Synchrony Financial

Synchrony reported decent second-quarter earnings, with diluted EPS of $2.59, up from $2.50 a year ago despite net income declining 8% thanks to a much lower share count. These results translate into a strong return on equity of 21.4%, well above the firm's cost of capital.

Why it matters: Synchrony continues to execute well across the core drivers of its business. Recovering loan growth, a solid net interest margin, and continued improvement in credit quality demonstrate that earnings remain supported by strong underlying operating fundamentals. While net income did decline year over year, this can be entirely attributed to a $102 million smaller reserve release in the second quarter. We do not see this as a sign of a downward shift in credit expectations, as Synchrony's credit results were excellent. The firm's net charge-off rate declined to 5.43% from 5.70% a year ago, though 30+ day delinquencies were effectively flat, at 4.16%. Management noted that its net charge-offs finished below the target range, reflecting continued underwriting discipline.

The bottom line: We will maintain our $87 fair value estimate for no-moat-rated Synchrony. We see the shares as undervalued at the current price. While we do think Synchrony is one of the weaker credit card issuers, and share the market's growth concerns, the firm trades at too steep a discount at 7.5 times our 2026 earnings projection. While trends are improving, loan growth remains weak, with loan receivables growing only 2% from last year. Competition in consumer lending remains intense as buy now, pay later and personal loans take market share from the private label card industry. That said, growth investments continue to strengthen the franchise. During the quarter, Synchrony added or renewed more than 15 partnerships and refreshed its DICK'S Sporting Goods credit card program. More significantly, we expect the firm's new Walmart partnership to provide an ongoing tailwind to loan growth.

While Synchrony is facing industry-level headwinds to receivable growth, the bank is enjoying impressive profitability on the loans it does have. Net interest margins remain unusually large, a legacy of the pricing changes it pushed through last year, rising to 15.08% from 14.78% last year. Combined with net charge-offs that remain below management's target range, the bank is regularly generating returns on equity above 20%, well above our long-term projections for the firm.

The bank has been using this strong profitability to take advantage of the deep discount of the firm's stock to repurchase at an accelerated rate, buying back $850 million in shares in the second quarter, or around 3.4% of total shares outstanding. We like this approach for Synchrony, but the firm's reserves will bear monitoring. The bank's common equity ratio of 13.2% is appropriate for the firm, but this represents a meaningful decline from the 14.2% it reported last year.

We are increasing our fair value estimate to $90 per share from $87. $1 of the increase is from the time value of money since our last update while the remainder is from lower net charge-off projections for 2026 and 2027. Our fair value estimate translates to a 2026 price/earnings ratio of 9.21 times.

Despite a shrinking loan book, 2025 was a strong year for Synchrony. While net interest income faced headwinds from low spending volume, this was more than offset by a significant improvement in the bank's credit costs. Additionally, the bank benefited from net interest margin expansion due to lower deposit costs and fee adjustments that Synchrony implemented to offset new late-fee limits, which it retained even after the rules were eventually scrapped.

We do expect Synchrony's net interest margin to decrease modestly in 2026 and 2027; however, we attribute much of this to asset mix shifts rather than declining interest rates. Private-label card issuers, such as Synchrony, typically do not benefit as much from rising interest rates as their larger peers. As a result, we also do not expect Synchrony to be materially affected by declining interest rates, believing they will be a minor headwind at most.

The company has historically faced long-term headwinds in growing its receivables, given its partnerships with brick-and-mortar retailers and the risk of losing additional partners. The rapid growth of buy now, pay later lending has only added additional pressure. That said, the firm's new program with Walmart should provide a boost, and we expect Synchrony to average 2.7% receivable growth over 2025-30.

We expect Synchrony's net charge-offs to decrease again in 2026 as credit quality has been stronger than expected industrywide. This will ultimately rely on labor market conditions, as changes in the unemployment rate and credit losses on credit cards have typically been tightly correlated. We project that net charge-offs will begin to rise slightly in 2027 from 5.19% in 2026 and normalize to the long-term rate of around 5.4% by 2029.

We assign Synchrony a Morningstar Economic Moat Rating of none, as we do not believe it has a durable competitive advantage. Synchrony’s private-label and co-branded general-purpose credit card business operates through long-term relationships with retailers, established through partnership agreements in which the retailer agrees to market Synchrony’s credit cards through both physical and online channels. In exchange, Synchrony provides easy financing to the retailer’s customers, driving incremental sales. Larger retailers can also enter into profit-sharing agreements, called retailer share arrangements, in which they receive a portion of the credit card program’s revenue. These partnerships are typically backed by long-term contracts lasting anywhere from three to 10 years. While these relationships are typically long-lasting, Synchrony has had some high-profile losses, losing Walmart in 2018 and Gap in 2022.

We typically view private-label and co-branded credit cards as less attractive than general-purpose credit cards. The emphasis on large retailers means that Synchrony faces meaningful concentration risk, with 54% of its revenue coming from its top five retailer relationships. Additionally, to maintain their merchant partnerships, private-label card issuers are encouraged, either implicitly or explicitly, to maintain loose underwriting standards, resulting in structurally weaker credit quality than that of typical credit card issuers.

That said, the downsides of the private-label card industry are partially offset by its concentration, with limited participation from most major banks. Synchrony has around 40% market share by receivables and an established track record of winning major partnerships, including Amazon, PayPal, and even regaining Walmart in 2025. However, during periods of low consumer loan growth, Synchrony must contend with increased competition from larger banks seeking to deploy excess capital. If another bank is willing to accept lower returns or has a better cost structure than Synchrony, its ability to offer more lucrative retailer-share arrangements to merchants provides a ready avenue for stealing business.

While competitive pressure from large banks has admittedly diminished in recent years, we don’t think Synchrony has durable competitive barriers to protect it from larger card-issuing banks or rapidly growing buy now, pay later firms, leaving the company exposed on two sides. We generally assess bank moats as based on cost advantages and switching costs, neither of which applies to Synchrony. We see cost advantages for banks as stemming from three primary factors: excellent operating efficiency, a low-cost deposit base, and effective underwriting.

Synchrony has been successful in maintaining a lean operating structure. Adjusted to treat Synchrony’s retailer share arrangement spending as an operating expense, the bank’s efficiency ratio is typically in the high 40s to low 50s. While this is higher than the low- to mid-40% range it used to enjoy, this is still better than the average performance of US banks with comparable asset size.

Synchrony’s cost efficiency is driven by its scale and lack of a physical footprint. Synchrony’s credit card business is fully national, with no region accounting for an outsize share of the loan book. However, as a fully digital bank, Synchrony has no branches and carries none of the costs associated with running an extensive branch network. Additionally, while Synchrony’s retailer share arrangements are a substantial cost layer, the bank’s relationship with its retailer partners allows it to effectively free-ride on their marketing efforts, keeping its own marketing spending light.

However, Synchrony’s reliance on online deposits leaves it at a substantial cost-of-funds disadvantage relative to traditional banks. Moreover, while the increased adoption of online deposits has enabled many digital banks to rapidly expand and improve the quality of their deposit bases, Synchrony’s lack of a strong brand has disadvantaged it. While Synchrony has a large deposit base, its depositors exhibit strong sensitivity to yield, and most of its deposits are certificates of deposit and brokered deposits, which we generally see as lower quality. Together, Synchrony’s operating cost efficiency is largely offset by its high cost of funds.

While most of Synchrony’s receivables come from long-term partnerships, we do not believe switching costs play a role in its business. Retailers can readily switch to a new private-label card provider if they are unhappy with their current issuer or receive a better offer. When this happens, the entire credit card portfolio associated with that retailer is typically sold to the new issuer, meaning that Synchrony can lose large chunks of its total business when its contracts are up for renewal.

Synchrony also faces new competition from buy now, pay later products, which are integrated at merchant checkouts and tend to target a similar subset of consumers. While Synchrony has not felt the need to lower its rates or fees, there are some signs that the new product category is becoming a headwind. Private-label card portfolios are seeing materially weaker growth trends than the industry average. We expect this pressure to persist as buy now, pay later volume increases rapidly in the US. Under these conditions, it is unclear whether Synchrony can maintain its rates and rewards without sacrificing significant volume.

Overall, while Synchrony has historically outearned its cost of capital, we do not think the firm has sufficient competitive advantages to give us confidence that this will remain the case over the foreseeable future. Synchrony faces intensifying competition at the low end of the consumer credit market, and we do not think the firm has a discernible competitive advantage to defend its position in the private-label card market or to push into general-purpose credit cards.

Synchrony enjoys long-term contracts with several successful digital retailers such as Amazon and PayPal. These partnerships should provide a source of receivables growth even if brick-and-mortar retailer partners struggle.

Synchrony's new card program with Walmart could be a major source of incremental receivables.

The company’s credit cards present a compelling value for its retail partners. Additional retail partners could be drawn to the incremental sales and revenue Synchrony’s credit cards offer, providing upside to our growth projections.

Synchrony’s largest partners could demand higher retailer share payments during contract renewal negotiations.

Private-label credit card portfolios typically suffer from weaker credit than general-purpose credit cards. If credit conditions in the US deteriorate, Synchrony will likely see net charge-offs increase materially.

Synchrony’s partnership base is highly concentrated, and the loss of any of its largest partners would be a severe blow.