OREANDA-NEWS. Fitch Ratings has affirmed Synchrony Financial's (SYF) long-term Issuer Default Rating (IDR) at 'BBB-' and short-term IDR at 'F3'. The Rating Outlook is Stable. A full list of ratings is detailed at the end of this release.

SYF's rating review was conducted as part of Fitch's periodic peer review of U.S. consumer finance companies. For a summary of the outcomes and drivers of this peer review please see the release entitled 'Fitch Affirms Five U.S. Consumer Finance Companies Following Peer Review' dated April 8, 2015.

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

The rating affirmations and Stable Outlook reflects SYF's market leading position in the U.S. private-label credit card industry, seasoned management team, consistent operating performance, appropriate capitalization and liquidity levels and improving funding diversity as a result of successful unsecured debt issuance and deposit growth at Synchrony Bank.

Ratings remain constrained by SYF's monoline business model, concentrated partner profile, the likelihood of asset quality reversion from current levels particularly given the higher-than-average mix of subprime borrowers, heightened regulatory, legislative 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.

Net income increased to \$2.1 billion in 2014, up 6.6% from the prior year period. Strong earnings performance was driven by solid growth in purchase volume and loans offset partly by higher interest and operating expenses as the company took steps to increase liquidity and build out its standalone infrastructure. Period-end loans increased 7% year-over-year to \$61.3 billion at Dec. 31, 2014, driven by purchase volume growth of 10% and active account growth of 4% year-over-year. Return on assets and return on equity were 3.2% and 26.7%, respectively in 2014. SYF expects to generate an ROA of between 2.5% and 3% in 2015.

Fitch expects operating performance in 2015 to remain strong, supported in part by economic growth in the U.S., continued improvements in the labor market, low interest rates, and the addition of new partner relationships such as BP, which is expected to close in mid-2015. That said, operating performance will be pressured by intense competition, normalizing credit performance and growing expenses, in particular costs associated with the separation from GE Capital and standalone infrastructure build.

Credit performance is expected to remain strong in 2015 although charge-offs and delinquencies will likely start to normalize, in line with industry trends. Fitch expects provision expenses to increase in 2015 driven primarily by portfolio seasoning and growth, as well as some modest deterioration in credit metrics. Net charge-offs improved 17 basis points (bps) to 4.51% in 2014 and SYF expects the net charge-off rate to remain stable in 2015. Reserve coverage remains strong at 5.28% of loans and 128% of loans past due at Dec. 31, 2014.

SYF is well-capitalized with adequate liquidity. At Dec. 31, 2014, SYF's Tier 1 common ratio was 14.9%, or an estimated 14.5% on a fully phased-in Basel III basis. Liquidity consisted of \$12.9 billion of cash and short-term liquid assets representing 17% of total assets at Dec. 31, 2014. SYF also had \$6.1 billion of undrawn committed capacity under its securitization programs (subject to collateral eligibility) and more than \$25 billion of unencumbered assets at Synchrony Bank, which Fitch views as potential sources of secondary liquidity.

SYF has broad access to multiple sources of funding, including lower cost deposits through Synchrony Bank and, more recently, unsecured senior notes. Post IPO, SYF has issued \$4.6 billion principal amount of unsecured senior notes with various maturities ranging from 2017 through 2024. Fitch expects Synchrony to continue to seek to utilize a diverse mix of funding sources while maintaining its investor relationships across various debt markets (e.g. unsecured debt markets, securitizations and bank loans). Fitch views this strategy positively as it reduces concentration risk and provides more funding flexibility in the event that wholesale funding sources dry up or become cost prohibitive, or if the online deposit platform experiences material outflows in a rising interest rate environment.

Synchrony's loan portfolio is well positioned for a rising rate environment. At Dec. 31, 2014, assuming an immediate 100 basis point increase in interest rates, Synchrony estimates that net interest income over the following 12-month period would increase by approximately \$45 million.

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.

On July 30, 2014, Synchrony completed the first step of its split-off from General Electric (GE) through an initial public offering (IPO). As a result of the IPO, GE reduced its beneficial interest in Synchrony from 100% to 84.6%. GE's remaining ownership is expected to be distributed via a tax-free transaction to GE shareholders in 2015. The final step in GE's exit from Synchrony will be complete when the Federal Reserve Board determines that GE no longer controls Synchrony for regulatory purposes and releases GE from savings and loan holding company registration.

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 has affirmed the following ratings:

Synchrony Financial
--Long-term IDR at 'BBB-';
--Short-term IDR at 'F3';
--Senior unsecured debt at 'BBB-';
--Support Rating at '5';
--Support Rating Floor at 'NF';
--Viability Rating at 'bbb-'.

Synchrony Bank
--Long-term IDR at 'BBB-';
--Short-term IDR at 'F3';
--Support Rating at '5';
--Support Rating Floor at 'NF';
--Viability Rating at 'bbb-';
--Long-term Deposits at 'BBB';
--Short-term Deposits at 'F2'.

The Rating Outlook is Stable.