Amazon Visa Card Partnership Could Be A Win For Synchrony
Amazon Visa Card Partnership Could Be A Win For Synchrony
Amazon Visa Card Partnership Could Be A Win For Synchrony Synchrony Bank provides Amazon Store Cards* and Amazon Prime Store Cards. Chase provides Amazon Rewards Visa Signature Cards for Prime and non-Prime subscribers.
Large Loan Portfolio Up For Grabs
Amazon.com (AMZN) is reportedly looking for a new bank partner for its co-branded Visa card (JPM). It has $15 billion in loan receivables and $50 billion in yearly purchases.
From the issuing bank’s perspective, this card relationship might be costly, with 5% cash back benefits on Amazon Prime transactions.
American Express (AXP) and Synchrony Financial (NYSE:SYF) are suspected suitors. American Express provides a small-business Amazon card. Synchrony issues the Amazon private label shop card.
Both issuers need the Amazon portfolio strategically. American Express might employ a consumer-based firm to counterbalance its corporate Travel and Entertainment expenditure.
Amex’s charge-off rate is 1.4%, therefore the Amazon portfolio might worsen average credit quality.
Synchrony is planning to replace its $8 billion Walmart agreement in Q4 2019. Amazon would virtually quadruple Walmart’s missed loan receivables. Amazon’s portfolio may be better than Synchrony’s, which had 3.6% charge-offs last quarter.
Synchrony has been diligent about leaving unproductive business, as shown with the Walmart departure and modest business additions thereafter.
With the Amazon Visa card’s high programme expenses (including cashback perks) and a possible bidding battle, Synchrony may not obtain the contract.
If Synchrony buys the Amazon portfolio, it should boost profitability following a first-year loan loss reserve increase.
Since my previous piece, Synchrony stock is risen 33% and nearing fair value. I’d add if it wins Amazon, particularly if the market reacts negatively.
Modeling The Amazon Deal Impact
I included 2022 projections to my model assuming Amazon’s portfolio purchase at the start of the year. According to recent data, I assume $15 billion in net loan receivables ($15.789 billion gross, $0.789 billion loss reserve).
This boosts Synchrony’s net interest margins by boosting the bank’s loan mix. Amazon’s retailer sharing agreements cost 6% and the rest of Synchrony’s company 4.7%.
I believe Amazon’s credit quality will be higher than Synchrony’s, therefore I’m adopting a 5.5% charge-off rate for the current company (comparable to 2019 and 2021) and 3% for Amazon.
The bigger loan portfolio should help the efficiency ratio return to 2019 levels. I suppose the $2.9 billion share purchase is completed in 2021 and no further shares are acquired in 2022.
2022 net income is close to my 2021 expectation, but the lower average share count increases EPS to $5.49 from $5.11 this year. The modest rise in net income is due to the $789.5 million reserve built in the year Amazon’s portfolio is bought.
Without this contingency, EPS would be $6.65, reflecting the bank’s long-term profits capability.
I estimate Synchrony pays $17.25 billion for the Amazon portfolio, a 15% premium over the net receivables as reported. Goodwill is $2.25 billion. Synchrony likely funded the transaction by issuing $10 billion in debt at competitive interest rates.
Increasing deposits by 5% nets the bank $3.1 billion. Current CD rates are approximately 0.50% for 1-year term, thus this should be possible. Increasing from 0.75 to 1% should attract deposits at little additional cost.
The remaining amount would be paid using cash on hand or produced in 2021. The bank’s tangible common equity / tangible asset ratio would be 9.3%, 110 basis points lower than in 2020.
Valuation
At $49.37, Synchrony’s P/E is 9.7 times my 2021 and 2022 forecasts. Excluding the first reserve increase to properly reflect Amazon’s continuing advantages, $6.65 EPS would have a P/E of 7.4.
Without the Amazon acquisition, Synchrony’s 2021 P/E of 9.7 is near enough to its long-term average to warrant a hold.
Synchrony would be a purchase if Amazon’s portfolio was sold for conditions similar to mine.
Risks
The card firms and possible new partners have not confirmed the contract. Synchrony might overpay or the transaction could fall through.
As I’ve said before, government stimulus funds have led to people charging less and paying off accounts faster. Continued credit card balance aversion would hurt Synchrony.
Conclusion
The Amazon Visa card portfolio would be a wonderful addition to Synchrony’s balance sheet if bought at a fair price. It would almost treble Walmart’s 2019 loan receivables loss but have better credit.
After a solid run since March 2020, Synchrony stock is approaching its long-term P/E. The Amazon transaction might be the growth engine required to boost the bank’s future profitability, but it’s far from clear.
I’m holding Synchrony until we get more transaction clarity, but I’d buy if the market reacts negatively.
