Synchrony Financial’s $2bn Ally Lending Acquisition

Synchrony Financial's $2.2 billion acquisition of Ally Lending, completed in March 2024, has significantly reshaped the POS financing landscape while presenting both strategic opportunities and financial challenges.

The deal expanded Synchrony's reach into home improvement and healthcare financing, merging 2,500 merchant relationships and 450,000 active borrowers into its portfolio.

Key Integration Developments

Sector Specialization:

• Synchrony integrated Ally's expertise in HVAC, roofing, and windows financing while expanding into cosmetic dentistry and audiology through healthcare partnerships.

• Introduced dual POS credit options (revolving + installment loans) to boost merchant conversion rates.

Financial Impacts:

• Credit risks escalated with allowance for losses reaching 10.44% of receivables by December 2024, up from 10.26% in 2023.

• Net charge-offs climbed to 6.06% in Q3 2024, triggering a $190 million reserve build and 33% YoY provision increase to $1.9 billion.

• Acquisition contributed to Synchrony's 56.3% net profit surge ($35B) in 2024, partly offset by Pets Best divestiture gains.

Strategic Shifts & Challenges

Digital Transformation:

• 57% of credit applications now processed digitally, with hybrid underwriting preserving Ally's sector-specific models.

• Implemented advanced fraud detection through Zest AI integration across platforms

Market Reactions:

• Analysts maintain 15.3% upside potential ($77.80 target) despite P/E ratio trailing sector at 7.7x vs 9.6x

• Goodwill adjustments raised concerns after a $201M increase brought total to $252M

Broader Industry Context

• Ally Financial exited non-core businesses post-acquisition:

  • Sold credit card division to CardWorks/Merrick Bank ($2.3B portfolio)

  • Cut 5% workforce and discontinued mortgage origination

• Synchrony projects 15% IRR from the deal, though delinquency trends and CFPB fee rules pose risk.

The integration exemplifies consolidation trends in specialized consumer lending, balancing scale gains against credit cycle vulnerabilities. Synchrony's success in maintaining merchant network growth while controlling loss rates will likely influence future M&A activity in POS financing.

Credit Risk & Portfolio Health

Strengths:

• The increase in loss allowance to 10.44% and the $190M reserve build highlight the true state of portfolio health in specialty lending.

• Synchrony’s Q3 2024 disclosure of a $180M reserve build tied to Ally’s portfolio, reflecting proactive risk management amid rising delinquencies.

• Net charge-offs at 6.06% in Q3 2024 mirror broader industry trends but exceed Ally’s historical average of ~4.5% in POS lending, signaling integration strain.

Missing Nuance:

• Synchrony’s deposit-funded model (84% of funding) vs. Ally’s reliance on wholesale financing pre-acquisition. Synchrony’s cost of deposits (~3.8% APY) may pressure spreads if credit losses persist, but the acquisition’s $2B price (at a discount) partially offsets this.

Merchant Retention & Economics

Documented Challenges:

• Ally’s portfolio included 2,500 merchants and 450K active borrowers, but Synchrony’s Q1 2024 filing notes lower payment rates post-integration, suggesting potential attrition or reduced merchant activation.

• No public data on merchant retention rates, but Synchrony’s hybrid underwriting (preserving Ally’s sector-specific models) aims to maintain relationships in critical verticals (e.g., HVAC, roofing).

Competitive Gaps:

• Affirm and Klarna are expanding into home improvement via POS partnerships (e.g., ServiceTitan). Synchrony’s response? Integrating ServiceTitan for contractor financing, but no explicit defense against BNPL disruptors.

Funding Costs & IRR Realism

Cost Dynamics:

• Synchrony’s deposit base ($82.1B in Q4 2024) provides stability, but rates remain elevated (4.00% APY on savings), pressuring margins. Ally’s sale boosted its CET1 ratio by 15 bps, but Synchrony’s post-acquisition P/E of 7.7x (vs. sector median 9.6x) reflects investor skepticism.

• The projected 15% IRR assumes cost synergies and portfolio growth, but rising charge-offs and a 33% YoY provision increase suggest execution risk.

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