2023-11-20 14:03:07 ET
Summary
- Synchrony Financial's preferred shares offer an attractive entry point for income investors, yielding just under 9%.
- The company's net interest income is rising and has reached pre-pandemic levels.
- Synchrony has consistently grown its deposit base and loans in a high-rate environment, with a low leverage ratio and a sizable cash pile.
Earlier this year, consumer lender Synchrony Financial ( SYF ) had an attractive opportunity emerge when its long-term debt was yielding over 9% . Since then, the company’s debt has rallied and while the 2033 notes are yielding greater than 8%, many of the notes are trading at or below comparable yields for its credit rating. Fortunately, Synchrony’s preferred shares ( SYF.PR.A ) are still trading around 60% to their 2024 call price and combined with their 15% tax qualified dividend of $1.41, they are yielding just under 9%. Based on the company’s most recent earnings, I believe Synchrony's preferred shares offer the most attractive entry point for income investors.
FINRA
Synchrony Financial is a consumer credit card lender with a deposit base, which makes it a hybrid between a bank and a non-deposit consumer lender. As such, since the company’s primary business is credit card lending, its income yield on assets is much higher. Like many regional banks, Synchrony has seen its interest expense rise with the increase in interest rates.
Company Financials
Despite the rise in borrowing costs, Synchrony’s net interest income (interest income less interest expense) is continuing to rise and has reached its pre-pandemic peak levels. The ratio of net interest income to interest income is still above 80%, which is significantly higher than regional bank counterparts (they are around 50%). Additionally, net interest spread and net interest margin improved in the third quarter and remained above levels seen during the pandemic.
Company Financials
Company Financials
While regional banks have been hurting to hold depositors and are consequently reducing their lending, Synchrony Financial is heading in the opposite direction. Since 2022, Synchrony has consistently grown its deposit base with 14% more deposits than it had a year ago. Consequently, this has allowed Synchrony to grow lending in a high-rate environment with loans also 14% higher than a year ago.
Company Financials
Company Financials
The one ratio that may create concern is the high loan to deposit ratio, but investors need to keep in mind how Synchrony Financial is structured. Due to the high return of its loans, Synchrony can access borrowing at higher interest rates with more ease than traditional regional banks because they can generate higher returns. This is why Synchrony is comfortable with issuing bonds and has so many issues outstanding. Synchrony also has a very low leverage ratio compared to the banking sector which gives it room to borrow if it needs to. Finally, Synchrony is sitting on a sizable cash pile of greater than $15 billion, which is more than 20% of its deposits.
With Synchrony Financial being in the credit card space, delinquencies and write offs are always going to be worrisome, especially in our current situation with rising rates, softening employment, and rising credit card delinquencies across the industry. Synchrony is seeing the effects of recent softening in the economy as their charge off rate has jumped from 2.8% last year to 4.6% at the end of the third quarter. Fortunately, the company has an allowance coverage ratio of 10.4%, which more than covers the rising charge offs.
In fact, I believe the allowance coverage ratio is high enough to protect the company through some of the worst conditions. For example, charge-offs for Synchrony appear to be trending at 200 basis points above the national average for credit card delinquencies. If we run that trend back to 2009, investors could expect charge offs to get close to the company’s current allowance, but it would still cover their bad debt write offs.
Like most banks, Synchrony Financial won’t eliminate its preferred dividend unless there is an immediate threat to the bank. The bank is continuing to generate healthier returns than it did during the pandemic. The charge off allowance is significantly higher than current conditions and would require a return to 2009 levels to threaten the bank’s loss coverage. While another opportunity in Synchrony’s bonds may arrive with a sell off, the 8.9% yielding preferred shares are priced at a great entry point for income investors.
For further details see:
Synchrony Financial: 8.9% Yielding Preferred Shares Are Attractive