Consumer financing giant Synchrony Financial (NYSE:SYF) has never quite lived up to its promise following its spin-off from GE's financing unit in July 2014. In its brief history as an independent credit card issuer that teams up with retail consumer brands, the company has woefully trailed the S&P 500 index, with shares chalking up a total return of just 66% since Synchrony's initial public offering, versus a 115% total return for the S&P 500 over the same time period.
Synchrony first encountered turbulence after losing its co-branded Walmart credit card business to Capital One in 2018, although it did retain its Sam's Club (a Walmart subsidiary) card relationship in 2019 as the portfolio transition was finalized. And in 2020, COVID-19 greatly impacted the company's ability to generate earnings off its book of consumer loans. Its fourth-quarter 2020 earnings, released Friday, show a slow recovery from the effects of the pandemic. But will this be enough to spark more vibrant share-price growth? Let's review the quarter below and address this larger question.
Improving -- if lackluster -- results
Synchrony's fourth-quarter 2020 net interest income declined by 7.5% year over year to $3.7 billion, although it did exceed the $3.5 billion generated in the sequential third quarter of 2020. This was due in part to an 80 basis-point increase in net interest margin (i.e. the spread financial institutions make between interest income and the cost of their funds) between the third and fourth quarters, to 14.6%.
Synchrony posted net income of $738 million, inching up 1% against Q4 2019 and improving considerably against the sequential third quarter's net earnings of $303 million. Synchrony's bottom line was helped by a lower quarterly provision for credit losses. The fourth-quarter provision of $750 million was well below the large provisions of the last three sequential quarters, which averaged $1.5 billion and were all booked to reflect expected credit losses as a result of the pandemic. Slightly better conditions in the U.S. economy allowed the company to normalize forward credit loss estimates over the last three months.
The financing organization's credit metrics showed strength as consumers continued to use stimulus funding received during the year to make timely payments on credit card debt. Net charge-offs as a percentage of average loans receivable fell two percentage points against Q4 2019 to 3.16%, while accounts 30-plus days past due as a percentage of period-end loans receivable dipped nearly 140 basis points to 3.07%.
Challenges and opportunities
Healthier credit quality metrics traceable to stimulus checks come with a downside for Synchrony Financial. Though consumers have paid down credit card debt, they've also visited retail stores much less frequently during the pandemic, and thus haven't added much in the way of new borrowings against many of the co-branded credit cards the company features with major retail partners.
Indeed, loan receivable balances at period end slipped 6.1% year over year, to $81.9 million. Shareholders want to see the company grow its loan receivables quarter in and quarter out; after all, loans to consumers represent its primary earnings base. And naturally, as we move past the pandemic, Synchrony can expect an uptick in consumer borrowing. But it's unclear just how long it will take for significant organic growth in its receivables base to materialize, just as it's unclear how much consumers' purchasing behavior has permanently changed over the last year, given the shift to digital commerce as opposed to in-store, physical card purchases.
To management's credit, Synchrony is responding to the digitization of commerce by offering fintech-friendly solutions. A salient example is the company's partnership with PayPal's social app Venmo, in which Synchrony is the issuer of the new "Venmo Credit Card." The card is designed to be mobile-first, i.e. tightly integrated with the Venmo app. It also comes with a virtual version that can be used for online purchases, even in advance of the customer's initial receipt of the card.
The company has a similar e-commerce-friendly approach in a new venture with Walgreens. Synchrony will be the issuer of Mastercard and Walgreens' co-branded credit and debit cards. Integrated with Walgreens' new loyalty program, the cards can be used for in-store and online purchases at Walgreens. The co-branded credit cards in particular can be used at other retailers and will generate loyalty program rewards based on purchase amounts.
The Walgreens deal also helps Synchrony add to its growing health and wellness financing platform, "CareCredit." Last week, Synchrony announced the acquisition of Allegro Credit, which focuses on extending credit for consumer purchases of audiology products, dental services, and even musical instruments. While the deal won't immediately impact Synchrony's earnings, it exemplifies management's desire to diversify away from the company's traditional retail concentration.
So, what's next for Synchrony Financial? Should its investments in newer, tech-enabled card revenue streams pay off, current shareholders may see some relief in the following quarters as its loan base rebounds. After years of chronic underperformance, Synchrony's stock presently trades at just 9 times forward earnings. This is a 59% discount to the average forward price-to-earnings ratio of 21.7 currently held by corporations within the S&P 500 index, of which Synchrony is a member. While the company is unlikely to score overnight success, if it can achieve a modest amount of sustained earnings momentum, shares could move significantly above their current level over the next several quarters.