Summary
- I am looking to find good value in credit card companies while stock prices are down and have analyzed both Capital One and Discover.
- This article focuses on Synchrony Financial, which has shown similar trends to the other banks.
- But Synchrony is still profitable and issues private label cards.
- The bank is trading at a favorable valuation when looking at a long-term hold.
Introduction
Due to the novel coronavirus and resulting economic hardship, credit card companies have taken a hit over the past half year. In my recent articles on Capital One Financial (COF), Capitalize On Capital One Financial and Capital One Is Trading Lower Than Tangible Book Value, I have analyzed the past two quarters' financial results, the company's financial health, charge-offs and forbearance, and valuation. What I found was that the bank had a good long-term outlook with a low valuation. Due to this, I am going to analyze more credit card companies to see if more bargains can be found. I recently looked at Discover (DFS) in the last article which can be read here. What I saw was that the trends were just like Capital One's, but the value was far worse.
In this article, I will focus on Synchrony Financial (SYF) to see if it offers the same value as previously reviewed Capital One. In ensuing articles, I will cover other card-issuing banks to look for companies that offer good long-term holding value.
Company Overview
Synchrony Financial is a consumer financial services company just like Capital One and Discover. Just like the other two banks, Synchrony also has a large credit card segment consisting of 73% of total interest and fees. But there is one major difference between Synchrony and the other banks. Synchrony is a private label retail credit card issuer, which means that issued cards are store branded. This means that the cards Synchrony issues are generally only used in a single store. The top retail card partners for the bank are Walmart (NYSE:WMT), Gap (NYSE:GPS), J. C. Penney (OTCPK:JCPNQ), Lowe's (NYSE:LOW), and PayPal (NASDAQ:PYPL).
In Sync With The Other Banks
For FY 2019 Synchrony posted interest income of $19.09 billion, up 6.13% from the prior year. Along with that provision for losses was $4.18 billion, down 24.62%. This resulted in stellar net income growth of 34.3% at $3.747 billion. The efficiency ratio and net interest margin in 2019 was 31.9% and 15.78%.
Just like the other banks Q1 and Q2 of 2020 were not great by any means. In Q1, interest income was $4.407 billion, down 7.92%. Provision for losses jumped 95.23% to $1.677 billion. This bump in provision resulted in net income of $286 million, a decrease of 74.16%. The efficiency ratio and net interest margins were relatively flat at 32.7% and 15.15%.
Q2 saw worse results as to be expected. Interest income came in at $3.83 billion, down 19.16%. Provisions for losses stayed flat from quarter to quarter at $1.673 billion but was still up by 39.65% from last year. The result was net income of $48 million, which was a decrease of 94.37% compared to last year. Both the efficiency ratio and net interest margin were worse this quarter at 36.3% and 13.35%.
Overall, for the total six-month period, Synchrony Financial posted interest income of $8.237 billion, provisions for losses of $3.35 billion, and net income of $334 million. The change from prior year is as such: -13.51%, +62.86%, and -82.96%. The efficiency ratio and net interest margin for the six months was 34.4% and 14.35%. Compared to the other banks I have looked at, Synchrony is so far the only one to post a net income, although it is significantly less than the prior year. This is attributable to the "smaller" increases in provision for losses, which is due to the fact the bank is a private label issuer with a stickier customer base. To note on that front, in 2019 the average FICO score of customers was 719, which is very solid.
