After losing out on the opportunity to issue new credit cards to Walmart customers, Synchrony Financial is at a crossroads. The problem is, the Stamford, Conn.-based company does not get to decide its path forward.

Walmart announced a deal Thursday that will make Capital One Financial the exclusive issuer of its credit cards starting in August 2019.

For Synchrony, the longtime issuer of Walmart credit cards, the important question now is what will happen to its existing portfolio of approximately $10 billion in loans to the retail giant’s customers.

Under one scenario, Synchrony would sell the Walmart loans, which account for about 13% of the credit card company’s total loan receivables. In the second scenario, Synchrony would hold onto the Walmart portfolio, and seek to convince those existing customers to switch to a credit card that has no affiliation with the discount retail chain.

Margaret Keane, president and CEO of Synchrony Financial
“While we are disappointed that we are not renewing our program with Walmart, we are focused on either optimizing the capital freed up, if the portfolio is sold, or leveraging the benefits from retaining the portfolio," said Synchrony CEO Margaret Keane.


The first option would free up capital, which Synchrony could use to strengthen relationships with existing merchant partners such as Amazon, Gap Inc. and JCPenney, pursue new partnerships, and buy back more of its shares. The second route would enable the company to diversify into the broader U.S. credit card market.

During a call with analysts on Friday, Synchrony Chief Financial Officer Brian Doubles indicated that the choice is out of his company’s hands. Under a contractually defined process, the portfolio will be given a valuation, which will be used to determine a potential purchase price, he said. Then Walmart or Capital One will have the option to buy the portfolio.

Executives at Synchrony also emphasized that either of the two options will be better for the company’s earnings per share than renewing the Walmart contract would have been.

“While we are disappointed that we are not renewing our program with Walmart,” Synchrony CEO Margaret Keane said, “we are focused on either optimizing the capital freed up, if the portfolio is sold, or leveraging the benefits from retaining the portfolio.”

Synchrony shareholders appear to be skeptical. The company’s stock price has dropped by 12% since late Thursday, when reports about Walmart's new partnership with Capital One were first published.

Kevin St. Pierre, an analyst at Bernstein Research, said in a research note that Synchrony shares are “now a ‘show-me’ story,” much like shares in American Express were after the New York-based card issuer was jilted by the retail chain Costco in 2015. Costco cards are now issued by Citigroup.

Synchrony also has a card partnership with Sam’s Club, the Walmart-owned discount club, which expires in 2021. The credit card issuer vowed Friday to be aggressive in trying to renew that contract.

But Synchrony’s failure to extend the Walmart deal may alter investors’ perceptions about its chances of renewing other partnerships, said Sanjay Sakhrani, an analyst at Keefe, Bruyette &Woods.

“The problem going forward,” Sakhrani wrote in a research note,” is there is likely to be a discount applied to the uncertainty of renewals.”

Synchrony, which was spun off from General Electric in 2015, has been partnering with the independent merchants for many decades, and it still leans heavily on credit cards that are co-issued with retailers.

However, Synchrony has also established a small presence in the general-purpose card market. Following the bankruptcy of Toys R Us in 2017, shoppers who had Toys R Us credit cards were offered the opportunity to obtain a Synchrony card.

Doubles said Friday that roughly 50% of the credit cards it currently issues with Walmart can also be used in other stores. “So they’re kind of acting like a general-purpose card already,” he said.

“So that gives us some comfort that there is a population there that we can convert and would be very receptive to a Synchrony-branded card with a very attractive value proposition,” he added.

During the second quarter, Synchrony reported a profit of $696 million, which was up 40% from the same period a year earlier. Loan receivables rose by 5% to $79 billion, the company said Friday.

Credit quality trends were mixed. The percentage of loans that were at least 30 days delinquent fell from 4.25% during the second quarter of 2017 to 4.17% in the same period a year later, while the percentage of loans that were charged off rose from 5.42% to 5.97%.

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