UPDATE: This article includes comments from the bank's earnings call and analyst notes.
Credit card issuer Synchrony Financial's profits surged 25% in the third quarter even as the generally spendy American consumer appeared to cut back on retail purchases.
Synchrony, which partners with retailers on store cards, said Wednesday that its net earnings jumped to $789 million during the quarter, from $628 million a year ago.
Though spending on its cards fell, Synchrony ended the quarter with more loans and was thus able to collect more interest revenues on those balances.
The reduced spending by Synchrony cardholders bucked the upward trend since the COVID-19 pandemic. Purchase volumes fell by 4% to $45 billion during the quarter, which CEO Brian Doubles attributed partly to consumers cutting back on discretionary purchases and rethinking big-ticket purchases.
Overall, consumers remain in "pretty good shape," and the fact that some of them are trading down to cheaper goods or buying fewer luxury items does not by itself pose concern, Doubles said.
"Consumers are slowing spend, but they're doing it in … a rational, disciplined way," Doubles said. "We actually like the fact that we can see that they're managing to a budget. They're navigating the higher cost of goods."
Rather than buying a $4,000 mattress, consumers are spending $2,500, or they're deferring some less necessary purchases such as cosmetics or Lasik surgery, Chief Financial Officer Brian Wenzel told analysts.
Synchrony's recent
The company's diluted earnings of $1.94 per share beat the analysts' estimate of $1.80 per share, according to S&P Capital IQ data.
"Overall, this was a solid quarter," RBC Capital Markets analyst Jon Arfstrom wrote in a note to clients, arguing that credit quality remains "very manageable" and pointing out that revenues beat expectations.
Even as spending dipped, Synchrony ended the quarter with more loans on its books. Loan receivables rose 4% from a year ago to $102.2 billion, as customers carried larger balances on their cards.
Higher loan volumes helped Synchrony earn more money from interest on cardholders' balances, outstripping higher deposit costs in the third quarter, which stemmed from its high-yield savings platform. Net interest income rose to $4.6 billion during the quarter, up 5.7% from a year-ago period.
Also helping drive revenues was a suite of changes Synchrony rolled out to blunt the impact of the Consumer Financial Protection Bureau's late-fee rule. The rule would slash the maximum late fees on credit cards to $8 from upward of $30.
Though the rule remains in
Those changes have already "started to flow to the bottom line," TD Cowen analyst Moshe Orenbuch wrote in a note to clients. As long as the rule remains in limbo, Synchrony "will be over-earning," he added.
The $119.2 billion-asset bank increased its provision for credit losses to $1.6 billion during the quarter, up by $109 million from a year earlier. Higher net charge-offs were the culprit.
Net charge-offs as a percentage of average loans jumped to 6.06% during the quarter, up sharply from 4.6% a year ago. But they dipped from 6.42% in the second quarter.
Loan delinquencies also rose as more Synchrony customers fell behind on their credit card payments. The share of loans with late payments of 30 or more days rose to 4.78% during the quarter, up from 4.47% in the second quarter and 4.4% a year ago.
Analysts didn't seem overly worried about the credit trends, with Orenbuch writing that the metrics were both in line with expectations and a sign of stability.
Synchrony said that it either added or renewed partnerships with 15 merchants, including the guitar-maker Gibson and Dick's Sporting Goods, during the third quarter. The latter partnership has spanned for more than 20 years, Synchrony said, and the renewal included major upgrades to member rewards.
