Synchrony Financial
Q2 2016 Earnings Call Transcript

Published: 22 Jul 2016

[Operator:]

Welcome to the Synchrony Financial Second Quarter 2016 Earnings Conference Call. My name is Vanessa, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations. Mr. Ketron, you may begin.

[Greg Ketron:]

Thanks, operator. Good morning, everyone, and welcome to our quarterly earnings conference call. Thanks for joining us this morning. 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 want to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for, and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Margaret Keane, President and Chief Executive Officer; and Brian Doubles, Executive Vice President and Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open up the call for questions. Now, it's my pleasure to turn the call over to Margaret.

[Margaret M. Keane:]

Thanks, Greg. Good morning everyone, and thanks for joining us. During the call today, I will provide a review of the quarter, and then Brian will give details on our financial results. I'll begin on slide three. Second quarter net earnings totaled $489 million or $0.58 per diluted share. Solid momentum continued across each of our business platforms, driving strong growth in purchase volume, loan receivables and net interest income this quarter. Purchase volume grew 9%, loan receivables grew 11%, and net interest income grew 10% over the second quarter of last year. Our online and mobile purchase volume also continued its strong growth trajectory. Second quarter sales grew 27% over the same quarter of the prior year. Our online and mobile sales growth has far outpaced U.S. growth trends, which had been in the 14% to 15% range. As per asset quality metrics, 30-plus day delinquencies were 3.79% compared to 3.53% last year. And our net charge-off rate was 4.49% compared to 4.63% in the second quarter of last year. Expenses were in line with our expectations, increasing 4% over last year and were largely driven by the growth we are producing. We generated positive operating leverage and our overall efficiency ratio improved 157 basis points to 31.9%. Our receivables growth is supported by continued deposit growth, which increased $9 billion or 23% to $46 billion this quarter. Deposits now comprise 71% of our funding sources, and know this is slightly above our original target range of 60% to 70%. We plan to continue to drive deposit growth by offering competitive rates, outstanding customer service, and a continued enhancement of our product suite. One of our strategic priorities is to build Synchrony Bank into a leading full scale online bank. Given our significant deposit growth, we were able to fully pay-off our bank term loan on April 5, well ahead of its contractual maturity in 2019. Our balance sheet remains strong with Common Equity Tier 1 ratio of 18.5%, and liquid assets totaling $14 billion or 70% of total assets at quarter end. The strength of our balance sheet and financial performance has enabled us to start returning capital to shareholders. As we announced earlier this month, our board approved the $0.13 quarterly dividend and has $952 million annual share repurchase program. We will now begin to opportunistically repurchase our stock and look forward to building on these actions, as we look to deploy capital through both growth of the business and return to shareholders. Moving to business highlights, we recently renewed several key relationships, including Ashley HomeStores, Suzuki, VCA Animal Hospitals, and the American Society of Plastic Surgeons. We also continued to sign partnerships in the travel and entertainment space. We won a new U.S. based program with Cathay Pacific Airways. We also signed a new program with Fareportal, one of the largest and fastest growing online travel companies. These programs add to our growing T&E portfolio, that already includes recently launched programs with (05

[Brian D. Doubles:]

Thanks, Margaret. I'll start on slide six of the presentation. In the second quarter, the business earned $489 million of net income, which translates to $0.58 per diluted share in the quarter. We continued to deliver strong growth this quarter with purchase volume up 9%, receivables up 11%, and interest and fees on loans up 10%. Average active accounts increased 8% year-over-year driven by the strong value propositions on our card, which continue to resonate with consumers. We also see this in average balances and spend, with growth and average balance per average active account up 4% compared to last year, and purchase volume per average active account increasing 2% over last year. The interest and fee income growth was driven primarily by the growth in receivables. The provision increased $281 million compared to last year. The increase is driven by higher reserve build and receivables growth, which I'll cover in more detail later. Regarding asset quality metrics, 30-plus day delinquencies were 3.79% compared to 3.53% last year, and slightly better than 2Q, 2014 of 3.82%. The net charge-off rate was 4.49% compared to 4.63% last year, and 4.88% in 2Q 2014. Delinquencies were consistent with the range we have seen in the second quarter over the past two years, with net charge-offs staying lower than the range. Our allowance for loan losses as a percent of receivables was 5.70%. As we noted in June, we expected the allowance to increase 20 basis points to 30 basis points in the second quarter, compared to the first quarter level of 5.5%. RSAs were up $43 million compared to last year. RSAs as a percentage of average receivables were 4.0% for the quarter, compared to 4.1% last year. The lower RSA percentage compared to last year is due mainly to higher provision expense associated with the growth in the programs, as well as the incremental reserve build, which more than offset incremental sharing on the year-over-year improvements and net interest margin and lower efficiency ratio. Given the increase in the reserve level, we expect the RSA percentage on a full-year basis to trend closer to the 4.2% to 4.3% range. Other income decreased $37 million versus last year. In the prior year, there was a $20 million gain on portfolio sales which should not (12

[Margaret M. Keane:]

Thanks, Brian. I'll close with a summary of the quarter on slide 11, and then we will begin the Q&A portion of the call. During the quarter, we again delivered significant growth across key areas of our business. We signed, renewed, and launched a number of important partnerships, and further expanded the breath of business segments we are serving, and our pipeline of additional opportunities remain strong. Our digital channels remain a key component of our overall strategy, and we've delivered strong growth there as well. And to support our growth, we are successfully expanding our deposit base and increasing its importance as a source of our overall funding. Our strong capital position and performance has enabled us to begin to return capital to our shareholders, a goal that we are very pleased to have achieved. I'll now turn the call back to Greg to open up the Q&A.

[Greg Ketron:]

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session so that we can accommodate as many of you as possible, 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. And our first question comes from John Hecht with Jefferies.

[John Hecht:]

Morning, guys. Thanks very much. First, with respect to credit, obviously, you guys gave us revised guidance a few weeks back, but the quarter reflected fairly strong kind of year-over-year credit trends. Just for, I guess, sort of ratification, when should we see the pace is in sales (24

[Brian D. Doubles:]

Yeah John, you cut out in (24

[John Hecht:]

Correct. And then, what pace should we see it start to normalize given the delinquency and low rates?

[Brian D. Doubles:]

Yeah, sure. So I would disconnect the guidance a little bit from what happened in the quarter. In the quarter, we had a little bit higher recoveries. If you look over the past two year's recoveries, it'd been running in the 1.1% to 1.2% of receivables kind of range. This quarter, they are right around 1.3%, so that drove a bit of the improvement. Going forward and what was included in our guidance is that recoveries would be pretty similar to where they've been in the last two years, so somewhere in that 1.1% to 1.2% of receivables. So that's really what was contemplated in the forward guidance. So no change to what we said in June, we gave you kind of what we think we're going to close the year at for 2016 at around 4.5%, and then starting kind of incrementally year-over-year 20 basis points to 30 basis points for the first quarter and the second quarter of 2017.

[John Hecht:]

Great. Thanks for the color there. And then just thinking about net interest margin, obviously there was a little bit of benefit this quarter because of the ratio of liquid assets to receivables. Are you able to kind of further optimize that, or how should we think about the movement there, and what that means to margin in the near-term?

[Brian D. Doubles:]

Yeah. The net interest margin came in pretty similar to where we were in the first quarter. At that point, we had paid down the bank term loan, so we were able to optimize liquidity a bit, and take some of that excess and pay down the bank term loan. We're obviously really pleased with that, and we thought jumping off in the first quarter the margin would be pretty stable for the balance of the year, which was right around, I think 15.75%. We still think that's a pretty good way to think about the back half of the year. If deposit growth continues at this pace, we'll get a small benefit there. We might be able to do a little bit more on liquidity, but probably not much. If you look at the year-over-year we have been able to improve the yield that we're earning on the cash and the treasuries. But then there is some, what I would call, modest offsets to those two positives. One, we continue to see really strong growth in Payment Solutions. As you know, those are our promotional balances, so those come on initially at a lower yield. And then our guidance initially back in January included a small benefit from another 50 basis points of Fed rate increases in the back half of the year, and obviously that looks a little bit less likely. So some few puts and takes, I would say, but the margins should be pretty stable for the back half of the year.

[John Hecht:]

Great. I appreciate the details. Thanks.

[Brian D. Doubles:]

Yeah.

[Operator:]

Thank you. Our next question comes from Ryan Nash with Goldman Sachs.

[Ryan M. Nash:]

Hey. Good morning, guys.

[Brian D. Doubles:]

Good morning.

[Ryan M. Nash:]

Maybe I could start-off with a question on the RSA, Brian. It was down 30 basis points year-over-year, and I think it's around 4% in the first half versus a guide for 4.2% to 4.3%, and that implies the RSA will be roughly in line with the back half of last year, give or take couple of basis points. So I guess, all else equal that would probably – my math, that implies either provision in the back half of this year that's similar to last year, or we get continued improvement in efficiency. So can you just maybe help us understand, why the RSA would go back up to the second half of last year's level, given how much it's come down in the first half or is it just being conservative on the guidance?

[Brian D. Doubles:]

Well, I think, there is a few things. So if we just – let's just break down the quarter maybe a little bit on the RSA. The RSA obviously included an offset on the reserve build, that's why you saw it down year-over-year, that's why we revised the guidance on RSAs from round 4.5% to 4.2% to 4.3%. You also have to remember that a lot of things in the P&L got better year-over-year. So we had obviously better revenue, margins were little bit better, efficiency ratio was better as you indicated. So all else being equal, that would have resulted in a higher RSA percent compared to last year. And then those improvements were both more than offset by the higher reserve build and the higher provision. And the one thing, I'm not sure you're taking into account, as you think about the back half of the year, the third quarter is typically the high watermark on the RSA. We've got some seasonality, and if you look back over the past two years you do see the RSA percentage trend up a bit in the third quarter seasonally. So as you think about the back half, you've got to factor that end, but that's all included in the outlook for the 4.2% to 4.3% for the year.

[Ryan M. Nash:]

Got it. And then, maybe I could ask a follow up on credit. You talked about losses at 4% or 5%, and then up 20% to 30% be for the four quarters after. Can you maybe just give us a sense of how much the upward bias on losses is actually coming from higher growth, so we've all heard about various banks talk about the impact of seasoning on portfolios, how much is actually coming from lower late stage QR rates that you talked about? And just, we're obviously up this year and next year and I know you don't have a crystal ball of three years. But at what level would you actually expect losses to begin to start leveling off assuming growth levels off?

[Brian D. Doubles:]

Yeah. I mean, there is a lot of factors here and some of these are obviously cause and effect. In June, our comments indicated that we're expecting to see this modest increase in net charge-offs. As part of that, we focus specifically around the payment behaviors that we are driving the reserve build in the quarter. Now, we're giving you some broader context on some of the dynamics that we take into account when we build the forecast. And those are things like portfolio mix, like platform, product, program, channel, as well as account maturation or seasoning of vintages, as well as the overall consumer trends. Now, I would say, if you look at seasoning of vintages for us, it absolutely plays out similarly in private label as it does for general purpose cards. So we typically see peak losses at around 24 months. I think that's pretty consistent with the rest of the industry. However, our growth rates have been more consistent than I think others. So while it certainly plays a factor in what we're seeing in our expectation, our growth rates haven't been perfectly consistent. So I'd say, it's a factor, but it's a not a significant, I think for us is what you're seeing for others out there.

[Ryan M. Nash:]

Got it. Thank you for taking my questions.

[Brian D. Doubles:]

Sure, Ryan.

[Operator:]

And thank you. Our next question is from Don Fandetti with Citigroup.

[Donald Fandetti:]

Yes, Margaret, I was wondering if you can comment on the pipeline of potential portfolio partnership acquisitions. And then can you talk a little bit about on these larger deals, what your competitive advantage is versus your larger peer, and kind of how you approach those types of transactions?

[Margaret M. Keane:]

Sure. So I'd say overall our pipeline continues to be robust. I think, I've mentioned in past calls that we have dedicated resources in each of our three platforms, and I think you can tell, by even this quarter we won some nice deals. We feel competitively in the $500 million to $1 billion portfolio size. The competition is pretty reasonable, and we really compete effectively there. When you get to the bigger portfolios, obviously the cost goes, an example of that, it gets much more competitive. I would say, overall on the bigger deals that are out there or people are discussing, I think, we start by competing on our capabilities and the history and the level of experience that we have in the industry, and that's how most of these conversations start. I would say, we generally win on those types of things. We feel that some of the things we've invested in, in the last couple of years, particularly around online and digital mobile are really playing to our advantage. We feel we're further ahead than the competition there. I think the other area that we're continuing to invest in is really the whole data analytics portion of the business, and really leveraging some new technology there. So on a capability point of view, I think, we have a couple of areas where I think we're a little ahead. We are very partner focused. And I think, the key relationships we have today really help reiterate with potential partners how we worked with our partners, and that I think is another advantage. So I think it's overall capabilities, experience and long-term relationships and partnerships that we have.

[Donald Fandetti:]

Okay. And on program deals like Cathay Pacific, can you talk a little bit? I mean, on one hand it's very good for your loan growth, but I wonder if that's a slightly more competitive segment, and can you talk a little bit about how you won that deal and the returns relative to private label transactions?

[Margaret M. Keane:]

Sure. Co-brand is a little more competitive. But I think we're not – our strategy is really to look at co-brand and Dual Card opportunities in the business that meet our returns. So Cathay and Fareportal being the other one for this quarter, again, it started out with our capabilities and our partnering experience, and that's really how we won both of those deals. When we look at overall return, every deal that we do, we make sure it's kind of competitive with any overall return for our business, and we look to ensure that we're keeping that return in mind, as we take our new opportunities. I don't know Brian, if you'll add anything on returns.

[Brian D. Doubles:]

Yeah. The only thing I would say Don is, you're going to see us be pretty selective around co-brand opportunities. We like the space, but we're going to be cautious around it. You're probably not going to see us go after the really big marquee deals, but we're, as Margaret said, we can go in and compete and demonstrate our capabilities and win on that basis, and still earn an attractive return. We're going to go after those deals.

[Donald Fandetti:]

Okay. Thank you.

[Brian D. Doubles:]

Yeah.

[Operator:]

And thank you. Our next question is from James Friedman with Susquehanna.

[James Friedman:]

Hi. In past quarters, Margaret, you've had more commentary on the digital channels. I was wondering if you could share some of the metrics that you've had in the past, or at least qualitatively describe some of the trajectory you're seeing there.

[Margaret M. Keane:]

Sure. So I'll just say that, the digital channels continue to be important, as more and more consumers are active on the digital channel. Our online sales for the quarter were up 27% versus the second quarter last year. Approximately a third of our applications now occur digitally, and if you go back to 2012 to current, we've received over 11 million mobile applications, and that's growing at about 78% year-over-year. So if you compare us to the industry, I think our growth is much stronger. The industry overall is reporting somewhere around 14% to 15%. And I think this is an area where the question earlier of how we compete, I think this is an area where extraordinarily important for us to ensure we're investing. We have a position with GPShopper. We've been able to leverage that partnership and help our partners, actually get out mobile applications sooner where we're fully integrated into the application. So those are the types of things that I think as industries shift from brick-and-mortar to more online, we just have to be the best-in-class on those types of things.

[James Friedman:]

Thank you. And I just want to ask one follow up Greig, about the OpEx seasonality, if you could share some perspective on that.

[Brian D. Doubles:]

Yeah, sure. This is Brian. I assume (37

[James Friedman:]

Well, I'm sorry (37

[Brian D. Doubles:]

I'm happy to put him on the line as well.

[James Friedman:]

I apologize Brian.

[Brian D. Doubles:]

That's all right. So we obviously delivered, I think a pretty strong efficiency ratio in the first half of the year. What I would tell you this quarter is similar to what I told you last quarter, which is we do expect the efficiency ratio to rise from here in the back half of the year, really for two reasons; we do more marketing and promotions in the second half of the year, particularly around holiday, and so that will drive an increase in the efficiency ratio. And we also have more of our strategic investment spend stacked against the second half of the year as well. So as those investments come in throughout the year, we would expect the ratio to increase, but we'll still be within the annual guidance of below 34% for the year.

[James Friedman:]

Thank you very much.

[Brian D. Doubles:]

Yeah.

[Operator:]

And thank you. Our next question is from Rick Shane with JPMorgan.

[Richard B. Shane:]

Thanks guys for taking my question this morning. I'd love to sort of circle back on the questions related to RSA, and uses as an opportunity, perhaps refine the way we think about this. Brian, I realized you gave guidance and that's really helpful. But I'd love to delve into the mechanics here. When we look at the interest income and fees quarter-over-quarter, those were roughly flat. Provision was up about a $100 million. That would suggest assuming that there is a 50%-50% share on the RSAs that you would expect roughly a $50 million decline in RSA expense. We didn't see that, that wasn't our assumption either. But I'd love to talk through, is it an accrual issue, is it a timing issue, how do we think about this on a dollar basis as opposed to a percentage basis?

[Brian D. Doubles:]

Yeah. Rick, part of the reason why we did give you some guidance on this is, as we recognized that it's very hard for you to model based on the information you have, and part of the reason for that is that, all of our deals are very unique, very customized both in terms of the percentage sharing, as well as the level at which we start to share with the retail partner, and for obvious reasons, we can't provide any visibility around those contractual terms. And our retailers also have seasonality. And so there are number of moving pieces that make it difficult for you to model it and to have that transparency, so we give you a guidance range for the year. What you should be able to see from the quarterly results is that, when things get better we tend to share more, when things get worse we share less with the retail partners, that dynamic whether you're looking at it as a percent of receivables, or a percent of pre-tax earnings excluding RSA, those ratios hold, I would say, fairly consistent, but for the seasonal components that I mentioned.

[Richard B. Shane:]

Got it.

[Brian D. Doubles:]

So I know that's not particularly helpful in terms of how you're going to model it, but I would just continue to use the guidance that we're giving you. I think that's probably the best way for you guys to get it right.

[Richard B. Shane:]

Okay. Just one follow up to that. When we think about the – let's assume that it's an ROA threshold. Is it on a trailing 12 months basis, or does it true up every quarter in terms of how you accrue it?

[Brian D. Doubles:]

For the most part assume that it stood (40

[Richard B. Shane:]

Okay. Great. Thank you.

[Operator:]

And thank you. Our next question is from Bill Carcache with Nomura.

[Bill Carcache:]

Thank you. Good morning. Recognizing that you don't give specific EPS guidance, can you speak to your confidence level and your ability to grow earnings in the current credit environment if the current environment holds, and you don't necessarily see further declines in unemployment, but you also don't see increases? It seems to us like your business model enables you to still be able to generate healthy EPS growth in this environment, particularly once you start layering in the upside from capital return, but I think there are some concerns around that, and we'd love to hear your thoughts.

[Brian D. Doubles:]

Well, Bill, I think the fundamentals of the business are still very strong, if you, let's just walk down – we'll walk down the income statement and look at some of the key indicators. Net interest margin is stable to improving. We feel good about the margins, the resiliency of the margins, RSAs act as an offset to other things that are going on in the P&L. We drove fairly significant operating leverage, and I think we're fairly optimistic going forward that we'll be able to continue to do that, particularly given that the infrastructure growth spend, that's all in the run-rate. We're really focused on driving operating leverage going forward. And then we're using some of the savings to invest in the long-term ideas and strategies, and things like mobile and data analytics, but this is a scalable platform, and we should be able to drive that operating leverage going forward. So then you're really left with what is the outlook on credit, and we've given you a view on that as well in terms of what we're seeing. So I'd say, you've got a whole bunch of positives, and then we're going to build reserves based on growth in the business as well as our expectation in net charge-offs, and we'll continue to do that. But I think that, that adds up to a pretty positive outlook, generally, for the business.

[Bill Carcache:]

Thank you. That's really helpful. If I may ask one follow up on credit. Just it looks like you guys are reserved at very healthy levels. And if just looking at yourself – you guys relative to peers, Capital One, which reported last night is running with reserve coverage of about 12 months in its domestic card segment, while you guys are running, well, north of that, you have less subprime exposure. Can you help us understand why you guys are running with what looks to be relatively higher reserve coverage versus some others?

[Brian D. Doubles:]

Well, obviously, I can't speak to how others reserve, that I can't do, but I can tell you that our reserve is based on our best estimate of the incurred losses that we believe exist in the book at the end of the reporting period. Our models generally look out over a 12-month window. They include our expectations for net charge-offs. We also include qualitative and other factors. And our reserve coverage, we don't book to a specific number of months, but it typically falls in that 13 months to 15 months of expected net charge-offs. So other than that, I mean, there is some really good disclosure in the Q is that, you can look at that kind of talks about the other factors that we build in, but tough for me to compare. I don't really have visibility into what others do.

[Bill Carcache:]

Understood. Thank you very much.

[Brian D. Doubles:]

Yeah.

[Operator:]

Thank you. Our next question is from Arren Cyganovich with D. A. Davidson.

[Arren Cyganovich:]

Thanks. In terms of the platforms, Payment Solutions continues to somewhat grow a bit faster. Is that a function of folks looking for the deferred interest products, or is it more a function of just adding higher number of partners in that over the past year?

[Margaret M. Keane:]

I actually think it's a couple of things. We've had great success in winning more partners there for sure. The second is, we've put a fairly robust marketing strategy in place there to actually get brief (45

[Arren Cyganovich:]

Thanks. And I guess, in terms of the – we're hearing from other issuers of the competitive environment, maybe more so related to the Retail Card side, seems to be increasing a bit over the past three months to six months, it's I guess, no big surprise, but I'm curious as to what you're saying from a competitive standpoint.

[Margaret M. Keane:]

Yeah, I think, it's been the same personally. I think, the players are the same players. You kind of get people come and go within that segment. I don't think it's hypercompetitive. I think, – listen, you need to ensure that you're building and investing in areas that are really going to help the partners. I think as you read, it's pretty 2% to 3% retail growth. So everyone is looking to try to get that customer back in there. We feel that, we have all the right aspects to compete effectively in the space. We're not going to win every deal, nor would we want to win every deal. So in the context of the overall market and what's available, we feel like we're winning the deals we want to win.

[Arren Cyganovich:]

Great. Thank you.

[Operator:]

And thank you. Our next question is from Mark DeVries with Barclays.

[Mark C. DeVries:]

Yeah. Thanks. I wanted to drill down a little more, Brian, as you commented on operating leverage in the business. I understand your guidance on the efficiency ratio for 2016. But just hoping if you can give us a little bit more to think about the kind of longer-term outlook for the efficiency ratio, and what kind of investments you need to make to continue to sustain growth from the business?

[Brian D. Doubles:]

Well, I would say, generally the level of investment will be fairly consistent with what we've been doing in the past few years. Investing in long-term growth, I guess is not a new concept for us, we've been doing that for quite some time. I think that's why we have the growth rates that we do, and we continue to win and renew our partnerships. What I would tell you is, we're very focused on driving operating leverage, you saw that in the first half of this year. It's a scalable business. I mentioned the infrastructure cost and the run rate earlier. We'll continue to drive operating leverage. But as we get more efficient across the business, we're always running productivity initiatives, and we're looking at moving more customers off of paper statements to online statements. We're improving our call center and collections efficiency metrics. And so we're working on eliminating waste in the backoffice, things like that, and that results in real operating leverage and real productivity. And then in parallel with that, we look at things that we feel like we need to invest in to be very a successful business for the next 10 years to 15 years. And those are things that, some of the things that Margaret talked about, investing in mobile capabilities which is something we've been doing for four years or five years, data analytics, CRM, I mean, this is a rapidly changing industry, and we've got to stay on top of those things. But even after you take those incremental investments into account, we would expect to and we would hope to continue to generate positive operating leverage. That doesn't mean we're going to generate positive operating leverage every quarter. We're not going to pass up a good long-term strategic investment to show a few basis points improvement on the efficiency ratio in any one quarter, but over the long-term, this is a big focus for us and for the management team.

[Mark C. DeVries:]

Okay. And just one clarifying question on the guidance itself. I think you indicated, remain below 34% on the back half. Are you talking about each quarter should remain below 34%, so the full year average probably remains below 33%, or you just saying, you're still sticking with the full year below 34%?

[Brian D. Doubles:]

We're sticking with the full year below 34%. Thanks for the clarification.

[Mark C. DeVries:]

Okay. Thanks.

[Brian D. Doubles:]

Yeah.

[Operator:]

And thank you. Our next question comes from Moshe Orenbuch with Credit Suisse. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks. Most of my questions actually have been asked and answered. But maybe just a follow up on credit, could you talk a little bit about the industry setting, and – because you've got more, I would say, more issuers also talking about the seasoning of their portfolios. Do you think that this kind of helps or hurts if others are in somewhat similar positions, and can you just talk about how that might affect yours and the industry going forward?

[Brian D. Doubles:]

Well, hard for me to comment on what others are saying. I think the trends are – and the commentary seems to be fairly consistent, which is I think that the backdrop is still pretty healthy. I think the consumer is still generally healthy. The overall macro environment is pretty strong. With that said, the consumer continues to take on more debt. They continue to take on more leverage, and while it appears to be modest, and it looks like the overall levels are still pretty reasonable and pretty responsible. It's something we're watching carefully, I think others are watching it carefully as well. So our forecast includes that trend. It also includes the other factors that I mentioned, portfolio mix and mix by program and channel and other things. We believe this is going to result in a gradual increase and charge-offs over time. Some of that is seasoning, but as I mentioned earlier, I think seasoning, while everybody has on a vintage similar seasoning patterns, depending on the growth rates and the consistency of the growth rates, you could end up with a very different result depending on the issuer. And so I think, while that is a factor we have certainly considered in our outlook, it gets place maybe less overall (51

[Margaret M. Keane:]

Yeah. So CareCredit is a great platform. It's one that we want to grow. So in addition to always signing up and winning new partnerships, which is key, the second area that we're focused on is really the utility of the card. So we're continuing to look at ways, and actually that consumers will have that card are looking to use the card more. So things like our partnership with Rite Aid, and you'll see more of those types of partnerships come out. We have a 50%, we use on that product, which is very high. We're looking at some additional industries that we might want to expand in, as well as, our biggest opportunity really in CareCredit is just getting more of what's in a partner's office. So if you think of dental as an example, it's getting more of those patients who come in to utilize the payment methodology of CareCredit. So we're working on some initiatives around that to really – similar to retail, increase our penetration in the office, of the card. So lots of activity going on there, lots of great marketing. We feel very positive about that business, and it might be a little kudos (53

[Operator:]

And thank you. And our next question comes from David Scharf with JMP Securities.

[David M. Scharf:]

Hi. Good morning. Thanks for taking my question. First, I had a follow up to really those questions on the pipeline in ROA. Margaret, as we think about the verticals you are targeting, and specifically T&E has been mentioned the last couple of quarters as a priority, you just signed up Cathay. More holistically, as we think about the T&E vertical, airlines, hotels and the like, and other verticals that are in your target area, is the profile or the mix of Dual Card in in-store going to materially change over the next few years? Should we be thinking about the profile changing, particularly as the T&E sector seems to be obviously, almost exclusively (54

[Margaret M. Keane:]

No, we look at – no, I would say, no. Dual Card is still a very important aspect of our business. We'll, I think generally speaking in our overall portfolio, we always prefer if we can have a private label card and a Dual Card in our retail segment, because it allows us to really grow that portfolio. In terms of the co-brand aspect of our business, we're really trying to take some of the learning set of our retail Dual Card space and leverage that across some of these opportunities on T&E side, and driving value props, and even how you sign up and using mobile and digital as a way to really advance there. As Brian said, we're not looking to be the next big co-brand company, that's not our strategy, but we think opportunistically in a way for us to grow the business is really to look for these other opportunities, and take our capabilities that we have, and leveraging those in some of these new markets.

[David M. Scharf:]

Got it. That's helpful. And then lastly, just one more follow up on credit. In the broader topic of curing later stage delinquencies, which was highlighted last month. Has there been any – is there any either internal change or external regulatory changes regarding call center activity, how active your delinquency management is, and anything on the collection front? And then in addition, can you provide some color whether historically you've sold many charge-offs, and how that mix plays into the recovery factor?

[Brian D. Doubles:]

Yeah, sure. So on the first one, I would say, generally we're always making improvements and refinements to our collection strategies. We're fully compliant with the applicable regulatory guidance, whether it's TCPA or whatever it is, and obviously those have some impact on our ability to collect. But I would not highlight them as being overly significant in terms of the overall results. There are things that we adapt to along with the rest of the industry and we make other improvements to work offset to those. In terms of recoveries, I would just reiterate what I said earlier, the overall recovery rate, which includes a combination of what we collect in-house as well as what we sell, it has been pretty consistent. If you look over the past two years, it's been right around 1.1% to 1.2% of average receivables. It's little bit higher this quarter. We think it comes back down into that kind of two-year average going forward.

[David M. Scharf:]

Got it. Thank you.

[Brian D. Doubles:]

Yeah.

[Greg Ketron:]

Hey Vanessa, we have time for one more question.

[Operator:]

And thank you. Our last question will come from Sanjay Sakhrani with KBW.

[Sanjay Sakhrani:]

Thank you. Good morning. I guess, I have a follow-up question on credit. It sounds now like you guys are talking about more normalization of losses versus some kind of specific stress as it might have sounded like at a recent conference. So maybe you could just talk about how you delineate the line between stress versus normalization. I think that would be really helpful.

[Brian D. Doubles:]

Yeah. Sure, Sanjay. So in June our comments indicated that we were expecting to see this modest increase in net charge-offs over the next 12 months. To us that's normalization. I think, others may have viewed it differently. And as part of that dialogue, we focus more specifically around the payment behaviors that were driving the reserve builds specifically in the quarter, that was the guidance we were providing. Now, I think we're trying to give you some broader context on items in the forecast that obviously influence the forecast, and items that drive some of that payment behavior that we're seeing, that the forecast includes things like portfolio mix by platform, by product, program channel. Well, seasoning is not as big for us, as I mentioned, as I think it may be for some others, that's included in our outlook as well, and we're also factoring the trends that we are seeing on the consumer. And I would just reiterate what I said earlier, that the consumer broadly is still generally healthy. We said all last year that we didn't think the consumer would get better, and they continued to get better all last year, and now we're seeing those improvements subside. But the overall macro-environment is still pretty strong. The thing that we're watching is the thing that I mentioned earlier, that the consumer continues to take on more leverage. It appears to be responsible at this point. The overall levels are reasonable if you look at, I mean, historic context. But it's something that we're watching carefully. And as we mentioned, we're watching what's going on in other asset classes as well, and looking at the layered risks. So our forecast includes that trend continuing, as well as the items I mentioned earlier.

[Sanjay Sakhrani:]

Okay. My follow up Margaret is just on the pipeline. I know you were asked the question, you characterized it as robust. But maybe you could just talk about the probability of something large happening over the near term. I mean, do you feel like that's the possibility?

[Margaret M. Keane:]

We'd love to have a big win. As I said earlier, we're going to continue to be disciplined and ensure that whatever we do win is a positive for the overall portfolio. We're competing on our capabilities, and we think in that particular area we're very strong, and we'll play out the opportunities that are out there.

[Sanjay Sakhrani:]

All right. Thank you very much.

[Margaret M. Keane:]

Thank you.

[Brian D. Doubles:]

Thanks, Sanjay.

[Greg Ketron:]

Hey, thanks everyone for joining us this morning and your interest in Synchrony Financial. The investor relations team will be available to answer any further questions you may have. We hope you have a great day.

[Operator:]

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