Bread Financial Holdings, Inc. ($BFH)

This afternoon is Bread Financial, welcoming back Perry Beberman, CFO. Perry, welcome back.

Thank you for having me. Appreciate it.

You must be happy today with the data you released this morning. Your May results look pretty solid. You've been stacking some wins recently. It looks like your charge-offs are on the cusp of breaking 7%. You're right on the dot there. It looks like your delinquencies are outperforming seasonality, and you're now sitting around 3.7% loan growth, it looks like. So maybe just give us a quick update on what you're seeing in the data.

Yes. No, the data is coming in even a little better than what we had been expecting. As you note, when we talk about things in the first quarter, we had inflected to growth. That growth momentum has continued with our end-of-period loan growth reaching 3.7%, and that's really driven by some of the nice wins that we've put on the board with Partners we launched in the fourth quarter, some more in the first quarter, and that's starting to manifest itself along with the declining loss rate. As you note, loss rates at 6.98%, a little better than expected. It's about 99 basis points better than last year. So that trend is continuing to march in the right direction with delinquency formation also improving. One thing I would note for the second quarter is you should expect the losses to be about flat going into June for the month of June compared to May. And then I'll also note that net interest margin will seasonally be down in the second quarter compared to the first quarter. And then expenses we already guided that they're going to be just under $500 million. And then the last thing is on noninterest expense during the first quarter earnings kind of guided that we would expect some pressure of about up to $40 million of higher RSA payments, which will pressure the -- that net interest income linked quarter about $40 million. It's now looking like it's going to be closer to $30 million. It's a little better than what we thought it would be.

So maybe just talk a little bit about the NIM seasonality rather. I know you obviously saw some really nice expansion recently. I think you upgraded your outlook for the year last quarter to be above 2025. So just what are you seeing for this quarter? And what are the puts and takes as you think about the rest of the year?

Yes. So what's -- the NIM is a very dynamic number. We've talked many times. There's so many moving parts in there. I'd say 1 of the things that now has stopped being a tailwind is the CD book repricing. It's now kind of repriced to the point where what's coming off or coming due that's rolling over is about the same rate as what we're putting on new. So before the higher-priced CDs, they can replace by lower priced CDs, that's kind of flattened out. You're seeing some of our pricing actions continue to play through, but at a slowing pace as more of it's already built in. And then what's a little bit of a headwind in, I'll say, yields is mixing in some better credit risk associated with some of the new products we're putting on that are obviously better Vantage scores and some higher lines that can drag down the top line yields, but that's also a help or 2 long-term loss rates. So your risk-adjusted margin holds up pretty well there. And then you also have improving delinquency at a faster pace which means lower billed late fees. So that pressures net interest margin. You've got lots of moving parts as the portfolio continues to churn. It's dynamic. And so the pace of that churn will really predicate where net interest margin lands for the year, which should be pretty close to 2025, maybe a little better, hopefully, but it depends on how quickly some of these other partners come online and grow.

Okay. And you'd probably take that trade-off any day or week. .

Day.

Lower losses, lower NIM. Yes.

Yes.

Maybe just taking a step back before we get into some of the quarterly details as well. I wanted to ask you about your evolution. When investors think about Bread today, I think you're often bucketed through the lens of that old Alliance data model, highly promotional, you sell card, a focus on growth, higher levels of leverage in the balance sheet. Maybe just take a step back, remind us fundamentally how different is Bread today versus the one you joined about 5 years ago? And what do you think the market still underappreciates? Maybe not today, it seems like, but what do you think the market still underappreciated about your transformation? .

Well, I think that's -- it's true. We're still room to go in terms of getting us to a valuation that's appropriate for who we are. But the transformation has been remarkable. I mean we focused from the day I've joined and really since the day Ralph Andretta, our CEO, joined a little over 6 years ago on running this place for the long term, making the right decisions every day, whether it means the balance sheet being responsible with how we're taking care of capital. We've paid down over 70% of our debt. The company we joined was really over-levered and undercapitalized, paI'd down 70% of our debt. We've built up our capital ratios to be where they are today where we're going to position of a true excess capital above capital targets. And those capital targets are built a way mature financial services companies build them from building blocks, including stress components and we're positioning ourselves for future regulatory scrutiny, which we're pleased to do. But we run it the right way, and that transformation has been real. It's running it with good disciplined fundamentals, responsible growth, trying to deliver the right returns. And then even under the hood, a lot of what we've done around enterprise risk management practices, that's not really well, seen by everybody but the rating agencies have seen it, the regulators have seen it, and it's really manifesting itself into a well-run company and all while continuing to invest in our company. The improvements that we've had in our technology stack and our ability to meet partners where they are and what they need is continue to win us new deal after new deal, and that's been a big part of our transformation.

And I think one of the more interesting developments over the last few years has been your success in the co-brand business. Why do you think Bread has been taking share there? And what do your partners increasingly value today that they didn't maybe even a few years ago?

Well, as you look at the private label market, can bring co-brand into a couple of components. One is you take a traditional, what used to be a private label card type of program. And now you're offering a co-brand product where customers can earn loyalty points and rewards on everyday spend that you can't if you're just doing an isolated private label. So private label is probably -- is more geared for newer to credit, lower credit lines, and now you're stacking up on top of that more of a co-brand and using the private label to be more of a down sell. So that's one aspect of the strategy that a lot of partners are adopting. And then the other part of co-brands are the co-brand wins like we've had with NFL, AAA, Ford, more recently, Crypto.com, those are true top-of-wall type co-brands. And our ability to win there is we have a deep experienced team who's good at running co-brand programs. So you think about our commercial team, our client partnership team. These are people who run some of the largest co-brand programs in America, and they're now on our team. And similarly, the tech people that we've been hiring in know how to build the right tech to serve those. So I think that's helping us win deals. And our flexibility with our tech stack is really winning over a number of new partners.

And as you continue to develop the pipeline and win over new partners, what's the pipeline looking like today? I think you've had a strong run of wins in home, auto, digital. You just highlighted a few key examples there. Any new verticals you're looking at? Or any areas where you're noticing more inbound interest coming in? .

The fun thing being part of Bread Financial is that because of the team that we have in place, I just talked about, we're getting looks at almost every deal that's out there. Now every deal is not going to be the right fit for us, given return profiles could be very highly competitive would be $10 billion or bigger type deals. We're not giving those serious consideration. Doesn't make sense for us or our shareholders or the return profile that we're looking for. But for deals that if some competitors are leaning out of the market in certain spaces and they are good size for us, and we like the returns. We're going to lead and be competitive. And look, we show up at most of the opportunities that are out there, and we win more than our fair share. And I think we'll have some more announcements later this year.

Great. Well, we look forward to that. And maybe just you touched on the competitiveness or the competitive environment. Just what are you noticing today versus a year ago? Anything to call out? Or is it pretty consistent?

Not getting into names of competitors specifically, but I think you see this over the ebb and flowing over -- if you look at the past 5 years, some of the really large banks have leaned out of some of the retail private label cards or some of those and focus more on the large-scale programs. Some others have had some issues where they've had to pull back, and that's how we picked up some of those furniture brands that we talked about. But you generally see some of the same people showing up to compete. And those are more mature competitors who are very rational and you end up landing in the same spot. So really, you win a deal based on the relationship or your ability to deliver tech and what they're striving for.

And maybe just like tying it back to the early part of the conversation on credit. I think another important aspect of your evolution has been what your target customer has become. I think Ralph has mentioned a few times now, you're more middle America, you're not really at the lower half of the anymore in the customer that you target. So to what extent has that shift contributed to the recent improvement in credit performance? And how do you see that evolving as you continue on from here? .

It's a good point. So one of the things -- and you talk about what I don't think people understood about our company is we were out and talking to investors and I get these questions about comparing us to really deep subprime competitors and I was like, wait a second, this narrative is wrong about our company. When you look at the average income of the new customers we're bringing in, it's about $100,000 of household income, and yet they're comparing us to companies that -- where their average income of the customer is $40,000 to $50,000. So we're not -- when you think about the economy, we're not serving the bottom end of that K. We're serving the middle portion of the K. And we're not over-concentrated in the top end either. We're not competing for those high spending, high annual fee card-type customers. The middle part is where is our sweet spot. And so we're trying to make sure that we're educating investors about who we are, where we like to play, and it's not low income, it's not -- people who are not creditworthy. It's really that space.

And what are you seeing from that customer right now or even just the back book of customers you have as well as you sort of think about higher gas prices from here? Are you seeing any noticeable shifts in behavior changes in discretionary spend or shopping trips, et cetera?

So obviously, when it costs more at the pump and if the average person is paying $100 more a month at the gas pump, it's real. They have to pay it. And so some of them have enough cash reserves maybe from some of the tax refunds if the average household had a tax refund on average about $350 higher that absorbs some of the near-term challenges that they may have with the higher fuel prices, but that's probably run its course at this point. So now what we're watching is what is customer behavior going to look like going forward? You have seen some, I'll say, pull back in some discretionary spend categories like a little bit of maybe clothing and apparel has pulled down. You've seen a little bit lower restaurant spend, some increases in grocery. So you start to see some of that movement that you actually expect, but consumers are resilient and choiceful meaning they're making the choices to continue to manage their credit. And that's what we're finding most encouraging is that, yes, there is inflation, but it's not rampant like it was post COVID. So right now, customers seem to still be -- are still in a position to deal with it. Labor market is still stable, pretty strong. So while that's holding up, it seems like for now, customers are dealing with the higher fuel prices.

And maybe just sort of any update on post the holiday weekend, we saw a few weeks ago, how your credit sales growth is looking this quarter. I think you put up around 7% the prior quarter. Maybe just how is that looking this quarter?

Credit sales continues to remain very strong, in fact, even accelerating a little bit, but it's still -- the quarter is not over, so we'll continue to watch that. But it's -- the consumer, again, it's resilient healthy. Some of our growth is because of the new partners that continue to ramp. So like-for-like, it's not necessarily as strong as what our reported numbers might be if you're looking at a comparable customer. But we're putting on the retail verticals, you're seeing good growth in our installment lending is starting to pick up some growth with our installment lending offerings to the Home Depot, Vivint and Cricket Wireless.

Okay. Great. And I think that feeds into the loan growth question here. So as that spending comes back and as you add more partners, you are seeing an inflection in average loan growth already underway here. And you're already kind of at the low single digit that you called out for the year. So why shouldn't we be thinking about even better than low single digit at this point given the recent trends in -- maybe just talk about the key drivers and the time line to getting back to that mid- to high single digit you target in the long run?

Yes, I think we'll continue to see how this is playing out. But so far, to your point, it seems like it's a little ahead of schedule so far at this point in the year, we're in very good success with some of the more recent launches. Some of these launch in plateau a little so you have to see how that continues to build what happens with the consumer. Do they remain as resilient throughout the back half of the year? So I think the next half of the year, what happens with the Iran conflict with fuel prices will inform a bit more of how that momentum continues to go. I mean, obviously, I expect end-of-period loan growth to continue to get higher relative to where we are right now. So I think there will be continued growth, but the average -- whether we get much beyond that low single digit will yet to be seen. So it really depends how the back half of the year performs.

Is there any -- if things do sort of continue at the current pace, and we don't see oil come down meaningfully and gas risks come down meaningfully, would you consider looking at tightening on credit to maybe deal with that? Or how would you think about the risk there? .

Yes. That's an excellent question. Some of it I think our credit underwriting is a very dynamic process in that it's always on. And it's not a matter of doing wholesale tightening or expansion, it's really about the customer coming in the door or that's already on our books and how are they performing, we're able to monitor tens and tens of data points on them with their activity, meaning what you're seeing on the trades on the credit bureaus, you're able to see how they're performing on us, and it happens reflected in their scores, and we have an internal proprietary score, when you combine your Vantage score plus a number of other internal data points. So if they are showing signs of weakness, obviously, you won't be increasing their lines. It will be tightening accordingly sort of risk detection, and same with the customer coming in the front door, looking for credit, what do they look like when they're coming in, and you'll give them an appropriate line. Again, we'll start them with a low line and grow that line over time as they serve a higher line.

You sort of touched on the RSA driver of the noninterest income this quarter coming in more at the $30 million as opposed to up to $40 million. So anything to sort of flag there in terms of what drove that refinement. And I think we talked about the rest of the year also continuing to see that impact grow as your credit sales grow and the partner programs sort of...

As a CFO, you never like to see that number get more negative in the P&L, but the reason for it is a good thing, right? It's it means that you have -- your margins have been expanding. There's more profit share to be provided back to the brand partners, that credit sales have been growing at an accelerating pace and for partners that are receiving compensation based on basis points on those sales. That grows -- it's growing faster than average loans, right? You just mentioned 7% credit sale growth compared to 2.6%, our average loan growth for the month. That continue to exceed. So that's just causing a greater portion of that. And it also it goes to the product mix within that. So it's not a bad thing, but it's part of the -- it's the business model.

Right. Now on expenses, I don't think this is an area we should overlook either. I think you've done a really good job maintaining some positive operating leverage in spite of some slower loan growth until recently. So -- and you're also, I think, in the middle of a cloud migration. So -- what do you think the key to this expense discipline has been? And how can you assure investors that you can maintain it going forward, especially as we think about things like our tokens has been very topical at this conference. .

That's an excellent topic and one that we should touch on a little bit. But when you think about what we've been talking about for the past 2 years, we really instilled a culture of operational excellence. And that means we're constantly encouraging our associates to find better ways of doing work, and we invest in that. So we -- it's delivered tens of millions of dollars per year that allows us to reinvest into the business in new capabilities and contain our overall expenses to hold them kind of say flattish. And now we're seeing some of that loan growth. And at the same time, dovetailing into this year, I think there's some expenses that I think I'd say. I know that we've had to invest in a little maybe more than what we thought we'd have to do towards the back half of last year as agentic commerce-type investments need to be made into AI capabilities that aren't going to pay dividends probably until next year or beyond. And then your point on tokens, it's one that I don't think anybody has a real handle on yet. We certainly are at the point where we have any agentic engineers in motion or -- so we're not consuming a huge portion of tokens, but we are very focused on understanding those costs, understanding the ROI on the AI investments that we make and being very smart and disciplined about that. I mean that is fundamental to the way we do things in general. So there's going to be no change in that discipline. And you have to understand the cost to deploy something and the value you're going to get in return otherwise it's not worth doing. You're not going to build something and hope it has a return. It really has to have a sound business case.

And speaking of AI and agentic, Ralph did characterize Bread as more of a fast follower in the Agentic world. I guess maybe as the technology evolves and larger platforms beginning adopting this, embedding this into their ecosystems. How do you ensure Bread stays competitive as you sort of follow that trend? And where do you think we are? I mean I think we've heard some others say we're still in the OnDeck circle. We're not even in the first inning. So...

I think that's a good -- I think it's a nice way to frame that. I might refine Ralph's comment. And in this case, I'm not sure we're a fast follow. I think we're right there with others in the industry at the same place. I would have thought we would have been a fast follow, but it's not a huge investment. So you're working with all the big players making sure that we are dialed in with what AWS is thinking, Google, everybody and then working with our partners understanding where are they in their agentic journey because we need to be with them and however they want to go with a solution, whether it's us prototyping something, a full agentic commerce capability for them or plugging their payment solution into their agentic ecosystem. So we have to have a flexible approach to this. And we have an amazing tech team with a laggard Driscoll at the helm and some of the newer people she's hired in that -- this is an exciting time. So I think we're well positioned to be right there at the front, not. I'll say the first one to go, but we're all trying to be going at the same pace. And again, I also want to caveat this with the agentic commerce, it will be a portion of e-commerce sales. And my understanding is that e-commerce in general is what about 15% to 20%, maybe around 18% of overall retail sales. Say it grows to 25% what portion of that will actually be adgentically completed? So there's -- it's important to have the capability because it's going to be important to our brand partners, so they don't get disrupted in some portion of their sales. So we'll make sure we have that capability. But I don't see it as the overarching defining win loss for anybody in this industry, but it's going to be a table stakes capability that you have to have as a means for our brand partners to complete their payments.

Well, it sounds excited, maybe you can automate your Eagles ticket purchases through agentic next year.

Don't be jealous.

I mean a little bit. I'm not too jealous. No. We have now.

Yes, good luck with that.

I think it will work out. Anyway, so maybe moving on to capital. I think you recently just did another preferred equity raise, puts your Tier 1 ratio back about 14%, as I understand it. What kind of buyback cadence should we be thinking about here with the remaining, I believe, $765 million of authorization you had at the end of last quarter? And as you think about the new capital we propose not finalized yet, obviously, that incremental 100 basis points of capital relief, how are you thinking about deploying that?

Sure. So we did do the $135 million of additional preferreds. And first and foremost, we're going to make sure that we maintain our capital ratios in that 13% to 14%. And at the end of every quarter, we'll know where we're tracking, and we'll try to deploy capital appropriately. And in this quarter, we have -- we're going to have a decent amount of new loan growth. We'll fund that first. We'll continue to invest in the business and what's left over above that capital amount. We'll try to return to shareholders. So we'll keep that cadence going of returning to shareholders. I think we've repurchased over 20% of our shares from 50 million to now under 40 million of common shares outstanding. So I think we now have a track record of being disciplined on that front. As you look forward, we have another, I'd say, about 100 million to go on the preferreds that we could issue to really get ourselves fully optimized. I don't think that will happen until in the fourth quarter or early next year depending upon what the markets are looking like. And then to your other point on the Basel III end game, that is an opportunity because with the standardized approach as it's currently written, it would reduce the amount of risk-weighted assets that we have. So our capital targets remain the same 12% to 13%, but you're holding it on a lower amount of RWA, which produces some additional capital to either accelerate future growth or return to shareholders.

And I think one other aspect of the model that supports capital over time and some other benefits you get comes from merging the subsidiary banks you have. So maybe just talk about latest timing there, thoughts around that. .

Yes. So we are really pleased. The team had submitted the application to merge our 2 banks into 1 bank. Really, we're at the point now where we've gone through the iterations with the FDIC. So we're thinking it could be any week now that we'll get the notification that we're able to merge this 2 banks. We get a little bit of capital benefit by being more, say, optimized across the 2 versus having a little bit of a mismatch on some things. But really, the ultimate benefit there is allowing our treasury team to holistically fund one pool of assets with all our capabilities of direct-to-consumer deposits, our asset-backed securities platform that we just built out of our Utah bank and whatever else we need to do. So it's been -- we're looking forward to that. It's not a huge cost benefit. It's really more a funding opportunity to be more efficient on that front.

I think we'll see Tom smiling pretty widely over there at your comment there. Nodding his head, I think he agrees. Maybe just to touch on a longer-term question here. You spent several years repositioning the business as we talked about already. Maybe just put a finer point on it, how do you balance the desire to lower your credit losses while driving a higher ROTC or return against your desire to also drive partner sales? How are you balancing all that in today's world, you're competing for these partners, data what you're offering, but you also want to be disciplined at the same time?

Yes, it's an excellent question. And it really goes to the mosaic of the company that you're putting together the portfolio that is constantly shifting. And so the discipline is when you're evaluating new business you're -- obviously, you have a loss projection anticipation depending upon the profile of the customer. Some new business might have sub-2% losses. Others might have 8% expected losses. So you're piecing it all together, and you want to make sure you're getting paid for the risk you take. So the pricing component is very important with the loss component and then what capital gets assigned to that and ensuring that the new business that we're putting on hurdles that mid-20s ROTCE at least on a marginal basis to ensure that it's going to be accretive or hit the mark for what we're looking for. And then when you put it all back together, do you have confidence that it lands us on a glide path that we're on to get below -- at or below 6% losses. Our goal is -- and you -- we've talked about this before, is not to drive to the 6% ahead of schedule, meaning we're not going to do something draconian and really tighten up credit on our existing partners. It's one of the things that we do really well is supporting partners, supporting and unlocking value for them, do credit sales and underwriting as deeply as appropriate so that we like the returns we get on those -- on the margins, and we do. And that's why we continue to underwrite in that fashion. And it's been one of the strengths of our company. It's not the only strength but it is something that's foundational and that we do really well.

And I'm curious, I think you always get asked the question about buying out Paylater in the fintech threat, so to speak. When you go to your partners, is the offering you have from a big-ticket Bread Pay perspective, is that helping you at all? Are you seeing that come up in conversations more? What kind of are you hearing on that debate as well? .

It is interesting. I think when you think about the brand partners, a lot of them feel like they do have to have that button of one of the big buy now pay later offerings as an option for customers to pay with. And that's fine because a lot of those customers are traditional debit card customers who can't pay cash for something. They need to space it over a few payments. And that's not the space we're looking to play in. We want to offer more installment loan-type products for larger purchases, and that's -- we like the profitability in that space. We like to keep the customer in our brand partners' ecosystem, whether it's a co-brand product in a private label or installment loan. So more of these types of customers or part brand partners, want to see that as well because we can white label it for them. But they also understand they need to have the payment mechanism with some of these other offerings that just because you want to make sure your customers could pay any way they want.

Awesome. And Perry, maybe just as we sort of wrap up our conversation today, if we fast forward 3 years from now, where do you see Bread? And where do you think investors most underestimate, or what do you think investors most underestimate about your earnings power?

Yes. I think where maybe investors were underestimating us and maybe even so today is the durability of our returns, and our ability to continue to grow and win new business and have a right to win and that we're getting stronger and stronger every day. And you're going to see that continue to manifest itself in our results. When you talked about our path to delivering those mid-20 ROTCEs, its credit is a piece of it. Credit gets down to 6%. Our returns go up. We've optimized our balance sheet. That helps optimize those returns. And the last piece is scaling -- and not -- again, seeking growth just for growth's sake, but the good profitable growth. That helps with our overall efficiency ratios and the things that we've invested in. So it's just the confidence and belief that we will continue to accelerate our growth, and we're going to do it the right way. We're running this place for the long term. And if you look out 3 years from that, we should be a larger, stronger company than we even are today.

All right. Well, we look forward to seeing that play out. And thank you very much, Perry. It's always a pleasure.

Likewise, and hopefully, it's Eagle's, Patriots in the Super Bowl.

Yes, we'll see. We'll have to make a little side bet on that, right.

All right. It's a deal.

Take care.