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Will Synchrony Financial (SYF) Disappoint in Q3 Earnings?

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Synchrony Financial (SYF - Free Report) will release third-quarter 2017 results on Oct 20, 2017 before the market opens.

The company’s growing allowance for loan losses are likely to impact the third quarter earnings negatively. Despite improving credit metrics, the company expects an increase in its allowance for loan losses at an interim period end compared to the prior-year end, reflecting seasonal trends. The Zacks Consensus Estimate is currently pegged at $5.3 billion, reflecting 30% year-over-year growth.

However, the uptrend in total interest and fees on loans is expected to continue in the third quarter as well, driven primarily by the Retail Card platform. The Zacks Consensus Estimate for total interest and fees on loans is pegged at $4.1 billion, reflecting 8.7% growth from the prior-year period.

As the company continues to generate positive operating leverage that is favorably impacting the efficiency ratio. It expects the efficiency ratio to remain close to 31.5% for the full year. For the third quarter, the Zacks Consensus Estimate is pegged at 31%, reflecting a year-over-year improvement of 40 basis points.

Other Factors

Apart from increasing interest and fees on loans, strong deposit generation, loan receivables as well as increased online purchases are likely to drive revenues this quarter.

The company’s revenues are also expected to increase on the back of rising CareCredit receivables this quarter.

Strong value propositions and promotional offers in the cards are likely to boost active accounts growth, in turn, driving revenues.

However, continued strong growth in lower yielding payment solution receivables is expected to put pressure on margins in the to-be-reported quarter.

An increase in spending on strategic investments is expected drain the bottom line in the third quarter.

Earnings Whispers

Our proven model does not conclusively show that Synchrony Financial will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Synchrony Financial has an Earnings ESP of -1.62%. This is because the Most Accurate estimate is pegged at 63 cents while the Zacks Consensus Estimate stand at 64 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Synchrony Financial Price and EPS Surprise

Zacks Rank: Synchrony Financial carries a Zacks Rank #4 (Sell). 

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some other companies from the Finance sector that you may want to consider as these have the right combination of elements to post an earnings beat this quarter:

Aflac Inc. (AFL - Free Report) , which is set to report third-quarter earnings on Oct 25, has an Earnings ESP of +1.31% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

CNO Financial Group, Inc.(CNO - Free Report) has an Earnings ESP of +1.7% and a Zacks Rank #3. The company is also set to report third-quarter earnings on Oct 25.

Reinsurance Group of America, Incorporated (RGA - Free Report) has an Earnings ESP of +0.32% and a Zacks Rank #2. The company is set to report third-quarter earnings on Oct 26.

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