Morningstar | Until Synchrony can stabilize its partnerships and improve technology, we are cautious
We anticipate Synchrony will be able to maintain excess returns in the short run while the company works to address the issues surrounding Walmart's departure. Synchrony Financial provides the store-branded credit cards of many of the country's largest retailers and benefits from these long-term mutually beneficial relationships. Synchrony's partnerships include Amazon, Walmart, Gap, and JCPenney. Since 2008, Synchrony has routinely generated returns on equity exceeding 15%. In the coming years, we believe Synchrony will be able to increase returns on equity as a result of higher leverage while returning a substantial amount of cash to shareholders. We believe Synchrony's balance can increase leverage without putting shareholder returns at risk.The loss of Synchrony's partnership with Walmart is a significant blow to the company. Despite comments that losing the partnership will be earnings-accretive as opposed to retaining it, it signals to us that Synchrony will struggle to grow in the coming years. In addition, we have to assume that Synchrony will lose Sam's Club. Furthermore, we have to conclude Synchrony has an inferior technology platform to rivals, which seems to be of increasing importance to retailers. Retailers have been able to negotiate increasingly favorable terms, which we expect will dampen Synchrony's margins. In addition, Synchrony can only prosper so long as its partners remain in business. In 2017, Synchrony saw its partner HH Gregg file for bankruptcy. Our biggest concern is that Synchrony's performance will improve as pain increases for retailers, which could give a skewed picture of the company's prospects. Once retailers file for bankruptcy, it will provide a significant headwind to Synchrony's growth.Given the loss of Walmart, and given that Synchrony will be trading receivables with greater yields for lower-yield loans, we anticipate that Synchrony's net interest margins will be under pressure in the coming years. In addition, we suspect that Walmart's departure may tempt Synchrony's other partners to weigh potential exits or demand more from their partnership with Synchrony.Synchrony Financial is a savings and loan holding company and financial holding company. Through its subsidiaries, the company delivers a range of financing programs, as well as consumer banking products, across key industries including digital, retail, home, auto, travel, health and pet. The company provides a range of credit products through its financing programs which it has established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which it refers to as its partners. Through its partners, the company provides their customers a variety of credit products to finance the purchase of goods and services.
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