Fitch Rates Synchrony Financial 'BBB-/F3'; Outlook Stable

  Fitch Rates Synchrony Financial 'BBB-/F3'; Outlook Stable

Business Wire

NEW YORK -- July 31, 2014

Fitch Ratings has assigned long-term Issuer Default Ratings (IDRs) of 'BBB-'
and short-term IDRs of 'F3' to Synchrony Financial (Synchrony) and Synchrony
Bank. The Rating Outlook is Stable. A full list of ratings is provided at the
end of this release.

The ratings reflect the initial public offering (IPO) of Synchrony and
Synchrony Bank by General Electric (GE) as the first step in GE's exit from
Synchrony's business. The IPO closed on July 30, 2014.

Fitch had previously assigned expected IDRs of 'BBB-(EXP)/F3(EXP)' to
Synchrony and Synchrony Bank on July 15, 2014, subject to the IPO transaction
closing and implementation of a capital structure and financial profile
consistent with what had previously been outlined in the company's public
disclosures.

KEY RATING DRIVERS - IDRs, Support Ratings, Support Rating Floors, VRs,
Deposits

The ratings reflect Synchrony's market leading position in the U.S.
private-label credit card industry, seasoned management team, stable operating
performance through previous market cycles, appropriate capitalization and
liquidity levels as a stand-alone entity and improving funding diversity as a
result of the growing bank deposit platform.

Rating constraints include the monoline nature of the business model,
concentrated partner profile with a high exposure to retailers,
higher-than-average mix of subprime borrowers, heightened regulatory, legal
and litigation risk, sensitivity of the deposit base to rising interest rates,
and the lack of a track record operating as a stand-alone entity.

Fitch believes Synchrony stands to benefit from favorable secular trends in
private-label credit card lending, as consumer payment preferences continue to
shift to card-based payments and away from cash and check transactions.
Synchrony's unique, lower-cost business model positions it well within the
mature, highly competitive credit card industry.

Fitch believes the company's operating performance, which remained resilient
through the last market cycle, reflects the strength of the company's business
model, risk management policies and corporate governance. Furthermore,
Synchrony has stable, long-term contracts with its retail partners, which
include incentives (i.e. gain-sharing) for retailers to maximize portfolio
performance. Fitch views these agreements favorably as they reduce Synchrony's
earnings volatility and act as a buffer during down cycles.

Synchrony is well-capitalized with adequate liquidity. The company has broad
access to multiple sources of funding, including stable, lower cost deposits
through Synchrony Bank, although the online nature of the deposits may create
more sensitivity in a rising interest rate environment.

Synchrony is a monoline lender focused on private-label credit cards and its
portfolio is highly concentrated among a few select retailers. For example,
Synchrony's top five partners accounted for 48% of total platform revenues in
2013. In addition, one of Synchrony's largest retail partners, J.C. Penney
Company, Inc. (rated 'CCC', Outlook Positive by Fitch), has experienced
significant credit pressure over the last two years. As a result, Synchrony's
financial performance is highly dependent on its ability to retain existing
partners and increase customer penetration, as well as attract new partners.
Furthermore, Fitch believes the high concentration could expose the company to
weak performance in a particular retail segment.

Synchrony's loan portfolio includes a higher-than-average mix of subprime
receivables, a population historically associated with higher-than-average
delinquencies and credit losses. Subprime lending is also an area that has
received increased scrutiny from regulators, including the Consumer Financial
Protection Bureau (CFPB). In particular, on June 19 the CFPB announced actions
against Synchrony Bank, ordering the company to provide $225 million in relief
to consumers harmed by illegal and discriminatory credit card practices. This
amount included $158 million in credits and waivers to closed and written-off
accounts, which had minimal financial impact on Synchrony. This action was in
addition to an earlier Consent Order which required the company to pay up to
$34.1 million to qualifying customers in relation to certain practices within
the company's CareCredit business. While these costs were manageable, Fitch
expects regulatory, legal and litigation risk for Synchrony will remain
elevated for the foreseeable future.

The ratings for Synchrony and Synchrony Bank are equalized, which reflects
Fitch's view that Synchrony Bank is core and integral to Synchrony's business
strategy and operations. Fitch believes Synchrony would fully support
Synchrony Bank in the event of need.

The Support Rating of '5' and Support Ratings Floor of 'NF' reflect Fitch's
view that Synchrony is not considered systemically important and therefore,
the probability of support is unlikely.

The deposit ratings of 'BBB/F3' are one notch higher than Synchrony Bank's
IDRs and reflect depositor preference at U.S. banks.

RATING SENSITIVITIES - IDRs, Support Ratings, Support Rating Floors, VRs,
Deposits

Fitch believes positive ratings momentum is limited in the near term.
Longer-term, however, positive ratings momentum could be driven by a reduced
reliance on a limited number of retail partners, a material shift in the
underlying risk profile of the portfolio toward higher credit quality
borrowers, demonstrated access to the unsecured debt markets at a reasonable
cost, and additional actions to further enhance funding and liquidity sources
while maintaining strong capital levels at both the parent and operating
company levels.

Furthermore, Fitch believes the durability of Synchrony Bank's internet-based
deposit platform in a rising rate environment will be a key determinant 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 strategy as a standalone company and prudently grow the business over
time while balancing the expectations of shareholders.

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

Fitch assigns the following ratings with a Stable Outlook:

Synchrony Financial

--Long-term IDR 'BBB-';

--Short-term IDR 'F3';

--Support Rating '5';

--Support Rating Floor 'NF';

--Viability Rating 'bbb-'.

Synchrony Bank

--Long-term IDR 'BBB-';

--Short-term IDR 'F3';

--Support Rating '5';

--Support Rating Floor 'NF';

--Viability Rating 'bbb-';

--Long-term Deposits 'BBB';

--Short-term Deposits 'F2'.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Fitch Fundamentals Index' (April 2014)

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 2014);

--'Global Financial Institutions Rating Criteria' (January 2014);

--'FinCo Deposit Sensitivity to Rising Rates' (January 2014);

--'Nonbank Financial Institution Interest Rate Sensitivity' (January 2014);

--'2014 Outlook: U.S. Finance and Leasing Companies' (November 2013);

--'Finance and Leasing Companies Criteria' (December 2012).

Applicable Criteria and Related Research:

Fitch Fundamentals Index 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746196

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

FinCo Deposit Sensitivity to Rising Rates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726196

Nonbank Financial Institution Interest Rate Sensitivity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723766

2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But
Sector Headwinds Persist)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722839

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843315

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Contact:

Fitch Ratings
Primary Analyst
Brendan Sheehy
Director
+1-212-908-9138
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Meghan Neenan, CFA
Director
+1-212-908-9121
or
Committee Chairperson
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Managing Director
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or
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brian.bertsch@fitchratings.com
 
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