Fitch upgrades Synchrony Financial ratings to ’BBB’, maintains stable outlook

Investing.com -- On Wednesday, Fitch Ratings upgraded the Long-Term Issuer Default Ratings (IDR) and Viability Rating (VR) of Synchrony Financial (NYSE:SYF) and its subsidiaries to ’BBB’ and ’bbb’ respectively, from ’BBB-’ and ’bbb-’. The rating agency has cited the firm’s effective execution of financial and strategic objectives and its ability to navigate regulatory risks as key drivers behind the upgrade. The outlook on the Long-Term IDRs remains stable.

Synchrony Financial’s upgrade is a reflection of its management’s effectiveness in mitigating financial impacts from the termination of top partners, despite its retail partnership concentration. The company’s proactive response to pricing adjustments following the Consumer Financial Protection Bureau’s (CFPB) late fee rule is seen as an indication of its adeptness in handling regulatory pressures.

The firm’s ability to overcome the loss of key partners and tackle regulatory challenges has led Fitch to upgrade SYF’s business profile score. However, the company’s business profile still reflects its focus on consumer lending and earnings that are spread reliant. This is balanced by strong profitability compared to peers, funding stability due to strong retail deposit growth at Synchrony Bank (SYB), a market-leading position in the U.S. private label credit card industry, and a seasoned management team.

SYF’s risk profile reflects the concentration of its largest programs, which historically account for 50% to 55% of its total interest and fees on loans. Despite the departure of two major partners in 2019 and 2022, SYF maintained robust earnings and continued to attract new partners, demonstrating its ability to weather challenges through strategic adjustments and partnerships.

The firm’s net charge-off (NCO) ratio has been steadily increasing, mirroring trends observed across the credit card industry. Despite this, SYF’s loan loss reserve coverage, which equates to approximately 1.7x the year-end 2024 NCOs, offers a strong buffer against potential credit losses. This, combined with retailer share arrangements and strong earnings generation, positions SYF to effectively manage increased credit pressures.

Synchrony Financial’s profitability, which has historically been higher than most of its peers and traditional banks, is a credit strength. The company’s common equity Tier 1 (CET1) ratio increased to 13.3% at year-end 2024 from 12.2% at year-end 2023, driven by strong earnings accretion. Fitch expects SYF to continue to maintain a CET1 ratio in line with similarly rated peers.

Fitch also views SYF’s liquidity and funding as stable. Retail deposits, comprising 80% to 84% of SYF’s funding stack, is similar to peers, and Fitch expects SYF will continue to maintain deposits within this range in 2025. This is supported by SYF’s access to multiple funding sources, including lower cost deposits through SYB, securitization debt, and unsecured notes.

The Viability Rating (VR) is equalized with the operating bank, reflecting its role as the bank holding company, which is mandated in the U.S. to be a source of strength for bank subsidiaries.

Fitch notes that a meaningful deterioration in asset quality, a change in capital management philosophy, bankruptcies or non-renewals of SYF’s largest retail partners without adequate replacement, or legislative or regulatory actions that impede the economics of the credit card lending business model could lead to a negative rating action or downgrade.

On the other hand, continued execution by management against its long-term financial targets, a NCO ratio sustained below 6% for multiple periods, an increase in operating profit to RWA sustained between 4.5% and 5.0% for multiple periods, or further diversification of retail partner relationships could lead to a positive rating action or upgrade.

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