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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  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.  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 Nathan Flanders Managing Director +1-212-908-0827 or Media Relations: Brian Bertsch, +1-212-908-0549 (New York) brian.bertsch@fitchratings.com  
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