Synchrony Financial (NYSE: SYF) has rallied above $37 a share thanks largely to progression of the tax bill in Congress. Both the House and the Senate have passed a tax bill, greatly raising the probability that we could have a new tax law perhaps as early as before the end of the year. The two houses still have to reconcile the differences in their respective version of the bill.

While the working versions of the tax bill has been criticized for favoring corporations and the wealthy, essentially all income groups figure to see their after-tax incomes rise on average at least in the first few years. This is expected to lead to more consumer spending and more credit card transaction volume.

Furthermore, the passage of a tax reform bill should also encourage the Federal Reserve to raise interest rates, which would likewise benefit Synchrony because it can charge higher interest. Synchrony has estimated that a 1 percentage point rate increase would increase net interest income (revenue) by $143 million over 12 months.

Deepened Relationship with Paypal

Another positive recent development: Synchrony and Paypal will “significantly expand their strategic consumer credit relationship.” (Paypal’s words.)

Paypal agreed to sell to Synchrony $6.8 billion in loan receivables. The deal is expected to close in the second half of 2018.

The acquisition of these loans increases Synchrony’s credit risk very slightly but it is expected to be accretive by 2019. “Accretive” means the deal adds to revenue and earnings. And importantly, Paypal announced that at the closing of this deal, the two companies will extend their existing consumer credit card program agreement, and Synchrony will become the exclusive issuer of the Paypal Credit online consumer financing program in the U.S. for 10 years.

Especially considering the rapid growth of e-commerce, a tighter relationship with a major force in digital payment is obviously a positive for Synchrony.

Online channels currently account for about 25% of Synchrony’s retailer-branded card sales, but we expect the percentage to increase over time as e-commerce grows. Increasing cooperation with key online players is a wise strategy. We note that online giant Amazon is one of Synchrony’s largest partners, too.

Credit Risk Stabilizing

The slight deterioration of loan quality concerned some investors, but Synchrony was an early mover in tightening its lending criteria, and appears to have credit risk under control. The tighter credit criteria will reduce the rate of revenue growth but should also limit the rate of loss-reserve growth. Indeed, the company recently reduced said reserves, which signals it believes the risk of bad loans is stabilizing. Since these reserves are expenses and cut into earnings, if their growth slows, the impact on earnings is positive.

Even if there was an economic contraction, consumer activity falls, and bad loans rise, a drop in profit would be partially offset by a decrease of payment to retail partners in profit-sharing arrangements. Synchrony’s annual stress test results suggest that the company can still remain profitable under adverse economic conditions.

In light of a little more confidence in Synchrony’s credit risk, expected benefit from likely tax reform, and continued progress strengthening relationships with key retailers, particularly online retailers, we increase our suggested buy-up-to price for SYF to $40.