Good morning, and welcome to the Synchrony Financial Second Quarter 2019 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Greg Ketron, Director of Investor Relations. Sir, you may begin.
Thanks, operator. Good morning, everyone, and welcome to our quarterly earnings conference call. Thanks for joining us. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules and presentation are available on our website, synchronyfinancial.com.
This information can be accessed by going to the Investor Relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ in our SEC filings, which are available on our website. During the call, we will refer to non GAAP financial measures in discussing the company's performance.
You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by 3rd parties. The only authorized webcasts are located on our website. Now it's my pleasure to turn the call over to Margaret.
Thanks, Greg. Good morning, everyone, and thanks for joining us today. Before I get into the Q2 results, I'd like to outline some of the important changes we recently made at the executive level of the company. Brian Doubles has been promoted to President. In this role, he is focused on accelerating key growth initiatives across the company, deepening the integration of the key functions for which she is responsible.
These include business strategy, venture investments and M and A, enterprise data analytics, marketing including digital platforms, customer experience and the expansion of the company's direct to consumer banking and product strategy. Brian Wenzel succeeds Brian Doubles as CFO. Brian has successfully served as Deputy Chief Financial Officer for the past year and as Chief Financial Officer for our retail car platform for more than 12 years. His experience imparts a broad perspective of our operations and a deep understanding of our people and partners. He will continue to focus on execution of our long term financial and growth objectives.
These changes underscore our dedication to our strategic priorities and drive to continue to grow and transform the business. I am proud of what these leaders have achieved thus far and I'm confident that we have the right people in the right roles to lead us into the future. You will have an opportunity to hear from them today as Brian Doubles will cover our digital innovation and data analytics initiatives that are helping to drive growth and Brian Wenzel will detail our financial results. I'll begin by providing an overview of our Q2 accomplishments on Slide 3. Our progress continued in the Q2 as our focus on driving growth both organically and through new partner programs across each of our sales platforms helped deliver strong results.
Earnings of 853 dollars per share included a reduction in the reserve related to the expected sale of the Walmart portfolio, which positively impacted results by $0.27 Loan receivables grew 4%. On a core basis, excluding the Walmart portfolio, loan receivables grew a strong 17%. Net interest income and purchase volume both grew double digits and average active accounts were up 9%. Our efficiency ratio of 31.3 percent is in line with our expectations. This has been achieved as we onboarded the PayPal program I'm pleased to report that our conversion was successfully completed during the quarter.
We look forward to continuing to partner with PayPal to develop innovative solutions to grow the program successfully. We have also continued to make investments in our direct deposit program. During the quarter, we grew deposits $6,600,000,000 or 11% over last year and much of this growth has come through direct deposits. We also recently renewed and extended key relationships and launched a new program. In our payment solutions sales platform, we recently extended relationships with CCA Global Partners and Penske Automotive.
We also added new programs with Samsung HVAC and 0 Motorcycles. During the quarter, we also launched our new program with Fanatics, the global leader in licensed sports merchandise. Together, we are leveraging our deep expertise in data analytics to deliver personalized shopping experiences and enhance loyalty for fans. As you know, a key strategic priority is to grow our network to create broader acceptance and utility of our cards. We have been particularly successful in doing that with our CareCredit network.
This quarter, we expanded our CareCredit network to include Lehigh Valley Physicians Group and the Ballast Scott White Medical Center in Sunnyvale, Texas. We also renewed our relationship with Bosley and launched our partnership with Lighthouse. We remain highly focused on the risk adjusted returns of our programs, operating with a strong balance sheet and returning capital to shareholders. During the quarter, we began executing our new capital plan, which includes share repurchases of up to $4,000,000,000 and a planned increase in the quarterly dividend to $0.22 per share beginning in the Q3. Overall, this is a strong quarter for us as we continue to make progress against our strategic initiatives, growing both organically and via new programs.
Our investments in innovative digital technology, data analytics and seamless customer experiences are fundamental to our success, and Brian will outline some of those achievements shortly. Before I turn it over to him, I'll spend a few minutes on our sales platform results on Slide 4. In retail card, strong results were driven by our PayPal Credit Program acquisition, which was largely offset by the reclassification of the Walmart portfolio. Loans were up 2%, but excluding the Walmart portfolio, they were up 23%. Interest and fees on loans increased 16% over last year and purchase volume grew 14%.
Average active accounts were up 11%. We are happy to have completed conversion of the PayPal portfolio. This is a key relationship in the rapidly growing digital payment space and has expanded our capabilities within the merchant environment. And through this partnership, we are providing an enhanced customer experience for thousands of merchants and consumers. We are very excited about the continued opportunities with this valued partner.
We have worked hard to renew our relationships in the retail card space and have had great success in doing so. Currently, 97% of retail card ongoing partner interest and fees on loans are under contract until 2022 beyond. Payment Solutions also delivered another solid quarter. We generated broad based growth across the sales platform with particular strength in home furnishings and power that resulted in loan receivables growth of 8%. Interest and fees on loans increased 6%, primarily driven by the loan receivables growth.
Purchase volume was up 4% and average active accounts increased 3%. Our initiative to develop and extend the utility of our payment solutions network cards has yielded solid results. We now have nearly 7,000,000 cardholders in our Synchrony Car Care network with over 730,000 auto related locations nationwide where the card can be used. And we currently have approximately 5,000,000 of Synchrony home cardholders that can use their cards at over 1,000,000 locations. These networks along with other initiatives such as driving higher card reuse that now stands at approximately 30% of purchase volume, excluding oil and gas, have helped to drive growth and create significant opportunity for the future.
CareCredit continued to generate solid growth. Receivables growth of 7% was led by our dental and veterinary specialties. Interest and fees on loans also increased 7%, primarily driven by the loan receivables growth. Purchase volume was up 7% and average active accounts increased 5%. With new partners signed this quarter, we now have over 230,000 locations in the acceptance network and over 6,000,000 active cardholders.
We have significantly increased the network and utility of this card, helping to drive the reuse rate to 54% of purchase volume in the Q2. We delivered solid growth across our sales platforms as we continue to extend relationships, increase card utility, expand networks and provide value added solutions to our partners and cardholders. With that, I'll turn the call over to Brian Doubles.
Thanks, Margaret. Good morning, everyone. I'll begin my comments today on Slide 5. We have made significant investments to develop leading digital technologies, which have been essential to delivering a seamless customer experience and have helped us to drive both organic growth and acquire new programs. The rise of e commerce and digital shopping experiences has required innovation to ensure that programs work seamlessly across whatever channel a customer uses.
That means that cardholders must have access to their cards, rewards and account information across all channels seamlessly. Innovations such as Digital Apply, Digital Servicing and Synchrony Plug in or SciPy helped to meet the ever evolving requirements of our partners and their customers. Digital Apply is a powerful tool for credit applications that we can configure to each partner. It is an adaptive and responsive user experience that integrates dynamic and intelligent pre fill to minimize the number of fields an applicant needs to enter and can prequalify known customers. It can also incorporate 1st purchase offers, coupons and incentives.
Our digital servicing platform provides quick and easy access to key account servicing functionality that is optimized for the mobile experience. We have also developed virtual assistant servicing capabilities in Amazon Alexa and Google Home, where cardholders can do things like check their balance or make a card payment. Synchrony Plug in or SciFi is another powerful innovation that can quickly and seamlessly be integrated into a partner's mobile app. Through this platform, customers can apply for credit, service their account and check for and redeem earned rewards. These innovations are having meaningful impact on our ability to grow our online and mobile channels.
The digital sales penetration for our retail card consumers has been growing. Digital sales penetration was 34% in the 2nd quarter. Overall, nearly 50% of our applications are happening online with the mobile channel alone growing 47% over the same quarter of last year. Furthermore, we now have over $2,000,000,000 of payments being made through SciPy and 200% average annual growth in visits since we launched the platform in July of 2016. While these are significant achievements, we are continuing to make important investments to stay ahead of this evolving landscape.
We're focused on meeting customers where they are, with the features they need and conveniences they may not yet have contemplated. Turning to Slide 6. As you know, data and the ability to analyze and make it actionable has increasingly become an integral part of the success of our programs. We have developed an integrated data ecosystem that leverages a broad set of data assets from Synchrony, our retail partners and other external sources to transform customer experiences through personalized marketing, enhanced credit underwriting, optimized customer servicing and informed fraud strategies. We are developing transformative innovative data and analytic capabilities driven by customer behavior data, which will enable us and our partners to engage with customers more deeply than ever before.
It empowers us to provide the right experience through the right channel at the right time. The value of data analytics is demonstrated on Slide 6 today's presentation, where examples are provided to illustrate how data analytics is having a direct impact on program results. Through use of shared data and analytics, we have been able to improve credit line assignments for certain partners' best customers by 20% to 30%. This results in a better customer experience and drives more sales for our partners and at the same time provides improved economics for the program. Also, enhanced customer segmentation powered by data and advanced analytics techniques has proven to lead to a reduction of observed fraud rates.
Customer behavior scores are good predictors of fraud. Customers that have low engagement with our partners have the highest propensity for fraud, as much as 70% to 90 percent higher. Customer segmentation based on customer engagement with our partners also allows us to build more effective targeting and offer strategies for marketing campaigns, increasing our campaign returns while enhancing the customer experiences. These strategies help us drive increases in customer spending and higher account balances. Given the powerful results of data analytics, we will keep investing in this important component of our business, focusing on new methods to leverage and activate integrated data assets to help drive program performance and enhance the user experience.
With that, I'll turn the call over to Brian Wenzel. Thanks, Brian.
I'll start on Slide 7 of the presentation. This morning, we reported 2nd quarter earnings of $853,000,000 or $1.24 per diluted share. This included a reduction in the reserve related to the expected sale of the Walmart portfolio. The reduction totaled $247,000,000 or $186,000,000 after tax and provided an EPS benefit of $0.27 to the quarter. We generated strong year over year growth in a number of areas as noted on Slide 8.
Excluding the Walmart portfolio, loan receivables were up 17%. Interest and fees on loan receivables were up 14% over last year, reflecting the addition of the PayPal Credit program last year. We also continue to deliver solid organic growth. Overall, we're pleased with the growth we generated across the business as well as the risk adjusted returns on this growth. Purchase volume growth was 12% and average active accounts increased 9% over last year.
RSAs increased $206,000,000 or 32% from last year. Growth including the PayPal Credit Program acquisition and improved program performance drove the increase. RSAs as a percentage of average receivables was 3.9% for the quarter, in line with our expectations. We continue to expect RSAs as a percentage of average receivables to be in the 4.0% to 4.2% range for 2019, which I will cover in more detail later. The provision for loan losses decreased $82,000,000 or 6% from last year, mainly driven by the reduction in the reserve related to the Walmart portfolio, partially offset by a core reserve build of $114,000,000 in the quarter.
I will cover the asset quality metrics in more detail later in the presentation. Other expenses increased $84,000,000 or 9% versus last year driven primarily by expenses related to the addition of the PayPal Credit Program. So overall, the company continued to generate strong results in the Q2. I'll move to Slide 9 and cover our net interest income and margin trends. Net interest income was up 11%, driven primarily by the addition of PayPal Credit Program and loan receivables growth.
The net interest margin was 15.75 percent compared to last year's margin of 15.33 percent, which include the impact of the pre funding for the PayPal Credit Program acquisition and was in line with our expectations. We benefited from a higher mix of receivables as a percent of total earning assets compared to last year driven primarily by the PayPal Credit Program acquisition and loan receivables growth. Also impacting net interest margin was a decline in loan receivables yield and an increase in interest bearing liabilities cost. The loan receivables yield was 20.94%, a decline of 9 basis points versus last year, mainly due to the impact of the PayPal Credit Program acquisition. The increase in total interest bearing liabilities cost was 49 basis points to 2.73%, predominantly from higher benchmark rates.
We believe the net interest margin will continue to run-in the 15.75% to 16% range for the year with normal seasonality and some potential fluctuation around the Walmart portfolio sale later this year. Next, I'll cover our key credit trends on Slide 10. In terms of specific dynamics in the quarter, I'll start with our delinquency trends. The 30 plus delinquency rate was 4.43% compared to 4.17% last year and the 90% plus delinquency rate was 2.16% versus 1.98% last year. The increase in delinquency rates was primarily due to the reclassification of approximately $8,000,000,000 in Walmart loan receivables to held for sale.
The Walmart consumer loan receivables that we expect charge off prior to the expected portfolio sale remain in period end loan receivables, which was approximately $400,000,000 in loan receivables at quarter end. Given that we continue to report the delinquencies on the $400,000,000 in period end loan receivables and a high percentage of these receivables are delinquent and represent the majority of delinquent accounts in the Walmart portfolio in total, the exclusion of the $8,000,000,000 in held for sale from period end loan receivables skewed the reported rates higher. Also impacting delinquency rates is the addition of the PayPal Credit Program acquired in the Q3 of 2018. If you exclude the impact of the PayPal credit program and the Walmart portfolio, the 30 plus delinquency rate improved by approximately 10 basis points and the 90 plus delinquency rate improved by approximately 5 basis points compared to last year, reflecting stabilizing credit trends. Moving on to net charge offs.
The net charge off rate was 6.10% compared to 5.97% last year and 6.06% last quarter and was somewhat lower than expectations due mainly to higher recovery levels. We had expected net charge offs trend 20 to 30 basis points higher in the 2nd quarter compared to the 1st quarter. The recovery rate as a percentage of average receivables was 1.2% for the quarter and we had expected rate to run closer to 1% we had reported in prior quarters looking back to 2018. While credit trends continued to improve, this was partially offset by the impact from the addition of the PayPal Credit Program. Excluding the impact of the PayPal Credit Program and the Walmart portfolio, the net charge off rate was down approximately 5 basis points compared to last year.
The allowance for loan losses as a percent of receivables was 7.10 percent and the core reserve build in the 2nd quarter was $114,000,000 excluding the impact from the reduction in reserves related to the Walmart portfolio and in line with our expectations. Looking forward, we expect the core reserve build for the Q3 will be in the $175,000,000 range. This is higher than the 2nd quarter due to expected acceleration in loan receivable growth and a normal seasonality we see in the 3rd quarter. Consistent with the outlook we provided in January, we expect to see some degree of acceleration in core loan receivables growth in the second half of this year after taking into account that starting in the Q3, we'll be comparing the periods last year that include the PayPal Credit Program. The acceleration in growth reflects the opportunities we have in the fast growing digital space as well as the diminishing impact on growth from declining size of the Walmart portfolio that remains in held for investment.
Regarding future reductions in the loan loss reserve associated with the Walmart portfolio, we now expect the sale of the Walmart portfolio will be completed in October. The remaining loan loss reserve held against the portfolio was approximately $350,000,000 at the end of the second quarter. We expect the reduction of the reserve will be around $250,000,000 in the 3rd quarter with the remaining reduction occurring in the 4th quarter when the portfolio is sold. Regarding net charge offs, the 3rd quarter net charge off rate tends to be seasonally lower than the 2nd quarter. The credit related purchase accounting impact from the PayPal Credit Program acquisition in July of last year was also a significant driver in the 100 basis point decline in net charge offs in the Q3 from the Q2 last year.
We expect the decline to be more modest this year and more in line with historical declines of 40 basis points to 50 basis points from the 2nd quarter. This is in line with our expectations and included in our 2019 net charge off outlook. We continue to expect net charge offs for 2019 will be in the 5.7% to 5 0.9% range with a slight increase entirely driven by the impact of the PayPal Credit portfolio, partially offset by the sale of the Walmart portfolio later this year. Excluding the effects of PayPal and Walmart, net charge off rate is expected to be similar to 2018. Before I wrap up discussion on credit trends, I wanted to give you some visibility on our initial thoughts around the implementation of CECL beginning in 2020.
We are finalizing our assumptions with alternatives that remain under evaluation and we're still analyzing a number of factors for potential inclusion or exclusion based on the predictive capabilities over time. We have commenced parallel testing on our core model and our models are undergoing validation testing. We also continue to work with and obtain feedback from regulators. While these key factors remain open, based on our current view, our preliminary estimate from the initial impact would have been 50% to 60% increase in the total allowance for loan losses compared to what we reported at the end of the second quarter. The Oldsman impact will depend upon the composition and asset quality of the portfolio, the economic conditions and forecast upon adoption in addition to the factors I noted previously.
In summary, credit trends have leveled off and are showing improvement in line with our expectations and we expect the trends to continue to show stability as we move forward assuming stable economic conditions. We continue to see good opportunities for continued growth and attractive risk adjusted returns. Moving to Slide 11, I'll cover expenses for the quarter. Overall expenses came in at $1,100,000,000 up 9% over last year and were primarily driven by the acquisition of the PayPal Credit Program. Year to date expenses are up 7%.
We do expect the expense growth rate to slow in the second half of this year due to the following factors. 1st, beginning with the 3rd quarter, we will begin comparing against quarters post the acquisition of the PayPal Credit portfolio. In addition to this, will be the favorable impact on expenses after the sale of the Walmart portfolio later this year. The efficiency ratio was 31.3% for the quarter near last year's level and in line with expectations. Moving to Slide 12.
Over the last year, we've grown our deposits $6,600,000,000 or 11% primarily through our direct deposit program. This puts deposits at 75% of our funding compared to 73% last year. In June, we issued $850,000,000 in secured debt out of our Synchrony Card issuance trust. Issuance has a 3 year term with a fixed rate of 2.34 percent, net strong demand and was significantly oversubscribed. Turning to capital and liquidity.
We ended the quarter at 14.3 percent CET1 under the fully phased in Basel III rules. This compares to 16.6% on a fully phased in basis last year, reflecting the impact of the capital deployment through the acquisition of the PayPal Credit Program, organic growth and continued execution of our capital plans. On May 9, we are pleased to announce our new capital plan through June 30, 2020. Our Board approved an increase in the quarterly common stock dividend to $0.22 per share commencing in the 3rd quarter and share repurchase program of up to $4,000,000,000 which includes the capital freed up from the expected sale of the Walmart portfolio. We began to execute our new plan in May, repurchasing shares totaling $725,000,000 during the Q2.
This represented 21,100,000 shares repurchased during the quarter. Total liquidity including undrawn credit facilities was $23,700,000,000 which equated to 22.3% of our total assets. This is down from over 28% last year, reflecting the deployment of some of our liquidity for the PayPal Credit Program acquisition. Overall, we continue to execute the strategy that we outlined previously. We're committed to maintaining a very strong balance sheet with diversified funding sources and strong capital and liquidity levels.
And we expect to continue to deploy capital through the growth and further execution of our capital plan in the form of dividends and share repurchases. Before I conclude, I wanted to recap our current view for the Q3 and the year. Overall, the net interest margin performed in line with our expectations for the Q2. We believe the net interest margin will continue to run the 15.75% to 16% range for the year with the normal seasonality as well as some potential fluctuation around the Walmart portfolio sale later this year. RSAs as a percentage of average receivables was 3.9 percent for the quarter, in line with our expectations.
We continue to expect the RSA percent to be in the 4.0% to 4.2% range for 2019. Regarding credit, we expect the core reserve build for the Q3 to be largely driven by growth and a normal seasonality we see in the Q3 and will be in the $175,000,000 range. We now expect the sale of the Walmart portfolio to be completed in October. The remaining loan loss reserve held against the portfolio was approximately $350,000,000 at the end of the second quarter. We expect the reduction in the reserve to be around $250,000,000 in the 3rd quarter with the remaining reduction occurring in the 4th quarter when the portfolio is sold.
We still expect net charge offs for 2019 will be in the 5.7% to 5.9% range with a slight increase over 2018 entirely driven by the impact from the PayPal credit portfolio, partially offset by the sale of the Walmart portfolio later this year. Excluding the effects of PayPal and Walmart, the net charge off rate is expected to be similar to 2018. The 3rd quarter net charge off rate tends to be seasonally lower than the 2nd quarter. The decline from last year's Q2 to the Q3 of 100 basis points was also driven by the credit related purchase accounting impact from the PayPal Credit Program acquisition. We expect the decline to be more modest this year and more in line with historical trends of 40 to 50 basis points.
Turning to expenses. We continue to generate positive operating leverage and still expect the efficiency ratio to be around 31% for the full year. In summary, the business continues to generate strong growth with attractive risk adjusted returns. I'll now turn the call back to Greg to open the Q and A.
That concludes our comments on the quarter. We will now begin the Q and A session. So that we can accommodate as many of you as possible, I'd like to ask participants to please limit yourself to
And from Credit Suisse, we have Moshe Orenbuch. Please go ahead.
Great. Can you hear me? Can you hear me?
Yes.
Sorry about that. So I guess maybe the given that you're now pretty close to the transitioning out of Walmart and talking about the potential for acceleration in organic loan growth. Could you talk about how PayPal figures into that? I mean that relationship was growing probably 25% or 30% before and has the potential to expand significantly through. And so talk about how you're thinking about that as a vehicle for driving overall loan growth?
Yes. We're so first, I think the first thing that's really great, Moshe, is that we've completed the conversion, which was a fairly significant sized conversion for us. And that went really seamlessly, which we're really excited about. And I think now we can refocus our attention on a list of initiatives we have that really are targeted to drive growth for the program. I think we have our teams working closely together.
I would say it's a really strong partnership and we're really working on both technology enhancements as well as program enhancements to really be even more integrated as we go into the marketplace and really work the merchant base of PayPal. So we see this as a big part of our growth story going forward.
Great. Thanks. And maybe switching gears just a little bit. You despite getting a late start during the quarter, you were able to buy back over 700,000,000 dollars worth of the stock. I mean, are you looking to kind of continue at a similar pace?
Like how should we think about the deployment of that 4,000,000,000
dollars Great. Thanks, Moshe. The way I would think about it is you have a core capital return plan based upon our earnings. And then if you look at how the Walmart capital gets freed up, we had $522,000,000 of reserves, which released in the first quarter, dollars 247,000,000 in the second quarter. We've guided to $250,000,000 in the 3rd and $100,000,000 in the 4th.
When you tax effect that and then look at the capital, it gets released upon the portfolio conveyance in the Q4. That's kind of how you should think about how capital freed up and the cadence you can think about for 2019.
Great. Thanks very much.
From Jefferies, we have John Hecht. Please go ahead.
Thanks very much guys. You guys spent a bit more time talking about digital innovation and kind of the greater activity from online activity and Internet based activity. I'm wondering just at a high level over time, should we expect that to reduce customer acquisition costs or servicing costs?
Yes, John. Hey, this is Brian. Absolutely, I think this is an area that continues to be a real strength for us. It's an area that we've been investing pretty heavily in over really the last 5 years. I think it's if you look at our investment in Payphone, our acquisition of GP Shopper, we're now getting 50% of our apps through the digital channel.
If you look at mobile, we've seen 47% growth year over year, really good online sales penetration at retail card. It's about 3 times the national average. And so as we think about it, it's really it's acquisition all the way through servicing and paying your bill. And so part of this is clearly an efficiency play. We love the fact that customers can apply for credit.
It reduces our acquisition costs all the way through the back end making a payment and not having to call somebody in customer service. But I think if you look even beyond that, this is really helping us drive organic growth, but also helping us win new programs. So it's a real differentiator for us.
Okay. That's helpful. Thanks. And I guess you guys are the 1st card company to give this quarter to give some little bit more detailed guidance around CECL. I'm wondering within the guidance you gave us, out of curiosity as much anything, what's the duration that I guess in the different portfolios you have that they assigned or that you assigned?
Yes. Thanks, John. We really can't get into too much detail around some of those assumptions. Obviously, we are primarily a card based company. We have some commercial products.
But again, we're working through those assumptions now going through the various constituencies we have, whether there are accounts, other industry participants, and we generally believe we're in line with other card issuers.
Understood. Thank you guys very much.
Thanks, John. Thanks, John.
From JPMorgan, we have Rick Shane. Please go ahead.
Hey, guys. Thanks for taking my questions this morning. And congratulations, Brian and Brian, on your respective new roles. When I look at the sort of preliminary work on CECL, that suggests if you were to implement today a CET1 in the high 11s, low 12 type range. Please correct me if you think I'm wrong there, but I am curious, given that this is a lot of geography, how you will look at your CET1 targets going forward?
And will you consider lowering those targets?
Yes. Thank you. The first thing I'd say is that obviously, the range we announced this morning doesn't really impact our capital plan, first of all, for 2019 and going through the period 2020. As we think about capital, the posting of these additional reserves really creates additional loss absorption capacity, which reduces our unexpected buffer really in the capital range. So when we think about it, we obviously believe that we should get credit for the posting of these losses and really reduce our capital threshold or CET1 threshold.
That's discussions we've begun to have with our regulators and work out over time. But again, this loss absorption capacity that's being built through the posting of reserves should allow us to lower the CET1 ultimately over time is our belief.
Great. And we certainly agree. I'm curious, you mentioned that you're in conversations with the regulators. The other constituent there would be the rating agencies. What are they saying?
Yes. Our discussion with the rating agencies preliminarily has been that they don't believe CECL is really a credit event. They understand the loss of absorption capacity. We're familiar with their models and we're in discussion with them as well about how we think about the additional buffer that's put in by posting these reserves upfront. So we are engaged with both of our agencies.
Terrific. Thank you so much. Thank you.
From Goldman Sachs, we have Ryan Nash. Please go ahead.
Hey, good morning guys.
Good morning. Good
morning. Maybe I can ask
a question on the $175,000,000 reserve build that you're expecting in the Q3. Should we think about that as a new run rate as growth improves? And I guess related to that historically when you talked about $150,000,000 to $200,000,000 of core reserve build, you were growing in the 8% to 9 percent range. So is that how we should maybe think about where loan growth could be headed over time? Thanks.
Great. Thank you. The way I think about it is our reserves going forward should primarily be growth driven. What we see as we look into the back half of this year, we see an acceleration of growth as we move forward. We had loan receivable growth of 3% in the Q1, 4% in the Q2.
We've guided to a 5% to 7% range. And we expect that growth to accelerate in the back half of the year really through all of our programs and platforms. We're seeing terrific growth out of our payment solutions platform through the expansion of the Auto and Home network there, through CareCredit and the broader acceptance that's happening there as well as, as Brian has kind of highlighted, some of our fast growing digital channels. So we do see an acceleration in the back half of the year in growth. And again, reserves should be primarily growth driven as we move forward.
Got it. And then maybe if
I can ask a follow-up on Rick's question regarding CECL. So you obviously have several years for the implementation. Just wanted to get sense for when you think about capital return going forward, how you think about the ability to use the 3 year phase in? Thanks.
Yes. Again, you're right. The capital impact will be phased in over 3 years. As part of our capital plan that we submitted to the regulators, we incorporated our initial estimate of CECL into that, and we will continue to work with them with regard to how that's treated. Again, we think about it as building loss absorption capacity and our CET1 rate should come down over time and be in line with peers, first of all, but take into account the fact that we're posting these higher reserves.
Thanks for taking my question.
Thank you.
From Nomura, we have Bill Carcache. Please go ahead.
Hi, good morning. Sorry if I missed this, but my first question is for Brian Wenzel. Hey Brian, can you discuss how we should be thinking about the impact of a more accommodative Fed? And maybe any color that you can give us on the impact of each 25 basis point cut?
Yes. So thank you. Let me start with the second one. As far as the interest rate environment, obviously, we know what's modeled out there today, which is a forecast of 3 movements. We have done several models and scenarios where we've looked at the impact of rates on our business.
And generally, when you think about our business, our assets and liabilities are fairly well matched against each other, and we really try not to take exposure to rates. So we're fairly balanced whether it's a rising rate environment or declining rate environment. So when we look at those models that we've done, we're fairly comfortable or are comfortable that the net interest margin for the year will be in the 15.75% to 16% range. And then we've had the ability really to manage our retail deposits and CD business and we've lowered rates on CDs 5 times since April this year. We've lowered high yield savings, really relating to the competition of the market and where the interest rate forecast is going.
So we feel comfortable that we can deliver on our net interest margin. Again, given our balance sheet, we're not really exposed to interest rate movements. With regard to the accommodated Fed, we obviously are working with them on CECL and capital. They obviously know there's a large transition that's going on in the market for our participants and they understand that and I think we're going to be fairly flexible in the short term.
That's great. Thank you. And separately, I had another question for Brian Doubles. Thanks Brian for the new slides and the commentary on the impact of digital innovation on your growth. There's been a lot of on the digital investments that some of your less efficient competitors are making, for example, in public cloud technology.
Can you give us a sense of how to think about the impact of your digital investments on your operating efficiency over time? Is there room for your digital investments to benefit both the numerator and the denominator of your efficiency ratio, such that we can expect further improvements from your already industry leading levels? Any color on that would be great. Thank you.
Yes, sure, Bill. I mean, absolutely. I think we view digital as a big initiative for us both in terms of driving growth, driving revenue for our partners, again existing partners, but also winning new relationships. And every time we win a new relationship, obviously given our scale, we get real efficiencies and real operating leverage there. But then if you look at everything that one of our customers does through a digital channel saves us money.
It saves us money. The more we're able to move towards e statements and people checking their statements on either in the app or online, whether they're making payments through the app and we have now over $2,000,000,000 of payments that are coming through our SciPy apps. These are all things that drive real efficiency for the company. So I would absolutely think about it as driving both top line growth, revenue growth as well as operating efficiency.
Very helpful. Thank you.
Thanks, Bill. From Wells Fargo, we have Don Fandetti. Please go ahead.
Hey, good morning. So Brian, thank you. So on the NIM, I think last quarter you had said that NIM would be down slightly in Q2. It feels like it's down a little more than that, but you had mentioned it's in line with your internal. Is it kind of maybe a tiny bit towards the lower end of your internal?
Or is it just bouncing around? And then I have a credit question.
Yes. The niche margin was right where we expected to be in line with expectations. As it moves sequentially, there was a decline in interest and fees, which is primarily related to the acquisition of the PayPal Credit portfolio, a slight shift in the ALR mix with our loan receivables down 50 basis points versus the Q1 and then 9 basis points of pressure from our interest expense. So again, it was in line with where we thought it would be. And for the year, again, we still expect 15.75%
to 16%.
Okay. And then, I think Synchrony is largely through their underwriting adjustments that started back in 2015 or 2016. But it seems like there's mixed signals out in the card business right now, at least in general purpose. You have companies like JPMorgan accelerating growth, Cap One raising potentially raising lines. Within private label, what are you seeing competitors do in terms of underwriting tightening?
And do you think that the industry is actually shifting to a little bit more of an aggressive card lending sort of positioning overall?
Yes. I can't really speak for what others are doing in the industry. What I would say is we made some refinements back in the 2016 to 2017 timeframe. We make refinements every day based upon what we see in the portfolios and channels that we operate in. We are not, I'd say, making significant changes either opening the credit throttle or closing the credit throttle.
And we're operating the portfolio. And I think you can see through our results when you look 30 plus 90 plus delinquencies ex PayPal and Walmart being down year over year that we see stabilizing credit trends. So we're not in a position where we're going to take actions either way as we move forward here. So we're comfortable with credit, how it is performing. The vintages, as we look at them, the 2017 I'm sorry, the 2018 vintage is performing in line and back to almost the 2016 or 2015 vintage and the early results on our 2019 vintage are in line with 2018.
So we're comfortable with where credit is at and we're not taking any significant changes.
Okay. And then on the recoveries, are you seeing better pricing? Or was this just kind of like a bulk sale? A little bit of color on the higher recoveries? I know they can bounce around quarter to quarter.
Yes. Recoveries, again, this quarter was 1.2% of our average loan receivables. So better than we expected and what we guided to really in from the Q1. And we're seeing that, 1, we are seeing better pricing across most of our channels. We're seeing greater demand from the participants in the marketplace.
So obviously, we're a little bit more opportunistic as I think about the first half of the year. But I'd say overall recovery outside of those one time transactions and flow arrangements recoveries, the results and performance is better than our expectations.
Thanks, Brian.
Thank you. From Morgan Stanley, we have Betsy Krycek. Please go ahead.
Hi, good morning.
Good morning.
Hi, Betsy.
Hi. Question on just wanted to understand a little bit about PayPal. I know you've very nicely carved out the NCO ex PayPal and Walmart and just and then also the loan growth outlook. I'm just looking to understand as we think about your go to market strategy with PayPal because I would think that this is a portfolio that has opportunity for significant loan growth and spend growth and just wanted to understand how you're toggling that with the credit side?
Yes. We work closely with PayPal in terms of how we're building out the growth strategies with them. And they're pretty sophisticated on the credit side. And so are we. So I think we're going to approach this in a thoughtful way.
And as Brian said, there's no plans to just open up the throttle in any way or treat PayPal any differently than our other portfolios in the environment we're in right now. But I can say that the integration of the 2 of us, how we think about marketing and really the a lot of the growth that really is important on the digital front is really around placement and offers. And I think PayPal is really good at this and we're working very closely with them to make sure we're offering the credit in the right places. And that really makes a big difference in terms of the quality of the customer that you get in and your ability to approve accounts.
The only thing I'd probably add to that is while PayPal operates at a slightly higher net charge off rate than the portfolio itself, the risk adjusted margin and the returns that we get off that portfolio really compensate for that. And again, when you contemplate that relative Walmart exit later this year, obviously, from a credit perspective, we're better off as a company.
Yes. No, definitely. And I'm just thinking also that obviously, this is a mobile online customer set. And as a result, we think that that generates a little bit higher rev growth overall. Is that accurate?
Yes, it's a fast growing payment platform, I would say.
And then just a follow-up question is regarding the outlook for capital. I know you touched on it earlier, But we've got the Fed coming out with this tailoring rule and you guys don't even have to do see. So I know you opt in in your own way. But when you read the tea leaves of what's going on with how the Fed is thinking about BSCB and how it's thinking about the tailoring rule? Should we be anticipating that you can have a lower start point for what your stress levels of capital are?
Or does the some of these new portfolios change that and say, well, that's an offset, so we should still be running at the capital levels that we've been talking about?
Yes. So let me just clarify. I wish we'd say we could opt in as diesel. Unfortunately, that is a requirement for us. As I think about capital as we move forward here, obviously, we're very comfortable with the resiliency of the earnings of our business, the way in which it performs the returns of our business as well as the RSA offsets.
And when we look at that and then begin to look at the impact of CECL, we believe that we're going to be able to drive down our CET1 ratio, because right now we're in excess of peers. We're migrating down from where we started a number of years ago at 18% down. We believe we'll be able to be in line with our peers over the long term. So we really don't expect an impact from those rules on us.
Yes. So like 11 ish or something like that is really where peers are kind of triangulating to. So that's what makes sense for you.
Yes. I can't comment on exact long term target. But again, we are working to get in line with our peers. Again, given the profile of our business, that's where we think we should operate and that's the discussions that we're having with them.
Yes. No, I get that. Okay. And so if the Fed is kind of like migrating a little bit even lighter with the tailoring rule, etcetera, you'll just follow the path on that?
Obviously, as the rules come out, we'll assess them and engage in dialogue and be compliant with them. So again, we'll be nimble.
All right. Thanks, Brian.
Thank you. Thanks, Margaret.
From KSP Research, we have Kevin St. Pierre. Please go ahead.
Hi, good morning.
Good morning, Kevin.
Brian, I'd just like to better understand the 17 basis point decline in average credit card yields in the quarter? You touched on it a moment ago, but I just want to dig into that. Is it mix? Is it lower revolve rates? What drove that?
Yes. So when you look at it, we are seeing slightly higher evolve rate in the core business and some of the impact again of the interest rates movements flowing in moving into the portfolio. The yield decline is solely related to or the majority of it is related to the impact of the PayPal credit portfolio that comes in at a lower yield. But again, we took pricing actions last year on the portfolio. They've begun to take effect into the book, but they take a long time under the new card act rules, and we expect that to be fully in a run rate basis in 2020.
So it's really the acquisition of PayPal Credit that's driving the decline.
Got it. Thanks. And then as a follow-up, in terms of expenses and particularly marketing and business development, maybe it's just me watching too much golf and tennis, but I've certainly noticed a big increase in the commercials and the advertising. Where should we think that line item goes over time?
Yes. Again, our marketing and business development line, that will fluctuate a little bit with regard to campaigns when we do reissuances, when we relaunch value proposition. So there is some variability with that. We're not a big spender in commercial things like that. We've done things in order to position our brand externally, but that's we're not going to migrate into other peers that spend tens of 1,000,000 100 of 1,000,000 of dollars into that.
It's more thoughtful branding. Again, we expect that to grow generally in line with our volume and loan receivable growth.
Great. Thank you.
Thank you.
And our last question comes from Sanjay Sakhrani with KBW. Please go ahead.
Thanks. Good morning. Good morning. I guess, Brian, I wanted to follow-up on the NIM and the yield trajectory. You mentioned the PayPal repricing.
As we look to next year, is it safe to assume that all else equal, I know rates might move around a little bit and that might affect your assets, but the trend is higher on the yield because of the repricing tailwind that you have related to PayPal? And then secondly, similar question on expenses. I think I heard you say that expenses have been elevated related to PayPal and Walmart. So as we think through, sort of the exit run rate into next year for the efficiency ratio, should that be also a good Yes. So let me deal with your margin question first, so I'm just going
to Yes. So let me deal with your margin question first, Sanjay. As we kind of go in there, we obviously get the run rate of PayPal from the CIT company come in. We're not providing today specific guidance as it relates to 2020 as we'll do that in January as part of a more comprehensive look. The biggest change obviously is Walmart portfolio coming out, which operates at a higher net interest margin relative to its losses.
So there will be some effect there. We'll provide more guidance to you in January with regard to the trends and most certainly have greater visibility to what the interest rate environment is doing. With regard to expenses, again, we're projecting 31% or guiding to 31% for the year. We're very comfortable with that. As you think about going into 2020, again, we'll provide guidance on that.
Obviously, we've converted from an interim servicing basis this quarter from PayPal to us. So there would be some line item shifts that happen in there. So that would be fully in the run rate. And Again, we started to implement some of the Walmart cost out in the beginning part of the year for some of the fixed costs. In the back half of the year, particularly Q4, you'll see the variable costs come out and that will get into the run rate as we move into 2020.
Okay. Great. And my follow-up question for Margaret is just simply on the sort of micro competitive environment. It's one of your peers talked about the online players being a little bit more competitive in the market. I think I've heard you guys talk about it as well.
Maybe you could just flush that discussion out and just talk about the pipeline going forward because I know you're absorbing quite a big deal right now, but as we look to the pipeline of future deals, how does that look? Thanks.
Yes. I would say, we're excited about where the business is positioned right now and we do feel like we're winning because of our digital capability, our data analytics capability and some of the things we continue to build out. I would say there's not a lot of big deals out there, Sanjay. A couple of big deals maybe in the next 2, 3 years will come up, but our pipeline in all three platforms is pretty robust. And what we're trying to make sure we do is ensure we're winning the deals that meet the returns that we're comfortable with.
But I think there's enough out there that we feel confident that we can win both existing portfolios and startups.
All right, great. Thank you.
Thanks, Andy. Thanks for joining us on the call this morning. The Investor Relations team will be available to answer any further questions you may have. We hope you have a great day.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.