Synchrony Financial (NYSE:SYF) Q2 2024 Earnings Conference Call July 17, 2024 8:00 AM ET

Company Participants

Kathryn Miller - SVP of IR
Brian Doubles - President and CEO
Brian Wenzel - EVP and CFO

Conference Call Participants

Mihir Bhatia - Bank of America
Terry Ma - Barclays
Mark DeVries - Deutsche Bank
Moshe Orenbuch - TD Cowen
Ryan Nash - Goldman Sachs
Sanjay Sakhrani - KBW
Rick Shane - JPMorgan
Bill Carcache - Wolfe Research
Dave Rochester - Compass Point
John Hecht - Jefferies
Don Fandetti - Wells Fargo

Operator

Good morning and welcome to the Synchrony Financial Second Quarter 2024 Earnings Conference Call. Please refer to the company's Investor Relations website for access to their earnings materials. Please be advised that today's conference call is being recorded. [Operator Instructions]

I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. 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

Thanks, Kathryn, and good morning everyone.

Today Synchrony reported strong second quarter results, including net earnings of $643 million, or $1.55 per diluted share, a return on average assets of 2.2% and a return on tangible common equity of 20.2%. This performance is a testament to our differentiated business model. We continue to leverage our diversified portfolio of products and sales platforms, disciplined approach to credit underwriting and management, and innovative digital capabilities to further progress on our strategic objectives and to deliver sustainable, risk-adjusted growth and returns over the long term.

Customer demand for Synchrony's product and value propositions remained strong during the second quarter as Synchrony added 5.1 million new accounts, grew average active accounts by 2%, generated $47 billion of purchase volume and delivered ending receivables growth of 8% compared to last year.

Synchrony's proprietary data and analytics, in combination with our flexible financing solutions and dynamic technology platform, have been core drivers of our performance through evolving market conditions, particularly as we seek to responsibly address the needs of our customers and partners.

And while our credit trends relative to pre-pandemic levels have outperformed most of the industry today, we have leveraged these strengths to take action in our portfolio where we have seen indications of higher probability of default. These credit actions, along with a more selectively spending consumer, have contributed to lower new account and purchase volume growth in the second quarter, but have also improved our recent delinquency trends and should strengthen our portfolio's credit trajectory in 2024 and beyond.

At the platform level, purchase volume and receivables trends were generally consistent in the second quarter. Purchase volume growth ranged from up 2% to down 3% year-over-year, broadly reflecting lower consumer spend on bigger ticket items, particularly in categories like furniture, jewelry and vision, as well as the impact of the credit actions.

Meanwhile, receivables growth across the platforms ranged from 6% to 15% higher versus last year, driven primarily by payment rate moderation. Dual and co-branded cards accounted for 42% of total purchase volume for the quarter and increased 2%.

Synchrony's out-of-partner spend gives us deeper insight into recent customer trends as the broad utility of our offerings and compelling value propositions attract purchases across a range of categories, industries and products.

Our customers continue to be discerning in their discretionary purchases, particularly in larger ticket categories such as home furnishings, travel and entertainment. They have been spending more at restaurants, though, and continue to spend at the pharmacy and on health and wellness needs and contributing to non-discretionary spend growth more broadly.

That said, our customers are spending slightly less per transaction across most categories and credit grades, as average transaction values declined about 2% versus last year. Only our top credit segment saw growth in average ticket values during the second quarter.

Customers across credit grades are transacting more frequently, however, which has generally offset most of the impact of lower transaction values. Altogether, we view these spend behaviors as appropriate and consistent with the payment rate normalization that began in our portfolio in 2023 and has continued since.

Over the first six months of 2024, however, the pace of this payment rate moderation has decelerated across credit grades. And according to the external deposit data we monitor, there continues to be relative stability in savings balances compared to the rapid tapering that occurred through the middle of last year.

When taken together, we believe these spend, payment and savings trends support our view that consumers are making healthy decisions to actively manage their cash flows. And these trends, coupled with the impact of our credit actions, give us confidence that Synchrony's net charge-off rate should be lower in the second half of this year than in the first half.

As we continue to monitor the health of the consumer, our portfolio credit performance and that of the broader industry, Synchrony is also utilizing our proprietary insights and lending expertise to position our business for sustainable, risk-adjusted growth for many years to come. During the second quarter, we added or renewed more than 15 partners, including a program expansion and extension with Verizon and the addition of Virgin Red. We are excited about our continued partnership with Verizon and the opportunity we see to deliver maximum customer value on purchases made at Verizon.

We are also proud to be the exclusive issuer of Virgin Red's multi-category travel card, the first ever Virgin Red Rewards World Elite Mastercard, which will connect members across the Virgin family from flights to cruises, hotels and experiences with points that never expire. Cardholders will earn Virgin points on all of their Virgin Red Rewards card spend, which can be used for a range of gifts and rewards, all while enjoying a first-rate digital experience from application to servicing.

And as Synchrony continues to extend our reach and further optimize outcomes for both our customers and partners, we are incorporating strategic and technology-oriented partnerships to power more seamless digital experiences. Synchrony selectively works with second-look financing solutions to enhance the customer experience and our partner relationships.

We recently announced an expanded relationship that will utilize a fully integrated solution spanning the full customer, apply and buy experience across all points of sale. Synchrony will own the point-of-sale platform and connect to the second source provider in a way that's seamless to both the partner and the customer that's applying. This collaboration will utilize our innovative technology and data to responsibly expand access to credit to more consumers, while also driving stronger loyalty and sales for the many small businesses, healthcare providers and retail partners we serve.

Meanwhile, Synchrony launched our partnership with Installation Made Easy, a leading enterprise software and services company that supports retail-based home improvement programs. This partnership will enable Floor & Decor cardholders to use their Synchrony-issued credit card to finance both the materials and the installation service required for their home improvement projects through one streamlined process. We're excited about the opportunity we see to strengthen our position in the home improvement market and plan to scale this capability to additional retailers over time.

So whether it's through the continued expansion of our distribution networks, the addition and renewal of programs that span most consumer spend categories, or the enhanced functionality at point of sale, Synchrony is leveraging our proprietary data and analytics, our diverse product suite, and our innovative technology to drive greater access, flexibility and utility for both our customers and partners.

With that, I'll turn the call over to Brian to discuss our financial performance in greater detail.

Brian Wenzel

Thanks, Brian, and good morning everyone.

Synchrony's second quarter results continue to demonstrate the resilience of our differentiated business model through an evolving environment. While consumers are managing their cash flows and consumption and the impact of our credit actions are beginning the season, we remain focused on driving sustainable, risk-adjusted growth.

Turning to our financial performance. Ending loan receivables grew 7.9% to $102 billion in the second quarter, benefiting from an approximately 80 basis point decrease in the payment rate and reflecting growth across each of our sales platforms. Net revenue increased 13% to $3.7 billion, reflecting higher interest and fees, lower RSA and an increase in other income. Net interest income increased 7% to $4.4 billion as interest and fees grew 10%, primarily reflecting growth in average loan receivables.

Our loan receivable yield grew 14 basis points, benefiting from product repricing actions and lower payment rate, partially offset by the higher reversals as our net charge-offs increased. RSAs of $810 million in the second quarter were 3.21% of average loan receivables, down $77 million versus the prior year, driven by higher net charge-offs partially offset by higher net interest income.

And the increase in other income primarily reflected a $51 million gain related to the exchange of our Visa B-1 shares, as well as initial fee-related impact of our product, pricing and policy changes, or PPPCs. These benefits were partially offset by the impact of the Pets Best disposition. Provision for credit losses increased to $1.7 billion, reflecting higher net charge-offs and a $70 million reserve build.

Other expenses grew 1% to $1.2 billion, which was driven by technology investments, preparatory expenses related to late fee rule change and servicing costs related to newly acquired businesses, partially offset by the operational losses and cost discipline resulting from lower employee and marketing costs. The preparatory expenses related to the late fee rule changes reflected $23 million of incremental costs related to both the execution of our PPPCs and the implementation of the rule itself, should it become effective.

Even with these incremental costs, Synchrony's efficiency ratio was 31.7% for the second quarter, an improvement of approximately 380 basis points versus last year. In sum, Synchrony generated net earnings of $643 million, or $1.55 per diluted share. This produced a return on average assets of 2.2% and a return on tangible common equity of 20.2%.

Next, I'll cover our key credit trends on Slide 9. At quarter end, our 30-plus delinquency rate was 4.47% versus 3.84% in the prior year and 19 basis points above our historical average from the second quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.19% versus 1.77% last year and 18 basis points above our historical average from the second quarters of 2017 to 2019. And our net charge-off rate was 6.42% in the second quarter compared to 4.75% in the prior year and 62 basis points above our historical average from the second quarters of 2017 to 2019. Our allowance for credit losses as a percent of loan receivables was 10.74%, up 2 basis points from 10.72% in the first quarter. The reserve build in the quarter primarily reflected loan receivable growth.

As shown on Slide 10, the credit actions we've taken thus far are improving our delinquency trajectory as the rate of year-over-year growth continues to decelerate. We will continue to closely monitor our portfolio performance and the credit trends for the broader industry given our share consumer and we will take additional credit actions as necessary.

While these actions are reducing new account and purchase volume growth in the short term, we expect they will strengthen our portfolio's positioning as we exit 2024 and support our ability to deliver our targeted risk-adjusted returns over the long term.

Turning to Slide 11, Synchrony's funding, capital and liquidity remain a source of strength. We grew our direct deposits in the quarter as consumers responded to our strong offerings while reducing our broker deposits. Deposits represented 84% of our total funding at quarter end and a secured and unsecured debt, each representing 8% of total funding. Total liquid assets and undrawn credit facilities were $23 billion, up $3.6 billion from last year, and represented 19.1% of total assets, up 124 basis points from last year.

Moving on to our capital ratios. As a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony will make a final transitional adjustment to our regulatory capital metrics of approximately 50 basis points in January 2025. The impact of CECL has already been recognized in our income statement and balance sheet.

Under CECL transition rules, we end the second quarter with a CET1 ratio of 12.6%, 20 basis points lower than last year's 12.8%. Our Tier 1 capital ratio was 13.8%, 20 basis points above last year. Our total capital ratio increased 10 basis points to 15.8%, and our Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 23.9% compared to 22.8% last year.

During the second quarter, we returned $400 million to shareholders consisting of $300 million of share repurchases and $100 million of common stock dividends. As of quarter end, we had $1 billion remaining of our share repurchase authorization for the period ending June 30th, 2025. Synchrony remains well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan.

Combining those results, Synchrony delivered a second quarter performance largely within our expectations. We remain focused on taking appropriate actions to prepare our business for years to come, including our ability to deliver our long-term targeted loss rate between 5.5% and 6% and average return on assets of at least 2.5% on average over time. We've been closely monitoring our performance and taking prudent credit actions in support of these objectives.

And in preparation for the pending new rule on late fees and our desire to offset the impact on our business as soon as possible, Synchrony has completed the first phase of our PPPCs. Most of these actions will begin to go into effect in the second half of 2024 and we'll continue to track their financial and operational impact on our customers, partners and portfolio to determine alongside our partners whether any refinements to our strategies are warranted to achieve our shared objective.

As a reminder, specifically related to the framework around the pending late fee rules and our PPPCs, there continues to be uncertainty regarding the timing and outcome of late fee-related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of late fee rule changes and any potential changes in consumer behavior in response to the PPPCs we implement as a result of the new rule. Outcomes and actual performance related to these uncertainties could impact our outlook.

With that framework, let's turn to the outlook for the second half of 2024. We expect the consumer to continue to manage their cash flows and consumption, which, when combined with our credit actions, should result in flat to low-single-digit decline in purchase volume. We continue to expect payment rates to moderate, which, when combined with our purchase volume expectations, should contribute to more moderate loan receivable growth in the second half. Excluding the impact of late fee rule implementation, we expect net interest income and other income to progressively grow in the third and fourth quarters as our PPPCs take effect.

From a credit perspective, delinquencies should continue to trend in line with or better than seasonality. We expect our net charge-off rate to be lower in the second half of this year than the first half. Our reserve coverage ratio at the end of 2024 is expected to be generally in line with our year-end 2023 reserve rate. RSA will continue to align with program and company performance. And finally, we expect other expenses to trend in line with the first-half average on a dollar basis.

When you combine these factors and include the impact of the late fee rule assuming an implementation date of October 1st, 2024, along with the various offsets from the implementation of our PPPCs and the $1.96 per share gain on the sale of our Pets Best business in 1Q '24, Synchrony expects to deliver fully diluted earnings per share between $7.60 and $7.80 for the full year. This consolidated and updated EPS range is in the upper end of our prior guidance and reflects Synchrony's dedication delivering optimized outcomes for our many stakeholders, including strong risk-adjusted return for our shareholders.

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

Brian Doubles

Thanks, Brian.

Synchrony continues to execute at a high level in an evolving environment. We are leveraging our scale, our data analytics and credit management tools, our advanced digital capabilities, and our deep lending expertise to remain nimble and responsive while powering still better experiences and greater value to the customers, partners, providers and small businesses we serve.

We are consistently driving compelling results for our many stakeholders and that momentum is increasingly attracting new and deepening existing opportunities for continued risk-adjusted growth, further embedding Synchrony at the heart of American commerce.

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.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Mihir Bhatia with Bank of America. Please go ahead.

Mihir Bhatia

Good morning. Thank you for taking my question. I wanted to start with just the health of the consumer. It sounds like the consumer is coming in a little weaker than you had maybe anticipated between purchase volume being lower, reserve rate a little higher. First, I guess, is that a fair statement? And if so, can you just comment on what other changes that is driving? Is it signaling that you need to tighten underwriting? Are you continuing to tighten underwriting? Is that broad-based? Is it about tweaking around the edges? Just how are you thinking of the consumer heading into like back-to-school season here? And just trying to understand your view on the consumer -

Brian Doubles

Yes. No, thanks for the question. I think, well, generally, I think in the aggregate the consumer is still in pretty good shape. I think the trends that we're seeing are pretty similar across the industry. Obviously labor market is strong. That's definitely helping. I think most of the indicators so far are largely in line with what we expected to see.

With that said, as you kind of dig into the portfolio, there are clearly some differences as well, as you look at different customer cohorts. The more affluent higher-income segments are still spending. They're not really as impacted by inflation. On the other end of the spectrum, you are starting to see the lower-income consumer pull back a bit. They're rotating into non-discretionary categories.

So it's clear that they're feeling the effects of inflation and they're managing to a budget. And so while you're seeing that impact, purchase volume of the debt, new accounts, we think that's actually a positive from a credit perspective. People are being disciplined. That's a good thing. We don't see people overextending. So they're managing their spend and their cash flows, which again, I think is a positive from a credit perspective.

Mihir Bhatia

Maybe just staying on credit then. Just on the reserve rate guidance, it changed to be -- I think now you're saying year-end '24 in line with '23. I think earlier it was a little bit better than '23. That said, you did call out and we see the data, right, the delinquency rate is trending in line to better than seasonality. Were you expecting more improvement than you got? I'm just trying to understand the factors driving the higher guide on reserve rate and if that implies '25 net charge-offs will be similar to '24.

Brian Wenzel

Yes. Thanks for the question, Mihir. When we entered the year, I think everyone had a perspective with regard to how the economy is going to develop, how inflation potentially could bend and interest rates could move down, right? As Brian mentioned, the consumer is managing and the longer they stay in a period of higher costs, particularly those that are lower income to medium income, that poses different risks.

I think as we sit here in the middle part of the year, we would have hoped for probably greater progression against the inflation target, even though we understood it was sticky and we'd hope for, even though we only had three rate increases or rate -- I'm sorry, rate decreases for the back half of the year, we're down to one.

So I think things have shifted out a little bit. So I think we're just being a little bit more cautious with regard to how we think about the macro going forward until we see signs that inflation really is breaking through some of this stickiness and you see some help to those consumers. So I don't think it's a tremendously different posture. It's just a little bit more conservative in how you think about your quantitative reserves versus your qualitative reserves.

Mihir Bhatia

Thank you for taking my question.

Brian Wenzel

Thanks, Mihir.

Operator

Thank you. Our next question comes from Terry Ma with Barclays. Please go ahead.

Terry Ma

Hi. Thanks. Good morning. So I guess based on the rollout of your PPPCs, is the $650 million to $700 million range still kind of the right range to think about for the second half? And then secondly, is there a way you can kind of quantify what that -- how that range changes if the late fee cap were to not be implemented this year?

Brian Wenzel

Yes. Thanks for the question, Terry. I'll start where you ended. As we sit here today, there continues to be activity in the Texas courts. And as Brian indicated and I indicated in our remarks, that is uncertain. So the best guess we have now is an October 1st implementation date. And until we get some more definitive view with regard to whether or not that rule becomes effective on that date or a different date, we don't really have an update with regard to the impact and its effect if it doesn't go into play. So again, when we have greater certainty with regard to that implementation date, we'll certainly come back.

With regard to the impact of the PPPCs, we provided updated guidance today. Again, if you take the midpoint of the -- both the core as well as the late fee assuming October 1st implementation date and add the Pets Best, you're at the midpoint to high end of the range from an EPS, which should give you a perspective on how we feel about both the core business as well as the actions we're taking with regard to the potential change in late fees.

Terry Ma

Got it. Okay. That's helpful. And then in terms of the RSA, how should we think about that, how that would trend in the second half, as you were kind of that again start rolling in?

Brian Wenzel

Yes. A framework to think about it, Terry, is to think about the pieces that are going to flow through here. Obviously, we indicated that the second-half loss rate will be lower than the first-half loss rate. So obviously that's a upward bias on the RSA percent. Most certainly, I think in the third quarter, you're going to see some of the PPPC actions roll through. That's going to create an upward bias in the RSA.

And then that turns around in the fourth quarter is -- again, assuming an October 1st implementation date of late fees that comes into play. And then I think it's just going to track with NII growth, which will be a little bit beneficial with slightly lower purchase volume. So there'll be some puts and takes, some of which will create headwinds, some of which create tailwinds.

Terry Ma

Yes. Got it. Thank you.

Brian Wenzel

Thanks, Terry.

Operator

Thank you. Our next question will come from Mark DeVries with Deutsche Bank. Please go ahead.

Mark DeVries

Yes. Thanks. Look, I appreciate there's a lot of moving pieces on the NIM for the second half of the year just given the implementation of some of the PPPCs and then -- and the potential rolling of the late fee impact. But could you just, Brian, maybe just give us a sense of kind of what the moving pieces are and what kind of your expectations are for NIM in the back half of the year?

Brian Wenzel

Sure. Thanks for the question, Mark. So here's a framework how I think about some of the moving pieces you got to take into consideration, right? Number one, as we talked about, net charge-offs being lower in the second half versus the first half, you'll get a benefit to the net interest margin, right, relative to lower reversals. So that's a positive to the net interest margin.

I think when you look at the net funding costs, so the interest expense and the investment income, that's probably going to be flattish to the back half of the year. You will pick up and there'll be a benefit into the net interest margin relative to the mix between average loan receivables and average interest-earning assets. So that will be a positive to NIM.

You will pick up and you should see it in the third quarter some of the PPPC actions that are yield-related. So again, some of the things that were strictly APR related, some of the practices related to how interest was assessed and a little bit related to some promotional fees that roll into place. And you should see, again, hopefully a little bit benefit on the interest and fee line. So, generally there should be a positive trend up from where we move here into the back half of the year.

Mark DeVries

Okay. That's helpful. And are there any contemplated PPPC measures that you've yet to put in place and are waiting for either to see how the consumer behaves or for actual implementation of the changes to the late fee rules?

Brian Wenzel

Yes. What our team has gone through, the first wave that we've executed against that are ones that we have fully vetted internally with ourselves and then with our partners. So they are fully executed. There are other things down the road that are probably a little bit longer tail and we're still continuing to evaluate some around product configuration and other types of products for different segments inside the portfolio.

So that's not necessarily part of the initial solve, but that may be a reaction that we come back with over time but wasn't necessarily critical to us to try to achieve the goal of being ROA neutral with the same level of sales.

Mark DeVries

Got it. Thank you.

Brian Wenzel

Thanks, Mark. Have a good day.

Brian Doubles

Thanks, Mark.

Mark DeVries

Thanks.

Operator

Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. Please go ahead.

Moshe Orenbuch

Great. Thanks. Just continuing on that idea of the pricing changes. I know it's early, but have there been kind of impact on the consumer side that you can kind of see or talk about positive or negative from the pricing changes that you've put in place?

Brian Wenzel

Yes. Thank you, Moshe, for the question. We have a detailed monitoring dashboard that's in place that looks at a lot of different measures. Moshe, it starts with purchase active rate, sales per account, as you can imagine, includes closure rates -- voluntary closure rates. It includes call volume, complaint volume, all sorts of different measures that we would look at relative to this.

I think it's important to understand why -- the first wave is complete now. We only have the CITs that we mailed in December having a full quarter. When we look at that dashboard in its entirety, it's generally in line with our expectations. As we step into the third quarter, I think we're going to get a greater view with regard to consumers' adoption with regard to it. I think we've seen some positive things around e-bill adoption, et cetera. So we closely monitor it gets produced and distributed to a wide variety of people inside the organization as we closely look at that and share that with our partners.

Moshe Orenbuch

Got it. Thanks. And Brian, you talked a little bit about the delinquency and loss rates relative to the 2017 to 2019 averages. Given that you've kind of said and reaffirmed that they will continue to improve and be lower in the second half and possibly better than seasonals, I guess, how do you see that? Assuming employment levels are stable here, how would you see that kind of trending towards those averages? How close could they get? And what is it that would then kind of get you to the point where you could think about neutralizing or reversing some of those tightening efforts?

Brian Wenzel

Yes. So I think it's important, Moshe, to take -- to really take a step back. First of all, we've lagged the industry with regard to normalization. I think when you look at the amount that we are above our '17 to '19 range, I think outside of maybe one or two issuers, we actually are performing pretty well, being our 30-plus is 19 basis points higher than historical average and our 90-plus being 18 basis points higher than our historical average.

And then again, you're right. When you look at the second quarter on a 30-plus basis, we're a couple of basis points favorable to seasonality and 90-plus, I think we were from range of 1 basis point to 2 basis points less than, so, generally in line to slightly better than seasonality.

So I think we look at that -- I think we're going to look at how the macro environment develops. And again, the consumer is managing today as we start to see relief kind of come to them, I think we'll reevaluate it. I would not have an expectation that we're going to adjust those refinements in the near term here until we get greater clarity on the environment.

Moshe Orenbuch

Okay. Thank you.

Brian Wenzel

Thanks, Moshe. Have a good day.

Operator

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

Ryan Nash

Hi, good morning, everyone.

Brian Doubles

Hi, Ryan.

Brian Wenzel

Morning, Ryan.

Ryan Nash

Maybe sticking with the late fee topic. Given the range of things that have been added, APRs, paper statements, trailing interest and the like, obviously markets have become hopeful that the rule could get delayed or may roll in favor of the industry. And I'm just curious, in a scenario, in a positive outcome for the industry, when you think about the range of changes you've made, what changes do you foresee sticking versus others, that there's the potential you may pare back over time?

Brian Wenzel

Yes. First of all, good morning, Ryan. The first thing I think we have to have certainty, right, relative to whether or not the late fee rule, if it is delayed or ultimately overturned by the courts, whether or not the CFPB would continue down the path of pursuing some type of limitation on late fees. So I think you have to have some level of certainty beyond that.

I think as you think about the pricing change, first and foremost, we're going to look at consumer behavior and whether or not consumer behavior changes here and whether or not changes would be warranted. I think when you step beyond that, there's probably two buckets, Ryan. The first bucket is one that involves our partners and RSAs.

And there we would go and share the data with our partners and have a discussion with regard to pricing and make some decisions with their input. And then bucket B is things that are inside our brand and control. So you think about our Synchrony Mastercard, our Home & Auto cards, things like that, that we would control, but obviously we do that.

It's fair to say not everything would ever get rolled back. But to be honest with you, Ryan, we have not spent a lot of time as a team going through this scenario. Right now, we're really focused on implementing the PPPCs and following the developments in the court being prepared, I think, for the outcome that the late fee rule goes into effect.

Ryan Nash

Got it. And then if you look at how new accounts have progressed, obviously they're down a decent amount year-over-year, which makes sense given the discussion regarding tighter underwriting. But as you look ahead, given the tightness that it doesn't sound like we're going to be rolled back right now, you also have some payment rate normalization. How do you think about the pace of loan growth over an intermediate time frame?

Brian Wenzel

Yes. So first, let me just focus for a little bit on new accounts, the 14%. There's probably two big buckets there, Ryan. The first is, we are seeing, and Brian talked about this with discretionary spend and some of the things where the consumer is managing their spend levels. We are seeing lower foot traffic and lower retail traffic, both in a physical footprint as well as in a digital orientation. So the through-the-door population most certainly is limiting some of the opportunities to generate new accounts.

And then obviously you've had a modest impact from credit actions with regard to doing that. That will impact growth more so in '25 than it does really in '24, right? So you think about an account build that probably takes about 12 months or so to kind of get to a average balance per account that's more mature. So I think you're going to feel a little bit of pressure here.

I do think given our position with most of our partners, you would see probably something above GDP level and will continue to grow. Most certainly, when you look at the platforms, we're excited about the Health & Wellness growth we continue to experience, even though there's some pullback there in cosmetic and LASIK, for example.

But that is a strength for us. We continue to have strength in some of the other platforms, like our Home Specialty business and Home & Auto. So, again, we're not going to necessarily give guidance, but I think there are some positive things inside of the sales platforms that will hopefully bridge us into a better economic period.

Brian Doubles

I think the other thing I would add, Ryan, the active account growth that we're seeing, we actually probably watch that even more than new account growth because we've been making big investments in lifecycle marketing and figuring out across all of our platforms, how do you engage that customer in the second and third, fourth purchase. And so just seeing that positive inflection year-over-year I think is a positive.

And then, look, the consumer is still in a good spot, but we are seeing lower store traffic and some pullback there. And then we're obviously proactively making some credit actions that'll improve the trajectory into next year. So overall, we feel pretty good about the trends that we're seeing.

Ryan Nash

Awesome. Appreciate the color.

Brian Doubles

Yes. Thanks, Ryan.

Brian Wenzel

Thanks, Ryan.

Operator

Thank you. Our next question comes from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani

Thanks. Good morning. Maybe just to follow up on some of the questions around credit quality. Brian Wenzel, if we -- I know I've heard you talk about some of the moves you made to sort of refine the underwriting some time ago. I mean, is the -- are the benefits of that in front of us so that we should see some more stepped-up improvement in that second derivative on delinquency rates?

And then I'm trying to think through some of the questions that were asked before, like shouldn't that really -- that coupled with the tighter underwriting and the slower loan growth should help credit quality? Shouldn't it? So, I mean, is that just built-in conservatism in your credit outlook or what for this year in terms of the flat reserve rate? Thanks.

Brian Wenzel

Yes. First of all, good morning, Sanjay. Thanks for the question. I think there's a combination where the credit actions -- remember, we started this in second quarter last year into third, and then really started in again the latter part of the first quarter into the second quarter of this year. You see it reflecting in the moderation of the year-over-year change in delinquencies, which we showed on Page 10 of the earnings presentation here. So some of it is being manifested itself in delinquency trends. Obviously, it takes time to season. So I think you would expect the benefit of those actions to kind of continue to go through.

Now, again, actions that we put in place in the second quarter this year have probably a little bit more reduced effect on this year, more effect as you exit out of '24 into '25. So it's really a combination. I'd say from an efficacy standpoint, we are not taking or not continuing to take broad-based actions. At this point, we stand ready to do that if something deteriorates. But right now we're continuing with our normal refinements, which are more idiosyncratic at the partner portfolio, product and channel level.

Sanjay Sakhrani

Okay. And I have a question for Brian Doubles' follow-up. Maybe you could just talk about the state of potential partnership opportunities or deals for portfolios. Anything changed relative to the previous quarter? Thanks.

Brian Doubles

Yes. Sure, Sanjay. Look, I would say that we have a pretty healthy pipeline of opportunities that continues to be true. I think, competitively we're certainly differentiated in terms of our technology investments, how we partner, how we integrate, and so that continues to resonate with both our existing partners, but also new prospects. So I feel really good about all that.

I think, look, in this environment too, whenever you're in an environment that's a little bit uncertain, you tend to see more rational pricing, a little more discipline across the industry, which again, is a good thing.

When we were in the headier days of '21, '22, things could get a little bit irrational when you're pricing at historically low loss rates. We always price through a cycle. We'll continue to do that. But I think the environment right now, across the industry, across the competitive side is pretty rational. I feel really good about how we're positioned and we got a -- we've got a good pipeline of opportunities.

Sanjay Sakhrani

Great. Thank you.

Brian Doubles

Yes. Thanks, Sanjay.

Brian Wenzel

Thanks, Sanjay.

Operator

Thank you. Our next question will come from Rick Shane with JPMorgan. Please go ahead.

Rick Shane

Good morning, everybody, and thanks for taking my questions.

Brian Doubles

Hi, Rick.

Rick Shane

Look, I'd love to talk a little bit, you've moved guidance to sort of the upper end of your prior range, and I'm curious how much of that is a function of timing, favorable timing with PPPC implementation versus late fee, how much is a function potentially of slower loan growth into the second half of the year and a favorable impact on reserves and whatever other fundamental factors might be driving that.

Brian Wenzel

Yes. Thanks for the question, Rick. From a timing perspective, I don't believe that there's anything significant in the timing of the execution. I'd say from an execution standpoint, I think we've hit all our deliverables. Given the process you have to go through to do the amount of things in terms that we've done, we've executed on the timeframe, in the timeframes that we have in place, and they're rolling out according to schedule. So there's nothing really timing-related there.

I'd sit back and say moving to the middle end of the range, to the higher end of the range, just really overall business performance. I think we -- while purchase volume might be slightly lower than expectations, it shows the consumer is managing. We don't see them going under stress.

So I think as we look through the various elements, your funding costs have stabilized and stabilized and moving into the back half of the year, I think the expenses, which we haven't really talked about, only being up 1%, including the cost of $23 million related to the execution of change in terms otherwise would have been down, I think is a positive as we move forward.

So I think we're continuing to execute the business. The business is really focused on what we have to do this year in order to execute both on the core business, the reaction to or the PPPC changes that we're rolling out, as well as the integration of Ally Lending, which we're very happy about and the disposition Pets Best. So the team is focused on execution. That's what I would say drove us to the mid to the higher end of the range.

Rick Shane

Great. Brian, thank you very much. It's incredibly helpful.

Brian Wenzel

Thanks, Rick.

Operator

Thank you. Our next question will come from Bill Carcache with Wolfe Research. Please go ahead.

Bill Carcache

Thanks. Good morning, everyone. I wanted to ask about capital. So in contrast to many banks that are still dealing with large AOCI marks, you guys appear to have greater clarity on the level of capital that you're going to need to run with. And therefore, it seemed like you may be in a better position to perhaps return the capital in excess of your target a little bit more aggressively relative to those who are still accreting capital to sort of plug that AOCI hole. Can you speak to that dynamic and how we should think about like the trajectory of that excess capital position relative to the 11% target you've talked about historically?

Brian Wenzel

Yes. Thanks, Bill, for the question. We've been on a journey. You've heard me talk about this a number of times. When we separated from our former parent, we started out and got to a peak of CET1 of 18%. And then there's been a journey down where today we're at 12.6%. We have an excess relative to the target. We're continuing on the path, right? But our first priority is always going to be organic RWA growth. Our second is going to be the dividend. And then third will be what we do with share repurchases or inorganic. And Brian talks about the discipline we have around inorganic growth.

So we have the ability to do that. I think we're going to be prudent with regard to the way in which we return it back to shareholders. We're not going to just drop it tomorrow because obviously, we have many stakeholders here who would not necessarily agree with that action. But we are on a trajectory and moving towards our target, which has always been our long-term goal.

Bill Carcache

Thanks. Thanks, Brian. That's helpful. And then I guess as a follow-up on your expectation of a stable reserve rate at the end of '24 versus '23. It seems like your expectation of a more favorable loss trajectory in your reasonable and supportable forecast period under CECL would be supportive of reserve releases, all else equal. So is the takeaway that your outlook is essentially de-risked and now embeds greater conservatism? Just trying to get a sense for when you'd feel comfortable getting that reserve rate back to the day one level and whether we should be thinking of that more as a 2025 event.

Brian Wenzel

Yes, most certainly it's not going to be 2024 event, right? As I said, it's flattish to last year. It really goes back to when do we have greater clarity. Across the industry, everyone has greater clarity with regard to the macroeconomic. When are we going to get back to a more normalized interest rate environment, more normalized inflation environment, which makes the everyday cost for our consumers, a shared consumer across the industry much more manageable? It's that uncertainty that I think will give people pauses in how they run the different scenarios and have their qualitative assessments. That's probably the largest wildcard. Obviously, you're going to have to watch how your portfolio delinquencies develop and mix, but it's really getting clarity on that environment. So again, I think being prudent now is a better course.

Bill Carcache

Understood. That makes a lot of sense. Thanks again for taking my questions.

Brian Wenzel

Thanks, Bill. Have a good day.

Operator

Thank you. Our next question will come from Dave Rochester with Compass Point. Please go ahead.

Dave Rochester

Hi, good morning, guys.

Brian Wenzel

Morning.

Dave Rochester

By the time we get to October the 1st, will you guys have implemented your PPPC at substantially all of your partners at that point or is there a segment that opted to wait on those until the rule actually takes effect? And how large is that segment, if you have a sense?

Brian Doubles

Yes. Look, as Brian said, we've completed the first phase that covers a substantial part of the business. We do have one or two partners where we've largely agreed on what we would do, but we are waiting for the rule to be effective. Again, that doesn't change our view that we will fully offset this. We'll get back to pre-late fee ROAs, and we'll still support the customers and underwrite the customers that we do today.

Brian Wenzel

The only thing I'd add, Dave, is there is a tail, right, with regard to this, right? Because accounts that we originated in the back half of last year, we wouldn't give them a change in terms six months after we just originated account or three months after we originated the account. So there will be a tail that goes on here for a long period of time as well as the number of inactive accounts that become active. Once they become active, they'll get a CIT. So it takes a long time to get to 100% under any scenario, but this will go on. That's part of normal course. And any time we do a CIT, that is kind of a regular course of action.

Dave Rochester

Got it. That makes a lot of sense. Appreciate that. And then to follow up on Ryan's question from earlier, in the scenario where the late fee rule is shot down regarding the changes that stick. I know you haven't given us a ton of thought yet, and that's understandable. But just based on your early assessment of consumer reactions so far and your dialogue with your partners and the fact that there's a good amount of expense associated with implementing those changes, is there any reason you've seen so far to indicate you would want to unwind the APR changes, or would those be the easiest changes to leave in place? Thanks.

Brian Doubles

Yes. Look, I think, like Brian said earlier, this will be a discussion with the partners. We'll look at for the portion of the book that we control. We'll look at consumer behavioral changes. It's still really early. These CITs are now just working their way through the statements, and we're just starting to see the customer behavioral changes, which at this point are very slight, but we need to continue to monitor that.

As Brian said, we're all over it, and we'll adjust along the way if we feel like we need to. But we're not preparing for a scenario where the rule doesn't go into effect. I think we have to control what we control, and we control the pricing and policy changes and that's what we've done. And we're obviously -- we think we've got a great case in terms of litigating the rule, but it's uncertain. So we've got to focus on what we can control.

Dave Rochester

Great. Thanks, guys.

Brian Doubles

Yes. Thanks.

Brian Wenzel

Thanks, Dave. Have a good day.

Operator

Thank you. Our next question will come from John Hecht with Jefferies. Please go ahead.

John Hecht

Morning, guys, and thanks for taking my question. Actually, I think all of my questions have been answered, or asked and answered. But I guess I have one incremental one is, you did renew Verizon in the quarter and then you added Virgin. I'm wondering, given just, I guess, the overhang and uncertainty around the late fee situation, how -- have there been any kind of structural changes in how you negotiate these new contracts with that uncertainty in the background?

Brian Doubles

Yes. So let me start and I'll ask Brian to comment. Look, first, we're very excited to launch what we think is a very unique, one-of-a-kind program with Virgin Red. It'll span air travel, hotel, cruises. We're tapping into a very strong, loyal customer base. So we could not be more excited to partner with Virgin Red on this new product. Equally as excited to renew Verizon. It's been a strong program for us, great relationship, and so we're really excited about that as well.

Certainly, the late fee issue has crept its way into negotiations, new business, renewals, unsurprisingly, but there are ways to structure around this. So we have certainly contemplated an $8 late fee in every program that we've renewed since the rule was published, as well as anything that we've extended.

Brian Wenzel

Yes. The only thing I'd add, John, is in that structuring of pricing, we assume late fees go in at $8. To the extent that there's upside, we're protected. To the downside, there may be things that you do on the upside relative to partners. Even when you look at the portfolio we acquired in the second quarter from another issuer, we're relatively protected or are protected relative to the $8 late fee going in place.

It's just we're more conservative on pricing. We think it's going to -- as much as we like the chances that the industry has against the rule, we're not going to bank on it pricing a deal that lasts seven years to 10 years.

John Hecht

Great. Appreciate the color, guys. Thanks very much.

Brian Doubles

Thanks, John.

Brian Wenzel

Thanks, John. Have a good day.

Operator

Thank you. We have time for one last question. It will come from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti

Yes. Can you talk a little bit about the '23 vintage, just how that's performing? You've got another quarter under your belt relative to your expectations, and maybe '22. And I know you haven't had as much sort of volatility versus general purpose.

Brian Wenzel

Yes. Thanks for the question, Don. So again, I think level setting, first of all, I'd like to do it against the industry. I think if you go and look to some of the credit bureaus and you look at the industry vintage curves, our relative portfolios are performing better than the industry's curves, both from delinquency and accumulative net charge-off perspective.

That being said, we talked extensively over time that there is a shared consumer. We do feel the effects of what other issuers did as they exited the pandemic, adjusting some of their credit criteria or according the credit box in their world, and issued an awful lot of, some of the biggest vintages we've ever seen in the credit card industry. So I use that as a background.

I think when you look at delinquencies, and I'll give you some of the details here, Don. When you look at delinquencies, the second half of '21 through the first half of '23 are performing slightly worse than, or worse than 2018 vintage. 2019 gets skewed because you had the year of the pandemic. The second half '23, and what we see, and again, is very early. But when you look at the early indications off of '24, because the credit actions we've taken, they are performing better than the first half of '23.

And when you think about a charge-off perspective, the second half of '23 and the first half of '24 are performing better than '18. So I do think some of the modifications that we've made in credit actions are supporting the vintages. We have some of the shared consumer in that '21 into -- partially into the back half of '21 into the early part of '23 that has given us a little bit of the trends above our historical delinquency rate. But again, we feel good about how the vintages are developing.

Don Fandetti

Thanks, Brian.

Brian Wenzel

Great. Thank you.

Operator

This does conclude Synchrony's earnings conference call. You may disconnect your line at this time and have a wonderful day. Thank you.