Synchrony Financial

Synchrony Financial (NYSE: SYF) is General Electric's former retail finance arm and presents an interesting opportunity to invest in banking/lending and private label credit cards. What first got me interested is its cheap valuation (<10 times ttm earnings) and high returns on equity/assets (30%+/3%). As a bank these are fantastic metrics, though leverage is normal.

But how is this as a business? SYF is a bank which uses its deposits/capital to lend to consumers often through private label credit cards. These are the Home Depot credit cards, etc. which are often pitched in checkout lines. The benefit to consumers are discounts (up to 5%) at that particular chain, while companies get another tool to offer brand loyalty and promotions. It is this last aspect which is useful for companies and may indeed give it some pricing power. As the largest private label credit card issuer by market share (40%+) it may indeed be the go to source for private label credit. It can therefore focus more on relationships than pricing.

However, the relatively high rates and typically lower-class clientele on consumer side may be difficult. In particular, there may be a saturation point for such credit cards because such cards are more useful at larger/diverse retailers such as Amazon.

This may indeed be one of the larger risks for SYF. Lending, while muted, is highly profitable now because lower overall interest rates are suppressing defaults and the danger is that the credit cycle is a peak. I believe this is less likely given the lack of lending overall by banks (i.e. monetary velocity) such that only the top borrowers are getting credit. SYF survived the last crisis while remaining profitable (per their prospectus), so at ~ 10 times earnings this looks to be a good price for a decent business.

Disclosure: Long SYF