Conference Transcript - SYF 2026-09-14

Terry, Analyst — Audience Member

All right. So we'll get started. First presentation of the day. Very pleased to have Brian Wenzel, CFO of Synchrony Financial here again. So welcome, Brian.

Brian Wenzel, CFO

Terry, thank you. Glad to be with you today.

Terry, Analyst — Audience Member

Yeah. All right. We'll just jump right into it. Maybe we'll just start with the quarter. How are third quarter volume trends, purchase volume trends materializing? And what are you seeing across income cohorts and key verticals?

Brian Wenzel, CFO

Yeah, you know, if you go back to July, we talked about the first part of July being very consistent with the second quarter, which had about an 8% purchase volume growth. I'd sit back and say we're, you know, two and a half months through the third quarter, and that's kind of held true. So, you know, we're in that high single-digit purchase volume growth. Again, you know, if you break it down a little bit, Terry, you know, when you first look at the credit cohorts, right, you know, what we saw earlier part of the year was strength in super prime, non-prime, and the prime was in the middle. I think when you look at it now, you see super prime continuing to pull. We see a little bit more strength in the prime, and the non-prime is just a little bit behind, but nothing that's concerning whatsoever from that perspective, number one. Number two, I think when you look at the presentation we did back in July, we showed not only consistency in growth, but really the consumer's willingness in the face of affordability, in the face of higher gasoline prices, their willingness to do discretionary purchases. We've continued to see that in the third quarter. So we've not seen the consumer being in any way dissuaded from those discretionary increases. Now, again, that being said, you still see pockets of bigger-ticket discretionary pressure, right, most certainly in outdoor and lifestyle, in health and wellness, you know, big-ticket dental, cosmetics. You do see a little bit of that pressure, too. You know, furniture is one that, you know, again, a lot of winners and losers in the furniture space. But, you know, the good news is, you know, you saw the results this morning, but, you know, Labor Day fell a little bit later this year. Some sales are being pushed into September. But all in all, the consumer from a spending behavior pattern and even a payment behavior pattern is holding very firm and very consistent with the trends we saw the first part of the year.

Terry, Analyst — Audience Member

Got it. That's helpful, Collar. You published your monthly credit metrics this morning. Delinquencies have been largely stable. net charge-offs continue to trend lower, how would you characterize the health of a synchronized consumer today, and what gives you confidence on the credit outlook?

Brian Wenzel, CFO

Yeah, you know, first of all, from a credit standpoint, again, you continue to see strength entering delinquency. Our entry rate into delinquency is better than 2018 and 2019, which is remarkable in this period given the affordability and things like that, but it has been incredibly consistent. I think early stage and late stage has been consistent. Five do is probably a little bit weaker, but all in all, from a credit standpoint, we continue to see it as a strength. And part of it is where credit aperture is set, right? Because, you know, as we came through what was really an overextension of credit for a number of years, we wanted to get our loss rate back inside of the five and a half to six. Now, one of the things that you sit back and say, well, you know, we got to slightly less than five and a half this year, that's anticipation, right? You have a Walmart portfolio that at the end of the day, we just finished our 12th month of origination. So you're just starting to see the losses kind of come through on that, number one. Number two, we opened the credit aperture, you know, I'd say third quarter last year. You'll begin to see those losses flow through. So if you were higher into that range, you'd be bumping up against the 6%. So I think we feel really good about credit. It's in a good space. Consumers are, you know, being incredibly responsible, you know, at this point in the cycle. So we feel good. Now, again, we sit here in September, you know, for the most part, you know, 2026 is baked, right? So now you're sitting around saying, what's the setup for the first half of 2027, which obviously looks positive. Again, you'd expect it to tick up, right, with Walmart and the maturation of our credit actions. but really, really positive as we exit, you know, or exit the third quarter.

Terry, Analyst — Audience Member

Got it. Maybe just drawing into that a little bit more. You guys are operating below your long-term framework of 5.5% to 6% net charge-offs. You're about to lap your credit unwinding actions from last year. Just any key learnings or surprises from that process you can share? And then just looking forward, how are you thinking about underwriting and risk appetite? What do you need to see for you to kind of unwind even more?

Brian Wenzel, CFO

Yeah, you know, let me start where you ended. You know, some of the credit actions, we continue to take credit actions. They're more idiosyncratic. So when we see pockets of opportunity where the performance of a product, a channel, a vertical makes sense, we are continuing to widen that aperture. Again, it's not broad-based, but it's going to be idiosyncratic, which we normally do as we kind of go. And, you know, from a credit standpoint, I think we feel really good about the changes we made last year. You know, consumers have stepped into whether it was credit line increases or new accounts that we generated, and they're being incredibly responsible. So we feel good that the credit we're standing is in a good place. And, again, I think when you look at the maturation and seasoning of the credit actions, as well as Walmart coming through, it's going to put the consumer in a really good space. And you're going to look at this business, you know, will originate over 20, you know, 20 million new accounts this year. So, you know, credit is available for those who need it and want it, and, you know, we're there to meet their needs.

Terry, Analyst — Audience Member

Got it. On that point, your allowance for loan loss is the ratio declined by 50 basis points here in the second quarter. How should we think about reserve adequacy from here? or is the reserve rate closer to a kind of through-the-cycle level, or is there still room to bring that down if credit continues to improve?

Brian Wenzel, CFO

Yeah, you know, I go back to a mile mark. I'm not saying this is a goal or where we should be. If you go back to CECL Day 1, which lasted probably about a day, right, because the pandemic happened, it's around a 9.7 rate. So the first question is, when can you get back to that 9.7 rate? You know, we're hovering around 10 today. But that has QAs involved because at the end of the day, you know, the macro environment, while we feel good about it, while it's being constructive for the most part for the U.S. consumer, even in the face of affordability, there's still downside risk, right? So I think if you looked at the reserves without some of the QA and out some of the negative bias from a macro standpoint, I think you'd push lower. I think when we talked about it back in July, I sat back and said, listen, you probably don't expect releases or anything significant now, because I think we do have to see what's going to happen this week with the Fed and the latter part of this year and what they're going to do relative to inflation. You're going to have to continue to figure out what the geopolitical consequences are with the war with Iran. So there are some variables that go here. But I think we feel good about this rate. I tend to believe over the medium term, there's probably, you know, I would hope a little bit of more downward bias on the rate. But, again, that's going to play out here with the macro economy. That makes sense.

Terry, Analyst — Audience Member

Maybe we'll just turn to long growth. You've got it to mid-single digits by year end. You're currently tracking up 2.8% year-over-year based on today's report. what gives you confidence in that acceleration that you're guiding to and what important milestones should investors be watching over the next few months?

Brian Wenzel, CFO

Yeah, you know, there's a couple of things. First of all, we're excited about the new programs we have in place, right? You know, you think about a Walmart, which has just completed its 12th month, you know, really at the end of August. Exciting opportunity, just a tremendous retailer, tremendous traffic that goes through that either digitally or through the retail footprint. You look at our expanded relationship with Lowe's and the commercial portfolio there, you know, there's a heavy push into the pro side of Lowe's. So our ability to offer not only that dual card, but also we had the private label card. Now you're picking up the accounts that are in the middle that maybe the prior issuer would not necessarily have approved. You go out into the furniture space, you look at Bob's that's come on, you know, top 10 furniture retailer in the United States. It's a very good program. Much smaller, you think about RH, you think about Chico's, you think about J.Crew. So we had a bunch of different wins. So I think on the side where we've added to the partnership base and expanded relationships, I think we feel good. We've relaunched our Pay Later product in the health and wellness space. I think that's going to get some momentum behind the health and wellness sales vertical, which is really one of our most attractive opportunities in the space given the extended leverage we have and scale we have in that business. And then you look at the roster of what I would say some of the larger partners out there. You think about an Amazon and a PayPal who are doing incredibly well, but then you think about some of the more value-oriented retailers, a Sam's Club, a T-Jax. We play in a lot of the right spaces. And I think if you start to see some of the bigger ticket discretionary come back in, so you look next spring into, I'm looking ahead a little bit here, Terry, home specialty kind of come back into play. But then as you head into holiday, you'd see some of that coming back into play. I think from a core standpoint, you're getting it. And we've seen the green shoots in that discretionary space. So I think when we look at the diversity of the verticals combined with some of the newer relationships, I think it gives us some confidence in how we're going to deliver this year, but really how we continue to progress towards a long-term target of the upper single digits.

Terry, Analyst — Audience Member

Got it. You touched on it a little bit, but maybe just drilling down to performance by sales platform, digital and diversified in value, which is where Walmart's at. That's already at mid-single digits. Any room for that to continue to accelerate the rest of the year? And then as you look out to some of the other platforms, like home and auto, what needs to happen before it starts to contribute more meaningfully?

Brian Wenzel, CFO

Yeah, you know, starting with, you know, start with digital for a second. You know, we have, again, think about Amazon and PayPal. We have tremendous opportunity to generate penetration growth there. So our ability to, you know, have a value proposition that resonates. We relaunched the value proposition on the PayPal card not too long ago. That's given us great momentum in that business, and Amazon just continues to grow, and we have a very strong relationship with them. So there you're going to continue to ride, I'd say, penetration increases and, you know, some modifications to the product offering, which is exciting. In the diversified value space, yes, Walmart will be a big driver in there. But, again, you know, TGX, which may have had a little bit of struggles this last quarter, is doing incredibly well in the space, right? It's providing a compelling offering to consumers, so we're going to continue to lean in there. Sam's Club the same way when you have the affordability issues you have. So I think there's good momentum there. You mentioned home and auto. You know, I think you'll see that continue to accelerate here as we move into the back half of the year. It's kind of flattish in the front. I think that's going to turn positive here. Again, you know, in the furniture space, there are some winners, and people are willing to invest back. You know, they look at, you know, buying a new house. Maybe it's not, you know, as affordable as they like. So they're willing to invest now in furniture and doing some things around the home. So good momentum there. Health and wellness, again, I talked about our pay later installment loan push that we've just kind of rolled out here. I think you'll see that comp positive here in the back half of the year. The one that's probably the tougher one is lifestyle, to be honest with you. And, again, there are things that are real positive in there. You think about Dick Sporting goes to the American Eagle. Dick Sporting goes to the value prop, very compelling value prop. American Eagle, you know, is strong there. You have, again, J.Crew and the like, Chico's. But really the bigger part of that vertical is outdoor, which the whole industry is feeling pressure. So, again, you know, if we can continue to stay close to the dealers, I think when that pivots, we'll get momentum. So, again, I look at four of the five, you know, again, And people should be pleasantly surprised, which should help us drive into the back half of the year in that hopeful mid-single-digit end-of-period reserve, I mean, receivable guide.

Terry, Analyst — Audience Member

Got it. That's helpful. So maybe just looking beyond 2026, you've previously discussed a long-term growth target of 7% to 10%. Do you still view that as the right long-term framework? And what are the biggest building blocks required to return their level of growth?

Brian Wenzel, CFO

Yeah, you know, Terry, we haven't changed any of the long-term framework for us through the cycle. So, again, that is our target. If you take a step back and say, okay, what do you need to do as a business in order to achieve that? It's really important when you're in the retail space to understand your customer. Our customer is a customer who is the most engaged, most valued customer of our partners, right? It's not someone who shows up one time a year and says, okay, let me take out credit and does a purchase. There's someone who goes into a store, goes online, continues to buy. They're not as price sensitive, generally speaking, because they're connected to the brand. When you have that type of customer, you're generally going to over-index. You'll gain penetration, number one, and you should see growth in penetration and conversion rates in those stores. Number two, then, you should be, you know, in this type of space, you probably should grow at, you know, two times GDP. So if you take two times GDP plus that penetration growth, you should be into what would be a high single-digit type comp. And I think the other thing that you have to take a step back, and the unique thing about our business, we're one of two full-spectrum lenders in the United States, right? So we can go a little bit deeper into non-prime, but we can also go super-prime. And then you look at the diversity that we have inside these sales platforms in the verticals. We just have a lot of different ways. So even if you have a piece that may not be doing as well, it can be carried by some other part. And that diversification means an awful lot to the business. So, again, I think it's important for us to continue to focus on a multi-product offering, to have the product presented. you know, or multiple products presented to a customer to allow them to choose what products right in the path for the consumer when they're buying goods or services. So we're excited about that. We continue to invest there. We're going to continue to push multi-product. We're going to continue to push multi-channel. And, again, I think the relationships we have, we're going to drive penetration and growth. So, you know, we're very focused on trying to get back to that double digit over the long term, given the portfolio we have. Got it.

Terry, Analyst — Audience Member

So, let's just touch on the Walmart partnership. How has that performed relative to your original expectations, both from a growth perspective, certainly looks like growth is picking up, but also from a profitability and returns perspective?

Brian Wenzel, CFO

Yeah, I mean, you know, Terry, we don't talk about things specifically about any one program, most certainly when it comes to profitability. But here's what I'd sit back and say. You know, people ask me quite a bit about the differences between when we had it before and when we had it now. When we had the program back in 2018, the program was focused on maybe a lower revenue content. How do I get kind of, you know, everyday low APRs but no value proposition? I think if you fast forward to today, I think it's an APR that's competitive with the market, number one. But number two, and more importantly, is the value proposition that's on that card. If you're a Walmart Plus holder, you're much more engaged with the brand. You're doing a whole heck of a lot more shopping there. It's not just, you know, groceries. It's all sorts of goods. So you have a much more engaged customer. That much more engaged customer is more inclined to take our cards, right? You can see that most certainly on a read-through to loyalty because if you can take out our card and you're a Walmart Plus holder, you're getting 5% back when you add up the value proposition. It's very compelling in store. I'd say the leadership of Walmart is highly engaged. So I think when we look at a more competitive product, I think when we look at the expansion that they've done digitally and with Walmart Plus, the product is much more compelling than it was, and I think you combine that with an incredibly loyal base of customers that go into Walmart, it's a powerful growth engine, and most certainly, you know, I've said this consistently, you know, it shouldn't be long before hopefully it's a top 10, and most certainly it was a top five before. you know, we could potentially get to there. So we're excited about the relationship. We're very pleased with the partnership and the way in which we're engaged with them and the presenting not only digitally, but as well as in the store.

Terry, Analyst — Audience Member

Got it. Let's just touch on the competitive landscape for co-brand and private label. How would you characterize the current environment? And what does a pipeline for new partnerships look like today? Anything to call out on the horizon and with respect to renewals?

Brian Wenzel, CFO

Yeah, so let me break competition down into different pieces, right? So when you think about larger relationships, you traditionally see or you had traditionally seen Capital One, Citibank, to some degree, your company as well in the mix for them. And you see random people. You may see a U.S. bank or a Bank of America that has a corporate relationship. I'd sit back and say when you look at that landscape for a second, Capital One, I think, is very prescriptive with their strikes on and where they show up. So you don't see them all the time, but they're focused when they see a relationship that makes sense given their total portfolio. I think Citi's a little bit more in a transition. I think that they want to keep some of the larger relationships, I presume, when you think about a Macy's or a Depot. But some of the other ones, I'm not sure over the long term. You know, what they've said is, are they going to be quite as competitive to keep some of those? So that's an opportunity for us. You know, your company is probably a little bit more aggressive as it tries to get scale and relevance, you know, in this space, given the relationships that you guys have. So, you know, again, we're, you know, we're focused on what you guys do. So I think that's in the larger partner space. I think what you continue to see is more narrowly focused on FinTechs that you see, whether it's in health and wellness, home specialty, outdoor, et cetera, that are there, that are focused into certain verticals. and most certainly they have a different, I don't want to say advantage, but they have differences in the regulatory framework they operate in because it's generally unregulated, number one. And number two, what you see is they don't have the balance sheet in order to do it, so they have to rely upon the liquidity. Right now there's a lot of liquidity, particularly in the private equity markets, et cetera. So we continue to watch them, but they're more focused on certain verticals, So it's really important for us to maintain, particularly in the fragmented side of the business, having a product that's really relevant and having good relationships and the ease of doing business with them. So, again, I think it's different depending upon what part of the business you're talking about, but it's not one where we look at and say, you know, it's significantly moving one direction or the other direction. You know, to unpack your question a little bit further, with regard to relationships, are, you know, bigger relationships are all between 2030 and 2035. So I think we feel good about that. We have a handful, you know, of more moderate ones between now and 2030. But again, you try not to wait to the expiration date. You're trying to work on these relationships every day and try to get that extension every day. And when there's an opportunity to change the value proposition, change the way that you drive marketing, it gives you an opportunity to extend those relationships without having to give up, you know, economics. So that's what we're focused on to continue to build them. And, listen, there will be some opportunities probably in portfolios in that $500 to, you know, billion, billion and a half range over the next couple of years from competitors, and we look to compete for those.

Terry, Analyst — Audience Member

Got it. So I appreciate you don't comment on specific partnerships. One of your big partners has been in merger headlines this year. maybe just talk about change of control, how synchrony would potentially handle any renegotiation or potential loss of the partner. Yeah, you know, you're right.

Brian Wenzel, CFO

I don't talk about individual relationships, and I'm not going to talk about the one large relationship you're specifically referring to. But, listen, you know, what we try to do is say, how do we make sure we're really relevant to that partner? And I think in any situation where there could be a merger or an acquisition, if you're relevant to the partner and you provide a fair economic distribution to them, you're generally going to hopefully continue on with that relationship. And if it's a fair economic relationship, there's generally not an opportunity to have significant extraction. You know, in larger relationships, for all of our customers, there is some contemplation of change in control, both for us and for partners, and that's going to vary by partner. But, again, they're all unique, but it's really important for us to maintain the focus of how do we maintain the best partnership and fair economics with our partners, and that puts you in the best place regardless of what happens with them. Got it. Makes sense.

Terry, Analyst — Audience Member

We'll switch gears, and let's just touch on RSA and loyalty costs. Both have been increasing as credit performance have improved and value propositions have become richer. How do you think about balancing partner economics, customer value props, and synchronized target returns when you price new business?

Brian Wenzel, CFO

Yeah, so, you know, I hope for those in the room and online and listening to the webcast who own the stock, you own the stock for a couple of reasons. is number one, and incredibly attractive for the asset class return on assets. Number two, there's stability in that return on asset profile. And the key for us is the RSA, and we've been doing this for over 20 years. I've been with the company 28 years. We've been doing it well over 20 years where we align the interest with our partners. So when losses go down, RSA goes up. When loyalty goes up, RSA goes down. So it balances up, but it provides that stability. So, yes, under that model, we may give up upside, but we also protect the downside. But it aligns the interest. I think from an RSA standpoint, you know, the partners, you know, really do understand, and I think we spend a lot of time with them about what a good value prop is and what a good value prop isn't. You know, something that creates adverse incentives for a consumer to not engage with the card in the right way, we really spend time with the partners to go through that. And ones in which we're trying to incent the behavior and what they want from the card, giving it to the most loyal customer, is a big focus. I think one thing over time, you know, Terry, that we have a track record for is we're very disciplined when it comes to pricing and how we think about it, and we're incredibly transparent. And I think, you know, you're not going to wake up someday and, you know, half our earnings go away because we share that P&L with the partners. Say, here's the profit pool. And we can have a discussion about what's, you know, depending upon where the levels are set with regard to sharing, you know, how that profit pool is distributed. I think when you've done that for a long period of time, you have, you know, the trust of a partner to sit back and say, okay, I understand it. your interests are aligned much it's much more easy to get that alignment of interest I think when we approach new relationships I think we go through that philosophy with folks and go through a long education process because it's really critical to the model that we have is we want to have aligned interest so again we're very disciplined when it comes to pricing but a key element is going to be that retailer sharing arrangements and transparency Got it.

Terry, Analyst — Audience Member

That's helpful. So let's touch on your fiscal year guide. You recently revised your EPS guide, provided more color on just the cadence of expenses, expecting OpEx to be similar. In second half to first half, can you touch upon some of the tech investments you're excited for and where should we expect to see the benefits, whether it's, you know, customer acquisition or something else?

Brian Wenzel, CFO

Yeah, so technology for us, and we've scaled up our technology over the last five years. If you think about the big thing, we're probably 20-plus minutes into this. We haven't talked about AI, but we've spent a lot of time on AI and a lot of money and investment there. And that's really kind of spread across different things. There's foundational elements that you have to build as you get the workforce to engage with that technology. number one but then you look at where we're deploying our ai investments right so there's some that are more productivity oriented so do you know we're working on deploying agents into a dispute channel so if you dispute a credit card transaction it's really complicated labor intensive if you've ever done it every every credit card just will tell you it takes 30 to 60 days to resolve resolve a dispute because it's cumbersome i think ai is going to speed that up and most certainly help us to drive productivity there. But then you go on to the other side of the equation and say, okay, how do I use it to drive growth and engagement? And two examples there is one is on our merchant onboarding process. If I can get a merchant up faster and get them engaged quicker, they tend to pass us more applications, particularly in the fragmented business, number one. Number two, it's our investment around agente commerce and how do you get into that discoverability phase and relevance, you know, as consumer behavior will shift over time into agentic commerce. So AI is a big investment. We're in probably year two or three-year journey on cloud. We're going to move a lot of applications there, which ultimately will have a cost-benefit, as I think about it, in 28, but really drive capacity and the ability to do things faster. So that's one. I think when you look about the investment for multi-product offering, so we can pop an offer to you that has an installment loan, a dual-card loan, or dual-card offering at the same time and have offer persistence, that digital capabilities that we have there. We launched the marketplace. So it's all around digital assets for us as we continue to do that, as we do that. And we're also, you know, not exciting, but on the back side of this business, you know, we're redoing the technology stack inside our operations to make it easier for the consumers or our associates to kind of get through that process if they need to contact us. So we'll continue to focus there for the medium and long term. We think, you know, things that, you know, particularly on the digital side and agentic, commerce will differentiate ourselves.

Terry, Analyst — Audience Member

Got it. But you previously mentioned that Synchrony could potentially see double-digit EPS growth in 27 and beyond. Can you maybe touch on your confidence in achieving that, and what does the path to improved efficiency ratios look like?

Brian Wenzel, CFO

Yeah, you know, the way our framework, our long-term framework works is, you know, our core earnings power should match our receivable growth. Now, we talked quite a bit about this year. You know, most certainly when you get into, in the lending business, step function changes in growth rate. That creates, you know, either headwinds or tailwinds. We were negative two last year. We're going mid-single digits. That step up creates, you know, effectively what's a flattish EPS. You know, if you look at the outlook versus last year, a flattish EPS look is you kind of get behind that. Once you're kind of in a relative range, even if you accelerate a point or two, you don't really feel that. So, again, I think what you're going to hopefully see is that earnings power, the core business, matching receivables. So if you say, okay, I want to be high singles or mid-singles, you know, take this year. If you can get to mid-singles core earnings growth. And then the strength of this business, Terry, is just we generate because that high ROA and the excess capital we have, we just have a lot of capital to deploy. So I can move that, you know, mid-single-digit EPS or high-single-digit EPS to a very reasonable share of purchase program, assuming I don't have opportunities to grow the organic side of the business, you know, to double digits. So I think, again, what we have to do is focus on getting that core earnings back. You know, expenses, we've significantly increased technology. I think now what we're trying to focus on is, okay, what do we need to stop doing in order to reallocate dollars versus continuing to just add on to dollars? So, you know, this year we'll end up with headcount that's probably down year over year. Part of that's just driving productivity and AI into it, and we're going to continue to drive that. So we should see better operating leverage, I think, as you move into 27 and beyond, which just helps you get back to that core EPS growing in line with receivables.

Terry, Analyst — Audience Member

Got it. That's helpful. Since you mentioned it, we'll just maybe just touch on excess capital. You recently issued $500 million of PREFs. Your CET1 ratio is above 13. How should we think about the balance between supporting loan growth and just capacity for capital return?

Brian Wenzel, CFO

Yeah, you know, to unpack that a little bit, Terry, you know, the preferred stock offering, that was the very last piece of having a fully developed capital stack for us. So when I think about maximizing the tier one, I take away that as any form of binding straight, not that it was, but that, you know, now we're just back to CET1 and that focus. You know, again, this business generates, you sit back and say you have a high twos, You know, to call it a 2.7 or so ROA, you just generate a lot of capital. Our first preference is to have RWA growth, right? That is solely focused. That's what we prefer to do because the return on investment and that return on capital is the best alternative. We'll then have a reasonable dividend. It's going to be, I think, in line on a yield basis and a percent of net income. And then we get back into inorganic versus shared purchase. Inorganic, we're very disciplined. I don't think you'll see us do large transactions. A lot of times they don't end up working or take too long in order to pay back. We tend to focus on some more bolt-on things when you think about Allegro, when you think about Ally, when you think about what we do with Pets Best. That's probably better use of capital for us if we go down that path. And in an asset price, to be honest with you, it's probably not in line with reality of the earnings power of available assets. So, again, that brings you back to share of purchases. So you combine the earnings power of the business with excess capital we have today. We're hopeful that when Basel III comes out at the end of the year, there is some incremental relief that's there, and we're going to try to move the CET1 ratio, which, again, was 13-plus at the end of 2Q, down closer to our target, externally of 11.

Terry, Analyst — Audience Member

Got it. Maybe we'll just touch on NIM. NIM has benefited from the triple PCs, while lower late fees have been a headwind. As you look ahead, what do you see as the key drivers of NIM in the second half and beyond? And then just longer term, is 16% NIM, roughly the right target, and what needs to happen for you to get back there?

Brian Wenzel, CFO

Yeah, so we haven't changed our long-term framework, which had a 16%. I think it's important to kind of go back and unpack, you know, that framework for one second. That framework had essentially a Fed funds rate around 2.5, right? And it had a loss rate, you know, call it 575, the midpoint of the range. And it carried a certain revolve rate with that. So when you look about where we are today, I have a loss rate that's lower, right? I don't have the same revolve rate, which is a headwind to NIM to the target. I have an elevated funding cost, which more impacts you on some of your fixed-rate loans, which is the promotional financing program. So while we have some mechanism to offset price or a merchant discount, it doesn't fully do that. So you have some compression there. Those are headwinds to that target. What's kept us closer to the target has been the triple PCs. So I think as you say, okay, how does it gravitate up over the long term? You're going to sit back and say, when does that funding cost begin to come down 2.5 to 3? I'm not going to be like the Federal Reserve and give a point, but call it 2.5 to 3, relieve some of that pressure. How do I get more of the revolve rate that's associated with a, you know, call it a 575-ish type loss rate? That's going to help give you momentum, and then you have the triple PCs that sit on top of that. So there should be strong momentum. As you think about the back half of this year, you know, one of the things we said is you should have, you know, it's coming out of 2Q, you should see, you know, sequentially move up here in the third and fourth quarter. That's partially because you're not necessarily comping some of the negatives when it comes to late fees. The interest rate environment, again, assuming the Fed doesn't move this week or the back half of the year is a little bit more favorable, then it just comes down to liquidity, which is going to go a little bit lower. So, again, you should see a push-up in the back half of the year, which I think most people have set that expectation.

Terry, Analyst — Audience Member

Okay, got it. Just a few minutes left. I'll just open it up to the floor for any questions, if there are any.

Brian Wenzel, CFO

Everyone's excited about the Giants win last night.

Terry, Analyst — Audience Member

Yeah. So just two minutes left, maybe just to close out the discussion. Sounds like there's a lot to be excited for moving forward. As you look out over the next three to five years, what do you think investors are underappreciating most about the Synchrony story today?

Brian Wenzel, CFO

Yeah, I think people think about this business, and they think about the downsides with the consumer and how the consumer is going to come through credit, and they're afraid of that. I think one thing we demonstrated, whether you go back to 16 to 17, or most certainly in the period post-2023, we've been able to control credit. We've been able to do it. We've done this for 90-plus years. the technology and the investments we've made we call a prism in our advanced underwriting I would believe and I'm sure others would say for their own companies is really a differentiator for us so I think people are probably more concerned hey listen you're non-prime and you're exposed to the consumer we're less non-prime than Capital One we're most certainly significantly less non-prime than bread So I think we can weather that storm quite a bit. I think the diversity in the business and the ability for us to generate a high ROA and the amount of capital that we have, and, again, we hope positive effects of Basel III rules when they come out at the end of the year is going to create a tailwind. So I think when you think about that return, when you think about the ability to control credit as well as we have, when you think about the partnerships that we have, the multiproduct offering, I just think there's a lot of tailwinds onto this business. And I'd say the last thing, Terry, we're spending a lot of time trying to be a leader here as the landscape is now shifting, most certainly as it comes to AI and agente commerce. You're seeing a lot happening in discoverability. We're on the front lines of that, whether it's with open AI and Anthropic, et cetera. We are trying to push that and be a leader in that space. So I think that gives us momentum. them so it's a high return controller credit just a tremendous set of partners and diversity in the platforms okay great with that I think we're at time would send it there thank you great thanks