OREANDA-NEWS. Fitch Ratings has today affirmed Synchrony Financial's (SYF) Long-term Issuer Default Rating (IDR) at 'BBB-' and Short-term IDR at 'F3'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

Today's rating actions have been taken as part of Fitch's periodic peer review of U.S. consumer finance companies, which comprises five publicly rated firms.



The rating affirmations and Stable Outlook reflects Synchrony's market leading position in the U.S. private-label credit card industry, successful separation from General Electric Company (GE), seasoned management team, consistent operating performance, strong capitalization and liquidity levels, risk sharing arrangements with retail partners, and improved funding diversity as a result of deposit growth at Synchrony Bank.

Ratings remain constrained by SYF's monoline business model, high partner concentration, an above average mix of nonprime borrowers relative to general purpose card issuer peers, heightened regulatory, legislative and litigation risk, relative sensitivity of its deposit base to rising interest rates, and short track record operating as a stand-alone entity.

On Oct. 14, 2015, SYF received approval from the Board of Governors of the Federal Reserve System to become a standalone savings and loan holding company, to retain control of Synchrony Bank and to retain control of nonbank subsidiaries following the completion of GE's offer to GE shareholders to exchange the remaining common shares of SYF owned by GE for GE shares. On Nov. 17, 2015, SYF announced the completion of the exchange offer and the official separation from GE. Following the separation, GE no longer owns any of SYF's outstanding common stock and SYF no longer relies on GE for funding purposes.

Net income increased to $2.2 billion in 2015, up 5.0% from the prior year period. Strong earnings performance was driven by higher net interest income, partially offset by increases in retailer share arrangements, provision for loan losses and other expenses. Period-end loans increased 11.4% year-over-year to $68.3 billion at Dec. 31, 2015, driven by purchase volume growth of 10.1% and average active account growth of 4.4% year-over-year. Return on assets and return on equity were 2.9% and 19.1%, respectively in 2015. SYF expects to produce an ROA of between 2.5% and 3.0% in 2016.

Fitch expects operating performance in 2016 to remain strong, supported in part by a relatively stable macroeconomic backdrop in the U.S., market share gains at existing retail partners, and the addition of recently acquired partner relationships. However, SYF's margins will likely be pressured by the intense competition, normalizing credit performance and investments in growth initiatives. Competitive intensity in both the co-brand card and private label card segments has increased markedly over the past year, with several sizeable portfolios being bid away from the incumbent card issuers. To the extent the high level of competitive intensity does not abate, it could lead to margin pressure and/or the loss of key retail partners for SYF as existing retailer contracts expire.

Credit performance is expected to remain solid in 2016, although charge-offs and delinquencies will likely experience some upward pressure as new accounts season, but remain roughly in line with broader industry trends. Likewise, Fitch expects loss provision expense to increase in 2016 driven primarily by portfolio seasoning and growth. Net charge-offs improved 18 basis points (bps) to 4.33% in 2015, and SYF expects the net charge-off rate to remain stable in 2016. Reserve coverage remained strong at 5.12% of loans and 126% of loans past due at Dec. 31, 2015.

SYF is one of the better capitalized companies among its peer group and Fitch believes it has adequate liquidity to meet its upcoming debt maturities. At Dec. 31, 2015, SYF's common equity Tier 1 capital ratio was 16.8% on a Basel III transition basis, or an estimated 15.9% on a fully phased-in Basel III basis. SYF is not formally subject to the Comprehensive Capital Analysis and Review (CCAR) administered by the Federal Reserve (Fed) for the country's largest banks; however, the company plans on submitting a similar capital plan to the Fed shortly. Fitch expects SYF's capital plan to include a request to establish a common dividend and share repurchase authorization. Although the company plans to maintain a payout ratio similar to that of its credit card issuer peers, SYF's shareholder distributions are likely to lag those levels initially. As SYF's payout ratio increases over time, Fitch would expect the company's capital ratios to moderate toward levels that are more in line with its peers.

Liquidity consisted of $14.8 billion of cash and short-term liquid assets representing 17.6% of total assets at Dec. 31, 2015. SYF also had $6.1 billion of undrawn committed capacity under its securitization programs and more than $25 billion of unencumbered assets at Synchrony Bank, which Fitch views as potential sources of secondary liquidity.

SYF has broad access to multiple sources of funding, including lower cost deposits through Synchrony Bank and unsecured senior notes. Post the June 2014 IPO, SYF has issued $6.6 billion of senior unsecured senior notes with various maturities ranging from 2017 through 2025. Fitch expects SYF to continue to seek to utilize a diverse mix of funding sources and maintain its investor relationships across various classes of debt (e.g. unsecured debt markets, securitizations and bank loans) while growing its retail online deposit franchise. Fitch views SYF's deposit funding strategy positively as it reduces concentration risk and provides more funding flexibility in the event that wholesale funding sources become inaccessible and/or cost prohibitive.

Synchrony's loan portfolio is well-positioned for a rising rate environment. At Dec. 31, 2015, assuming an immediate 100 basis point increase in interest rates, SYF estimated that net interest income over the following 12-month period would increase by approximately $107 million. However, the interest rate sensitivity of the online deposit channel is untested during periods of rising interest rates.


Synchrony Bank's uninsured deposit ratings of 'BBB/F3' are rated one notch higher than their respective IDRs because U.S. uninsured deposits benefit from depositor preference in the U.S. Fitch believes this preference in the U.S. gives deposit liabilities superior recovery prospects in the event of default.


SYF's IDR and VR are equalized with its bank subsidiary, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.


SYF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, SYF is not systemically important and therefore, the probability of sovereign support is unlikely. SYF's IDRs and VRs do not incorporate any support.



Positive ratings momentum could be driven by further diversification of Synchrony's retail partners, a meaningful decline in the percentage of the loan portfolio comprised of nonprime borrowers, greater clarity on the company's long-term capital distribution plan, demonstrated ability to sustain above average profitability through credit and interest rate cycles, and continued shift in funding mix toward retail deposits.

Furthermore, Fitch believes the durability of Synchrony Bank's internet-based deposit platform in a rising rate environment will be a key consideration in evaluating the strength of the company's funding profile. Positive rating momentum could also develop from the company's ability to successfully execute on its product expansion and diversification strategy over time while maintaining strong underwriting standards and profit margins.

Negative ratings momentum could develop from the loss or default of a key retail relationship, substantial credit quality deterioration, a sharp increase in leverage, a meaningful reduction in liquidity, an inability to access the capital markets on reasonable terms for funding, above average shareholder distributions, and/or potential new and more onerous rules and regulations.

The senior unsecured debt ratings are primarily sensitive to changes in the long-term IDRs of SYF.

Synchrony Bank's uninsured deposit ratings are rated one notch higher than the IDR. The deposit ratings are primarily sensitive to any change in SYF's long- and short-term IDRs.


Should SYF's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential Fitch could notch the holding company IDR and VR from the ratings of the bank subsidiary.


Since SYF's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

Fitch has affirmed the following ratings:

Synchrony Financial
--Long-term IDR at 'BBB-';
--Viability Rating at 'bbb-'.
--Senior unsecured debt at 'BBB-';
--Short-term IDR at 'F3';
--Support Rating at '5';
--Support Rating Floor at 'NF'.

Synchrony Bank
--Long-term IDR at 'BBB-';
--Viability Rating at 'bbb-';
--Short-term IDR at 'F3';
--Support Rating at '5';
--Support Rating Floor at 'NF';
--Long-term Deposits at 'BBB';
--Short-term Deposits at 'F2'.