the expense outlook? And should we view that as a onetime step up? Or will it remain in the run rate? And I have a follow-up.

[Brian Wenzel]

Yes. So thanks for the question, Ryan. Let me deal with the latter part of your question. The $130 million and any potential offsets we have will not be in the run rate. They will be onetime. So when we actually make those decisions, and that could be a wide ranging effect. That could deal with some of our fixed costs and again, continuing to adjust for the way in which we work. There could be some investments in marketing programs, and we’ll highlight those, but it should not go into the run rate of the business and would be additive to what we have here on the page.

I think generally, when you think about the expense base, we are going to generate positive operating leverage, and that’s the way the model was set up. So that as we think about the expenses this year, our view would be that we would have greater growth relative to the assets and the revenue. So we do believe we’re going to get operating leverage. We’re going to manage the positive operating leverage throughout as we step through 2022.

[Ryan Nash, Goldman Sachs]

Got it. Thanks. And if I can ask a follow-up question. On credit, losses are obviously at very, very low levels. And we’ve seen a little bit of increases in delinquencies and charge-offs. So I was wondering, can you maybe talk about any noticeable trends you’re seeing across the portfolio? Are you seeing any more normalization in the near prime relative to the prime?

And then second, Brian, just to clarify, the allowance at 10.76 versus 10% Day 1 CECL, although I recognize that 4Q is seasonally low. You mentioned it being asset driven. So is Day 1 CECL still the eventual destination? And maybe can you just give us some color on how to think about the trajectory of the reserve over time? Thank you.

[Brian Wenzel]

Yes. So let me – I’m probably going to give you a longer answer on credit, Ryan, because I do think it’s important to get this background. To specifically answer your question, we have not seen anything discernible in our results, and I’ll explain to you where we come out. But there’s nothing that we see that says this is performing worse than our expectations.

I think we understand there’s a lot of concern about what the term credit normalization means and how fast that comes and the ranging damage. I want to give you a framework. First, we talked about, earlier in the call, in my prepared remarks, about the delinquency being 60 basis points better and 30 basis points better than previous periods when you exclude the held for sale. So the delinquency formation of how that will give you lost content for the first half of the year is in great shape.

I think, Ryan, when we look at the vintage performances, both on a cumulative basis and a coincident basis and look at it from 2018 forward in these six-month kind of tranche views, each of the vintages from 2018 through 2020 have improved. And we see no deterioration in those vintages as we sit here at the end of 2021.

When you look at 2021, both 2020 and 2021 are significantly better than all of the pre-pandemic vintages, significantly better. When we look at 2021 specifically, that’s a little bit worse than 2020 because we took some credit refinements. We don’t believe we have added incremental risk in, but slightly worse performance. But again, significantly better than pre pandemic.

I then think you have to think about three other factors, Ryan, as you think about credit. The first is our credit strategy and multiproduct strategy. Our credit strategy is we have a tighter loan grow line strategy. We have tighter account management strategies, which gives us lower severity as you head into this normalization period. So we think we’ll be less volatile, and that’s been demonstrated when you go back and look at the loss curves both in the GFC, recessions and then the pandemic. And then I think when you look at the tools we outlined on Investor Day, the increase in data analytics, the unique sources, the ability to be more surgical, we can control credit as we step through 2022.

And then the last thing is the RSA, right? The RSA will ultimately take those charge-offs and our partners will offset that. You combine that with the revenue generation, this would give you a resilient risk-adjusted margin as you kind of step through. So that’s how I think about credit. I think Brian and I and the leadership team are really comfortable with how credit will develop in 2022 into 2023.

With regard to your second question on the allowance, we don’t have a differing view that says we’re not going to get back to Day one CECL. It really goes back to what you think your target loss rate is and what your mean loss rate is, and we don’t really have a fundamental view. There will be some portfolio mix that comes into that. But I think we ultimately can migrate back to that assuming that’s the view that we hold, it’s really the timing. And that generally – if you hold that view, there could be offsets to asset-driven provisioning as we step through 2022. So I apologize for the long answer, but I think a framework for how you think about and talk to your customers.

[Operator]

From Citi, we have Arren Cyganovich. Please go ahead.

[Arren Cyganovich, Citi]

Thank you. On the NIM outlook there, I was wondering when you look at the guidance there on the kind of two each levels, which is, I guess, around $15.60, I would have expected that to rise a bit more with the rate increases we’re seeing. How many rate increases do you expect for the year? And what are some of the other aspects that are keeping that somewhat lower?

[Brian Wenzel]

Yes. So with regard to expectations for rate increases, we have three rate increases is our current view. Obviously, the market, I think, depending upon the day, may be different than that. But you got to remember, in our portfolio, less than 50% of our receivables are variable rate. And then when you factor in the transactors, it’s I think less than 30%.

So we’re not going to be highly subject to, I’d say, NIM movements. There could be 20, 30 basis points potentially as it relates to NIM. But to be honest with you, it’s not a significant driver. And at the end of the day, we intend to run our book really on a rate neutral scenario. We’re slightly asset sensitive, but not a lot.

[Arren Cyganovich, Citi]

Okay. Got it. And then helpful the discussion of our expense base, but a contrary revenue item, the loyalty program cost kind of picked up a decent amount in the fourth quarter, I guess, likely from, I guess, the sales volume you had there. But what’s the outlook on your loyalty program cuts ahead?

[Brian Doubles, President and Chief Executive Officer]

Yes. Great question. Brian and I look at this. That’s not necessarily a bad thing. It really means that our customers are engaging with our products and driving volume. So you’re right, it is volume-driven, number one. And you can see that in our dual card volume, our co-branded volume. Our new programs are contributing to some of that rise. And then the final thing is, obviously, value proposition changes where we refresh value props to drive volume factor in there.

The other important element that sometimes gets lost is this is a program expense where approximately 80% of this is shared back through the RSA. So we don’t bear the burden. And I think, again, going back to the unique model, we don’t have to inject a lot of marketing to drive growth. We don’t have to inject a lot in the loyalty. And then our partners are sharing both in the marketing expenses and the loyalty. So there’s a natural buffer in the RSA. So again, a lot of it’s offset in RSA, and it’s generally a good thing that rising means our customers are engaging with our products.

[Operator]

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

[Betsy Graseck, Morgan Stanley]

Hey, thanks so much. A couple of questions here. First on just expenses to tie that up a little bit. I know you’ve got the longer-term guide on expense ratio out there from your Investor Day last year, 32%, 33%. Is that something we should be expecting you would be targeting over the next one year or two? Or is that more like a 2024, 2025 kind of time frame?

[Brian Doubles, President and Chief Executive Officer]

Yes. First of all, good morning, Betsy, I would not consider that a 2022 related metric. We’re in a transitory year relative to the revenue. So I think you begin to look at that when you move into 2023 and how the revenue really develops. Again, we’re going to control the expense dollars. We can control that. The actual output of that has a denominator that’s a little bit less controlled, given the payment rate – elevation and payment rate.

[Betsy Graseck, Morgan Stanley]

Okay. And then the other question just on expenses has to do with the investment spend you're making. You've got the $130 million gain and then you're going to be investing that. And from the commentary, it sounds like you're talking about making those investments like during the second, third and fourth quarter next year. Is that a fair read of what you're telling us?

[Brian Doubles, President and Chief Executive Officer]

Yes. So I would look at the investment being primarily in the second and third quarter. That's where we'd like to have it in there to get the leverage effect of it. Obviously, it will depend upon the types of actions. And again, I think there will be a combination of actions that both had tried to reduce the fixed cost of the business as well as incremental investments really to drive the growth side of the business. So Brian and I will review that with the team and set our plans out and hopefully be able to give you an update at our first quarter earnings call in April.

[Brian Wenzel]

It's fair to say we're not going to make any investments that don't have a really good payback or a really good return use of those dollars.

[Betsy Graseck, Morgan Stanley]

Are you talking more about like marketing or investments in the programs as opposed to technology? Is that...

[Brian Doubles, President and Chief Executive Officer]

It's going to be a combination of things. It will be and potentially could be – we'll look at some of the fixed costs that we have in the business relative to facilities. It could be refreshes of certain programs where we may reissue cards and do things like that, campaigns like that. It could be in technology where we may try to accelerate and continue the acceleration of our digital capability. So it's a combination, but Brian hit on it. We're going to go through a review and the best projects with the best payback and IRs will ultimately win.

[Brian Wenzel]

It's usually two lifts, Betsy that we look at. One is to drive long-term efficiency in the business and the other one is to drive growth, right? Both, let's have great paybacks. We have a really disciplined process around how we evaluate those investments, and we'll obviously run that same play this year.

[Operator]

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

[Don Fandetti, Wells Fargo]

Hi, good morning. It seems like the CFPB has been talking a little bit more about cards recently. Can you provide your updated thoughts on the regulatory environment? And secondarily, how is the pipeline for new partners and portfolios?

[Brian Doubles, President and Chief Executive Officer]

Yes. Don, so look, I'd say the regulatory environment has been fairly stable. Obviously, we saw the CFPB's request for information regarding fees. First, I'd just say that we always strive to be very transparent in terms of our disclosures with our consumers. We really don't have a lot of fees other than late fees. As you know, those are already governed and calculated by the CFPB. We're completely compliant with that and their guidance on late fees today. So we'll obviously stay close to that, but nothing more to report really at this point.

[Brian Wenzel]

And then I would say, generally, the pipeline is strong across all five of our platforms, a lot of nice new program opportunities in the pipeline that we're looking at, a lot of opportunities to partner on new distribution channels that we're excited about, so a pretty strong pipeline. I would say there's not a lot of large existing programs out there right now. A lot of them have been locked up, but some really exciting new program opportunities out there. So we're excited about that.

[Don Fandetti, Wells Fargo]

Thanks Brian.

[Brian Wenzel]

Thanks.

[Operator]

From Piper Sandler, we have Kevin Barker. Please go ahead.

[Kevin Barker, Piper Sandler]

Thank you and just a follow-up on that question. Your late fees are relatively high compared to the industry just given the amount of accounts you have. So it naturally would be higher. If the CFPB were to do anything or there was any regulatory changes, do you feel like you have the flexibility to adjust your model to continue to generate similar type revenue trends, just given your relationships with other merchants?

[Brian Wenzel]

Well, so just the first thing I would say, I mean, we don't disclose the aggregate amount of late fees, but the late fee dollar amount that we charge on accounts is, again, regulated by the CFPB and very consistent across all of the general purpose card players out there. And look, if something were to change on that front, we could price for it in other ways and protect our revenue and our margin. But look, I think we just got to stay close to this, as I said. And I don't know, Brian, if you'd add anything.

[Brian Doubles, President and Chief Executive Officer]

Yes. The way I think about it Kevin, is when we look at it average late fee for incident, and being that we're in the safe harbor with the CFPB, it shouldn't be any real difference between us and I'd say industry participants. I think if you go back historically, under the CARD Act, our revenue when CARD Act changes went into place, essentially remained the same. We went back to partners and we worked that. So I think historically, we've had and run the play where if the environment shifts with regard to how the revenue may or may not be impacted, we'll work with our partners to, again, provide the value to our customers to them and their return an appropriate risk-adjusted return.

[Kevin Barker, Piper Sandler]

Okay. Thank you for taking my question.

[Brian Doubles, President and Chief Executive Officer]

Thanks.

[Operator]

From Jefferies, we have John Hecht.

[John Hecht, Jefferies]

Hey, good morning. Thanks very much for talking my questions.

[Brian Doubles, President and Chief Executive Officer]

How are you John?

[John Hecht, Jefferies]

How are you guys? You talked about the RSA, but just thinking – like RSA, the relationship to rising delinquencies or charge-offs, what's the timing there? And is it kind of basis point for basis point? And then also, how do loyalty program costs kind of influenced the RSA just trying to kind of think about those moving parts within that?

[Brian Doubles, President and Chief Executive Officer]

Sure. So if you think about delinquency John, delinquency should yield higher revolve and higher late fees that flows generally immediately through the RSA. The same things with charge-offs. So when they happen, it goes to media. There's no lag, no delay. Loyalty is the exact same way, it flows through in the period of which have been counted. So to the extent that you see higher interest and fee yield that will flow through, giving upward bias to the RSA charge-offs will give you the downward bias and then either marketing or loyalty depending upon which program expense line comes through, that will also provide immediate downward bias through the RSA.

[John Hecht, Jefferies]

Okay. So in that same time period, we should think about the fluctuation?

[Brian Doubles, President and Chief Executive Officer]

Correct. The only thing that really fundamentally works more on a lag would be reserves, John.

[John Hecht, Jefferies]

Okay. And then follow-up – second question on a different topic is. You had Clover go into play last year, you developed SetPay, new partners, Venmo, Verizon, maybe can you comment on kind of the contribution this year of those new partners and products?

[Brian Doubles, President and Chief Executive Officer]

Yes. I mean a lot of really exciting growth opportunities in front of us for 2022, John. You hit on a bunch of them. I would say Venmo and Verizon are doing extraordinarily well, both quantitatively and qualitatively. The feedback that I get on the Venmo experience is just off the charts, the feedback that we get on the Verizon value prop and how much you're able to save. And the fact that, that card is definitely acting like a top of wallet card, which is exactly what we intended. We couldn't be more pleased with the performance of both of those.

We also launched Walgreens, as you know, it's still very early there, but I think we've got a customer experience, very integrated, both in-store, online, mobile, et cetera. And then Pay-in-4, obviously, it's still very early, but we've got a really good pipeline of partners that we'll be integrating this year. In addition to individual partner integrations, we're also looking at broader distribution opportunities in health and wellness. We're going to be turning this on in that, in dermatology in the first quarter. We think just given the ticket size there, it's a product that will really resonate. The providers are excited about it.

So just a lot to focus on for the team, this is definitely a year of execution. I think we've got the product set that we want. We made a lot of progress on distribution channels and now it's just getting those products out there as much as we can. So they're available to consumers, and we're laser-like focused on the customer experience. I mean at the end of the day, that's what's winning out there, and you just can't invest enough and making sure that you can make it really easy to apply for our products, really easy to service and really easy to buy. So that's where we're focused, but a lot of exciting things for 2022.

[Operator]

From Barclays, we have Mark DeVries. Please go ahead.

[Mark DeVries, Barclays]

Thank you. A question for you on the credit guidance, there's been a lot of investor focus on just kind of the pace and magnitude of normalization. With that context, I just wanted to clarify, when you say peak expected in Q4 that what you're referring to is just that's kind of your seasonal peak for 2022. It's not your assumption of when you normalize. And if that's the case, how are you kind of thinking about kind of the pace and magnitude of normalization we'll see?

[Brian Wenzel]

First of all good morning, Mark. When you talk about normalization of delinquencies, that really is going to happen kind of post peak of losses, and we've kind of indicated the peak of charge-offs will be in the first quarter, maybe early second quarter of 2023. So it would happen – normalization happens on delinquencies after that. We expect it to rise.

Now I think you have to start out with where we start the year at and how that's going to build, we're at low levels. We haven't seen anything, but it will begin to rise as we step through 2022, which, again, we think is going to be closely aligned with how payment rate will begin to change. If payment rate remains elevated for longer period, delinquencies will be slower to rise. So I think that's – it's all going to hinge on that payment rate behavior pattern. And I outlined a little bit in our prepared remarks how we see some movement in there.

And I think as payment rate has changed, the one thing that we started to notice in some of our cohorts is that on a unit basis, we see migration back for some cohorts of accounts back to 2019 levels. What's happening is that we have another cohort of accounts that have increased spending and increased payments. And so on a dollar basis at the top of the house, it looks like payment rate is not slowing down for certain pieces. For some pieces of our portfolio, it is clearly migrating back to 2018. When that happens more in total for the portfolio, you'll see delinquency trends, I think, move with it.

[Mark DeVries, Barclays]

Okay. Great. And just on the pace of normalization. If you think about kind of the macro assumptions that you made about a stable to improving macro and it contained pandemic, kind of how are you thinking about – without economic stress, how quickly delinquencies could normalize?

[Brian Wenzel]

Well, typically, vintages take about 18 months to begin to season from a delinquency perspective. So again, being that we started some credit refinements in the first quarter this year, you would begin to see some of that flowing through in the latter part of this year, so the third or fourth quarter, mainly the fourth. So you'll begin to see that absent any changes in the macroeconomic environment. Just the simple fact that we've unwinding things and begun to induce what we would call smart growth with regard to some of our CLIs and upgrade activities inside our dual cards and private label book.

[Operator]

We have time for one final question from Wolfe Research, we have Bill Carcache. Please go ahead.

[Bill Carcache, Wolfe Research]

Hi, good morning. Brian Doubles, I believe you said that even if payment rates normalize just a little bit, you could see high single-digit loan growth. Can you give a little bit more color on mean by a little bit? Could that be 50% of 2019 levels? And Brian Wenzel, you said there's a scenario where loan growth could be double digit. Could you expand a little bit more on what that scenario looks like?

[Brian Doubles, President and Chief Executive Officer]

Yes. So look, Bill, I would say we certainly don't need payment rates to come all the way back to pre-pandemic levels to post high-single-digit loan growth. I mean a modest improvement and just a slight reversion to the mean. And I'm not going to give you basis points here, but would put us in that high-single-digits for the full year, I don't know, Brian, if you want to add anything to that?

[Brian Wenzel]

Yes. What I'd say, Bill, is our planning process this year, we had multiple scenarios that we ran and we ran it on varying degrees of how the payment rate evolves. So there is a scenario where the payment rate slows down quicker. And in that scenario, given the timing lag on purchase line, you will see potentially under that scenario a higher rate of growth when it comes to loan receivables. So it really is going to hinge-off of, I think the important part is what is that payment rate doing and the trend of the payment rate throughout the entire portfolio as we step through 2022, which will give you the range of outcomes. But again, when we're printing a mid-teens type of purchase volume growth, it doesn't take a lot on the payment rate in order to impact the sequential loan growth that we're seeing.

[Brian Doubles, President and Chief Executive Officer]

And Brian hit on this earlier. I mean, we are seeing some positive developments in terms of the payment rate in terms of fewer people paying in full. And so I think there's some indication that there will be some reversion to the mean in 2022. It's hard to call exactly when and how much. But again, if you look at the purchase volume across the platforms, we feel really good, closing out a record year last year and as you look across all platforms we see broad-based growth in purchase volume. And we did have every one of our platforms in the fourth quarter, had positive receivables growth. So it's a pretty good setup as you look to 2022.

[Bill Carcache, Wolfe Research]

Yes, that's really helpful. I guess expanding on some of your earlier comments and sort of thinking about the interplay between that normalization in payment rates and credit, are you at all concerned over the risk of credit normalizing faster than payment rates and alternatively, based on what you're seeing in credit? Could there actually an opposite scenario where receivables growth leads credit on the normalization side?

[Brian Doubles, President and Chief Executive Officer]

Absolutely to the latter part, we could see loan growth going faster than credit normalization. It may be able to say. They're more likely than not, they're going to move in sync. We do not generally see a scenario where credit normalization happens and you have elevated payment rates, the way we have. That would be highly unusual and probably not something we've ever seen before.

[Operator]

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