Bread Financial Holdings, Inc. (BFH) Earnings Call Transcript & Summary

All right. Thank you, everyone, for being here. Next fireside chat is with Bread Financial. We have Ralph Andretta and Perry Beberman, representing the company. And we're going to -- most of you know I think what Bread Financial is all about, but let's have you, Ralph, just give a quick overview, describe Bread, and then we'll go to Perry and show some of the...

So we're formally Alliance Data Systems, but we're a full spectrum of consumer lending, ranging from private label credit cards, co-branded credit cards, direct-to-consumer credit cards, Buy Now, Pay Later and Pay-in-four and installment loan. We also collect deposits. We're a couple of banks. So it's full consumer lending.

Okay. And just -- we'll get to Perry on the numbers here. But either you, big picture, what's your assessment of the economy and the consumer health? And how are you thinking about that?

Well, Just dandy. Now I think a couple of things. So the first quarter, first couple of months are coming in as expected. We're seeing good spend. We're also seeing some pressure on spend at the lower FICO so lower VantageScore. We're seeing a little pressure on spend, but pretty much what we expected.

Okay. Perry, any updates or tweaks to some of the financial expectations for the quarter? Anything that you want to add?

Yes. So as Ralph mentioned, we're seeing some decelerated spend in cohorts [indiscernible] pressures with Middle America, low income -- lower income families, which kind of made global [indiscernible] elevated inflation. Some of that [indiscernible] coming through and foreseeing some private [indiscernible] in loss rates, which is part of the expectation [indiscernible] environment for us specifically. We have some conversion accommodations that were done July last year. But they were financed February reported numbers [indiscernible]. We expect February to be over 100 basis points higher than January's numbers leaving that just below 80%. I would expect for the quarter that our expenses would be flat to slightly [indiscernible], but I think more flat to fourth quarter. So for the quarter, so that and start to come down at that point. And then specifically around the interest margin, we've got the key interest margins essentially consistent with what it was in 2022. So I think about around [ 90.2% ]. For the first quarter, it should come in a little bit better than that because we had a period of a little bit higher delinquencies [indiscernible] there. And then in the second quarter, I expect losses to be higher than the first quarter as transitory items in the [indiscernible] in the combination of did back part of 2022. So more in the second quarter. So they have more reversal [indiscernible] lower [indiscernible]. So you have a little bit of movement, but solely into that [indiscernible] margins a little bit more dynamics for the quarters.

Okay. Can you just -- so people understand that the card transitioning impact on charge-offs, just explain that a little bit more.

Sure. So one of the things when we went into this transition anyone that's ever done on this massive core price and transition, there's some [indiscernible]. And one thing we want to make sure is that they're being very accommodative to customers that if, for some reason, they're still coming down for a period of time or initially getting a [indiscernible] that are not going investor adverse effect to the customer. So you might not want to create that we're in Asia through delinquency, if for any reason, they were unable to make a payment or notify that one didn't come through. So any time we thought there's going to be an issue of any sort, we have something called a customer-friendly accommodation. And what that I do is we would pay that [indiscernible] so we would work that and hold them [indiscernible] delinquencies but [indiscernible] would have to be all that works its way through as they renormalize that payment.

Okay. Got it. And with all the sessions, we're open for questions. So if any of you have questions just...

Yes, I think the most important is that we're we were very customer-centric. So we kept payment windows open within each customers. We didn't charge fees. That's appropriate, but -- and you'll see that roll through. Not unexpected, but our focus was to make sure that the customer was not harmed.

How important was the transition? I mean, to the digital technology?

Yes, it's -- we had to modernize the entire company. You see we were on a mainframe dusty, old technology that took forever to change if you wanted to change something. I think it will pay benefits. It's quicker to market. It's a -- it gives us pricing flexibility. It's a compliant system. It's always upgraded. It's always upgraded for any new issues or regs. So we feel really good about the transition conversion to Fiserv. And it's a -- whatever we save in terms of operating costs, we invest into the business, but the real opportunity is better enhanced data and analytics, better products, and that will drive top line growth.

[indiscernible] no longer defined. So if we see some of the noise telecom one thing in the [indiscernible] coming, when get through May, it will be a high point, more than 8% loss rate for that month, then we should lead. All that matters.

Why don't you say that my colleague and I say you have to find the cobalt programmers in the nursing homes, where you need to go find that. But I did just -- we haven't talked about this. I'm going to watch Brian's face drop.

I think that's why he's leaving.

Yes. He's running. There's a lot going on at your company. There's a lot of transition. Your transition technology. You've got some portfolios that are coming in and out. You probably spend most of your time answering questions like that. Just step back and give us an idea, what are you trying to do? And what are you trying to build?

Sure. Turnaround a company that had some -- that didn't fare well in the marketplace. It was confusing to the market, were we a credit card company, were we a technology company, we're an information data management company. So the first thing this is we've got to simplify this business. We've got to stand for something. We can't be old things, old people. So we simplify the business. In simplifying a business, we revamped the Board. So focusing on financial services, we boarded some financial services heavyweights. So John Gerspach, in particular, he's a former CFO of Citi. We've boarded him as a Board member. Then we leaned heavily into enhancing our product set. In 2020, we were a one-trick pony. We're a private label, mall-based and we wanted to enhance that product set. So if you look at us today, we have a diverse portfolio. We have enhanced product set. We have a portfolio -- different portfolio do different jobs. We're not really -- we're not focused on any one category or one vertical, and it gives us some flexibility. We also wanted to upgrade the management team. The management team had been there for a while, and we wanted to upgrade management team with seasoned professionals. And you see Perry is a seasoned professional, Val Greer joined us as a professional. We have a revamped business development team. They were really good people in place. We just wanted to have a melding of new and the old in the development team. And our view was we want to -- at the end of this rainbow, we wanted our investors to see, one, we were transparent and clear. And that the story we're telling was a consistent story. When we say, we're going to do something, we demonstrate that we are getting it done. Two, that our earnings are not jerking all around. They're clear, repeatable quality earnings, and that's important to us. Three, that our balance sheet was strong. When Perry and I got there, it was hard to find the balance sheet So they won't build it. So we built and we'll continue to build a strong balance sheet in this organization. We're going to pay down our debt at the [payment]. And our ultimate goal is to return value to shareholders. We want to do that from a position of strength as an organization.

Yes. How far along do you think you are to -- I mean, it's never-ending. I understand that, but...

I think -- I just tee off on the back 9. We've got through some of the some of the heavy stuff. Listen, taking the job 3 weeks before COVID hit was -- had 3 good weeks. And then it became, let's change the company to, okay, let's make sure we have enough liquidity. Let's make sure our employees are safe and sound. How are we going to manage through this thing? And now we're doing is 2 years of that. In that process, in some ways, it raised the concerns that the company had, right? You know who your A players were. You know who your A players weren't. You know how to replace, right, because you need to field generals. And quickly, we found that who are good people, who the field generals were and who they weren't. We had some product gaps. And said, boy, "The world is changing. People aren't going to the mall anymore or going to the store, they're buying digital." Boy, we really got to catch up on that. We've got to make those digital investments. We bought Bread. We enhanced our -- we started investing significantly into digital, right? We had some product gaps. We couldn't be just private label. We had to expand our product set. So that was the heavy lifting. We've boarded some good people. And then we began to work with investors to restore credibility and say that, "This is who we are. This is what we do. This is what we stand for. And here is what we say we're going to do, we're going to do." And we've been more transparent with investors. We're going to talk about gap earnings and quality earnings, not except for instead of. We're going to talk about real earnings, and that's what we've done. So now as I get to the back 9, I'll continue to invest in digital. We've got some challenges. The macroeconomic environment is a challenge now. I'm sure you'll get to the CFPB and their rules, so that's a challenge. But those are challenges that my seasoned team has met in the past, and will meet and conquer again. But we've won our more than fair share of partners. And the beauty is we can go up and down the scale. So you can win a partner like the NFL or AAA, and you can win partners in that $100 million to $200 million range, and those partners are great because it's limited customization and it's good returns. And you get 5 or 6 of those, that's $1 billion of a really good returning portfolio. So I feel we'll continue to do that. We'll continue to build the organization, be responsible with growth.

Okay. That's good. And I have to say as an analyst here, the transparency in the numbers has been great. You two guys have done a great job. There's a lot of stuff to get through to get over in terms of the portfolio movements and the loss rates and things like that, but it's...

Like the earnings now are, they're starting to get clearer, right? There's not a lot of noise in the numbers.

Yes. Okay. So you showed up and you thought 3 weeks later, you're going to shelter in place for a couple of weeks and bend the curve?

Yes. We thought -- I thought it was going to be like when I was in Asia. the bird flu, whatever -- [indiscernible] how long could it be, right? And then it went on over and -- okay, we'll close the office for a week. We'll close the office for 2 weeks. We've closed the office for 2 years. But again, we were -- it's interesting. I think in a larger company was harder to accommodate the remote workforce. We switched pretty quickly, probably 2 or 3 weeks of disruption, and then we have people working at home and they were productive. So it was an exciting challenge to say the least.

Yes. Okay. You brought up the CFPB. We might as well tackle it.

I thought before you did, I'll bring it up.

Yes.

Listen, the...

Just frame it for people so they understand kind of...

So the CFPB came out with a proposed new rules on late fees for $8 as opposed to what it is today in safe harbor, $38 whatever that number is. A real reduction in late fees, and some other rules around that. And our perspective is it will have a number of unintended consequences. So credit will be more expensive, and there'll be less of it. We're going through the proposal now. As a bank and being safety and soundness, we will close those gaps. There are a number of ways to do that. We'll do that. I think the -- quite frankly, the estimate on what the late fee cost is low. It's not about collecting a late fee, it's the cost to win. And that's what the -- that's the [Lacy] is part of that. So we'll work with our partners. We'll work internally to think through how you close that gap, but we're working through it now. We're in the common period. We don't expect it to be a 2023 issue. I think it will be a 2024 issue, but we'll be prepared for it.

Yes. Okay. I was just going to ask the cadence of it.

Yes.

How should we think about that? I mean, maybe you just answer the question, but...

Yes. So as we have the common period now, we'll go through the rules. I think they'll propose something probably back end of the year. And based on what the proposals are, we'll pull down on the levers we need to pull down of. But we've been planning for it prior to the announcement because we -- you hear it in the wind. And we'll -- based on what it is, we'll be able to pull the levers we need to pull to close to gap.

Perry, is it unfair to talk about the magnitude of it? Or is it just too difficult to really know how this all end?

Yes, I would say it's -- I want to say it's unfair to ask the question. It's certainly fair, but it is challenging to quantify the magnitude because it depends where the final rule lands, and then the levers that we use to remediate, is it across the board as higher APRs? Is it a combination of some additional fees for credit or the change to retail share agreements with the brand partners? Or as Ralph said, is the ultimate where you start to restrict credit at certain points? So there's a number of levers to pull to mitigate whatever the impact ultimately be.

[indiscernible] calculus. The retail share arrangement agreements, how quickly can you make changes to those, if it does happen?

It's a process, right? Because the goal of this is, today, the consumer is paying those late fees. So ideally, you make it up in pricing so that whatever the financial impacts are neutralized. And therefore, from a retail partner, they're left whole, were left whole the consumer's whole as they are today. It may just be more consumers across the board paying for those that go late instead. It just depends how it all plays out. Ultimately, we're not looking to mitigate the financial impacts to us by the retail partner paying for it because we're in this together as a partnership.

You want to treat your partners like partners, not like vendors. So we'll work through those issues. And we'll get to a spot where we are able to mitigate the issue.

And where it matters is when you end up in a situation where there's a cohort of customers who may not hurdle for us anymore the way they might have previously if you can't fully make up that late income for that population. Well, for the retail partner, they may want to forgo their revenue share or bounties for those accounts because for them, it unlocks the sale. So for them, it's the merchandise they're trying to sell. So for us, it could increase profitability. But that's not the first lever you're looking to do from top to bottom, It's sort of the last thing where we just don't underwrite them.

But going back to an upgraded talent across the board, my leadership team has been through this, taking great magnitude with cards. So we know that, -- we know what the levers to pull. We know where the focus has to be. And so we'll get through it and come out the other side, but there will be unintended consequences.

Yes. Absolutely. Lot on your plate. I mean there's a lot of stuff you guys are -- you're dealing with, but through it all, you're starting to add business wins, nice business wins.

Yes.

Are there things you can do today that you couldn't do before, say, you did the conversion or when you were working on other things that you were trying to clean up?

Yes. There's always -- when you're converting technology or buying technology like we bought Bread, we bought the platform, there is some cleanup you have to do, right? You have to make the platform compliant. We're a bank, we got to be compliant. So that's clearly job one. The new technology, as I said, faster speed to market, gives you more pricing flexibility, some of the data analytics that come out of it help us make decision for partners that much quicker. So that we -- if we put the conversion in our rearview mirror, which is hopefully by the end of the second quarter, there won't be any lingering effects, the focus is now to use the capabilities that we signed up for, as we move forward. Anyway, we are adding partnerships. AAA was a terrific add at the end of last year. The NFL was a nice add. And those are big partners for us, where we won them from places where they may have been a partner, but not a big partner. I mean revamp value propositions. We're very focused on making sure that we got top notch data analytics to acquire cards to decrease spend. And that's how we're going to -- part of the way we'll grow this business.

For what it's worth, I get the AAA e-mails all the time trying to get me to open up a card.

Hope you get one.

I think I should. I'll buy you lunch.

I'll come all you want.

Okay. When you -- so it's interesting, right, because you sit back and you think about it, if you're not familiar with the business, you think NFL, AAA, interesting, right? How big is the opportunity? Do you see opportunity everywhere you look?

We do. So those are marquee names, right. NFA, AAA really marquee names. Ulta and Sephora really marquee names where we renewed Ulta to a longer-term contract. Victoria's secret has been a part with us for a very long time. So we have a lot of verticals, and that beauty vertical is really humming. And so it continues to grow. But we see -- as I mentioned, we see that value at those new and emerging middle markets, $100 million, $200 million. So I'll give you an example of one that we work with is [B&H photo], takeout here in New York, mostly online, online audio visual equipment. Great partner, growing faster than we thought it would grow. And that's -- it's not a household name, but it's a name people know that are in the industry and are familiar with and are using our services to buy equipment and growing faster than we thought. So really you can lean in there quite frankly. We -- for the first time ever, we have direct-to-consumer credit cards. So we have two portfolios. One was designed to just save customers. That portfolio has 1 million customers in it now. And then that get gave us the confidence to go to market with the American Express double cash credit card. And that's been continuing to grow. And through all this, we're collecting deposits. Our deposit business has increased 77% over the last couple of years, which helps our funding. And we'll continue to grow deposits to offset our funding costs?

So you say 2% cash back?

What did I say?

Double cash.

2% Well, 2 is double [indiscernible].

Double.

I put a double cash by this city. My apologies, 2% cash. That was better than double.

You said -- when you said save, that just means somebody is going to leave and you have another product for them to...

No, I said...

The Comenity card.

The Comenity card.

Yes.

So in the past, when -- if a retail partner was leaving or if they went bankrupt and you had to do something of the portfolio, the former for Ralph got here, they would sell the portfolio into the market. So the assets would leave, the customers leave, now you can rebrand them into a branded product. And that's typical what you see in -- but all other large AMEX cards.

Yes, which was very powering some [indiscernible] So we don't sell the portfolio, we just try to save it, and we grew that portfolio to 1 million customers.

Yes. Okay.

Sorry.

That's okay. The commercial bank discussions are all about deposit betas, and the margins are much thinner than yours. You're kind of -- I don't want to say proud of your deposit beta, but explain your deposit gathering strategy. How far do you want to take this?

Sure.

And are you concerned at all about deposit beta, so to speak?

Look, it's always great if you can lower the deposit beta, right? But it's -- because of the way our margins are, as you mentioned, really strong, right? We've got over 19% net interest margin. So -- and variable priced assets that go up with prime. So if we want to raise our deposit rates in lockstep with Fed funds increases or Prime, we could and stick to a -- what I say, a neutral net interest margin approach. We're not trying to create rate arbitrage here. We are proud of that. And we're not passing along 100% of that increase. So far we were slightly asset accretive. But because we want to increase deposits as a percent mix of our funding, because of our start point, we're good staying towards the top of the league table and still planning to grow the business the way we plan for the future.

And we're at low cost, we're digital. So it's helpful for our funding.

Yes. Okay. Okay. Capital, Perry, anything you want to touch on there in terms of your capital goals and where eventually you'd like the company to be?

Yes. I think overall, our priorities have remained very consistent. We said we're going to fund profitable, responsible business growth, and we're doing that, continuing to invest in important things in the business in terms of capability that Ralph said, is the priorities for the firm. We're doing that. We are planning to increase our capital levels, and you've seen that since the time I started. Ralph was joking about not being able to find a tangible capital ratio, but we're getting up close to the marker that we said we were targeting to at least 9% minimum TCE to TA ratio. And with the gain on sale, we're seeing this in the first quarter, coupled with some provision release, even with increase in our provision rate. That will continue to have a nice step up in our capital levels. And we've established a company-wide, enterprise-wide capital targets for the company, and we'll share more about when we get to our Investor Day later in the year. But we're on the path where we wanted to be when we set the agenda 18 months ago to improve our balance sheet. We are fortifying the balance sheet, and our goal then is to get up to peer levels with disciplined internal operating targets. And I can tell from -- speaking to the regulators, they're very pleased with the progress we've made and the advances we made and the discipline we're putting in place in how we operate the company. And so that will then determine when we look at our 3-year growth plans, how much capital do we unlock at that point?

Okay. Good. We do a lot of modeling with Brian, and he does a great job of helping us tune up the models and your stock looks cheap, but it comes back to this credit question. And I know we kind of started with it. I listened to one of the credit bureaus yesterday, who presented and then we talked about the K shape recovery and then the middle was okay. Let's just go back to it. You talked about a little bit of pressure for either of you, a little bit of pressure on some of your lower-end subprime clients. I don't know if you want to call it that. But what is the assessment? What are you really seeing in the economy? Is credit going to get worse for you other than normalization? Or what's your overall assessment of it?

Yes. So I think the way I think about it, and I really do understand the K recovery. I think we're past the point of recovery with the K economy. I think that's the right way to think about it. And the reason why the Fed has been so focused on taming inflation is exactly for what you're seeing. It's a regressionary tax where it's hurting Middle American modern income families across the entire consumer base. And for us, I look at it as the portfolio of the consumer had a cold. They're not severely ill, but they all don't feel well. And the sooner we get inflation under control, they'll all feel a little better. And so the longer inflation remains elevated, the longer people don't feel right, because they're having to tackle and grapple with higher utility bills or higher grocery bills. And they're doing what they can to make ends meet, but they're living a little bit more maybe paycheck to paycheck and making the choices in spend. So you're seeing a little bit less spend. You're seeing shifts in spend, but it is putting pressure. And so inflation is something that is concerned. While employment remains very strong, even though I think I saw something today that perhaps open jobs came down some, but payrolls went up. So there's still this dynamic if they can go -- they can pick up additional hours, they are able to get a second job if they need to. So they're doing what they can. So I don't think there's a systemic stress, but we're past the point of normalization for the near prime customer because they've already used up their stimulus savings. They're now grappling with the reality of this period of inflation. And hopefully, that does moderate. But the outlook for us is that does the Fed go too far where jobs do get restricting with higher unemployment later in the year, which affects really more 2024? But that should then replace this period of elevated inflation. But there's lots of possible outcomes. And that's what I think we're all wrestling with and being prudent about pulling back on risk along the way. And price off from our guidance, we pulled down on our expected growth rate this year for that exact reason. As the consumer is moderating as are we in terms of some of the underwriting.

Okay. And you have this charge-offs rising, but unemployment relatively flat. How do you think about that relationship? And if the unemployment rate does deteriorate, how should we think about that?

When I think about the charge-offs rising, for us, you're going to have this first and second quarter that are impacted because of these conversion stuff. But if you were to take normalized, that noise out, the second half of this year would be -- is higher than what 2022 was. And that's because for -- you think about our through-the-cycle loss rate is 6%. Periods above and periods below when you're above, you're in a more stressed environment. Our rate will be above 6%. So you're in this period of stress. Even with unemployment being low, that's the effects of this elevated inflation the pressure is putting on the consumer. What it means long term, it really is dependent on how quick does it come down. And do you -- I don't believe you have a scenario where you have a compounding effect of high inflation, high unemployment. But our outlook for our loss rate assumes this elevated inflation throughout the year.

Okay. What is the Investor Day planned?

We haven't -- we don't have a date yet, but probably some time in the fourth quarter.

Okay. By that time, it's all going to be clean.

Piece of cake.

I mean there's a lot of accounting nuances. This is what I'm saying Q1 even Q2.

Obviously, we'll have a better perspective on the way the CFPB is coming out. We'll have a better perspective on inflation, the impact on the economy growth. So a lot of the questions now will be answered towards the back 9.

Nobody new ones by that at. I'm opening new questions I'm sure -- all right. Well, good. We're out of time, but thank you guys for being here.

You bet. Thank you.

Thank you.