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

Got it. So taking a step back, your portfolio is diversified meaningfully since pre-pandemic. Can you just talk about some of your recent partnership launches, how they performed relative to your initial expectations?

Yes. No, I appreciate you saying that. This business had been largely private label, mall-based type retailers years ago. And since Ralph joined as CEO, we really focused on trying to diversify our partner base. You could even think about some of the big ticket ones that we just signed back in the fourth quarter, some of the furniture verticals. So expanding our verticals, not just soft good or clothing type retailers. Those are nice sized brands that whether it's Raymour & Flanigan, Furniture First, Ethan Allen, that again diversifies us. Then you heard me talk about the buy now, pay later ones of Home Depot, the Vivint, Cricket Wireless, where the -- again, we've got NFL out there. You've got other brands that are coming online. And when you talk about how they perform, some who've never had a program before, we're kind of guessing around how they're going to perform. Sometimes they perform a little worse, sometimes they exceed your expectations. Programs that were those furniture ones I mentioned, they had credit programs before with the incumbent. Now while we didn't buy the back book, they knew how important credit was to unlocking their credit sales. So those are performing in line or even better than we expected. So it's just -- it depends on the program. If it's new space, sometimes we get it wrong, but it's not like it's a big commitment of dollars where if it doesn't perform quite as well. Others, again, like I say, come in way better than you expect. So it's -- you're always projecting when you have new programs.

Got it. And what's the pipeline for new programs and renewals look like? You mentioned just a minute ago that if you potentially have a new partner with size, you could potentially pursue some sort of like private capital arrangement?

[ Yes. So one thing that we're very disciplined, what you'll find is some of these real large scale programs have very thin returns, but they fill certain needs of some large players out there. For us, because of our size and that maybe partnerships that seem less strategically important to some of the much larger peers, fit into our wheelhouse. So if there's a program that's $100 million in size to $700 million in size, we love those programs, right? Because we can give the attention and grow with them where it's not even a rounding error for somebody that's hundreds of billions of dollars in size. So for us, there's opportunity as some of those programs are getting deprioritized, we have the opportunity to grow into those and win those. And there's always competition. So we're very disciplined with that, but we are winning more than our fair share. And to your point on renewals, we're having a very strong success rate of renewing our key partners. Look we love all the partners we have. They all perform a little differently. But so long as we take care of that relationship, we work with them, we value their brands, understand what their needs are through data analytics, we provide more insights and you try to give them flexible custom programs or products and programs or loyalty, this is the business we're in. So I think we -- that's one of the reasons why we've had successes we've had with renewals.

Got it. Maybe just to follow up on the recent extension of renewal Signet. Maybe just any color on what that conversation was like and like how to think about returns for that program kind of going forward?

Yes. So one of the things that as you think about renewals in general, I'm a huge fan of renewals. If we take care of that partner, and again, you go back to what we call as a partnership business, both parties working together to grow the program over time and make sure it's meeting the partner's objective of unlocking credit sales for them returning to them some of the value from the lending side. Obviously, we're taking on the loans and doing the lending that gets the right return for our shareholders. Renewals are part of this business. So that if you do a good job, my view is a couple of years before the natural expiration, you try to get in and get what we call an early renewal done that comes with an extension. It may mean that you're sharing some more of the partner -- the economics back to the partner through profit share or other things, investments in technology or marketing to continue to grow the program and expand the profit pool. That's a good thing. So in the case of Signet, we will get them locked up a couple of years before their natural expiration. We pass over some better economics to them in the time while before it goes to expiration. And then after that time, we're probably getting a little better deal than we would have had should have gone to a clean RFP at that point in time and then even risk losing the partner. So it's good for both parties when an early renewal happens because that's -- those better economics that they're enjoying they wouldn't enjoy with anybody else except us. So it's good for both of us, and it gets us very aligned to the same thing. So in this particular case, to speak to Signet, in particular, was a fantastic partner. We're very much aligned now on trying to grow the program together, increase or improve the profit pool, manage risk appropriately, making sure the pricing is right because if something goes the wrong way in either direction, they have a lot of skin in the game, too, when you put that profit share component into it.

Got it. So you mentioned that once RFP, I potentially lose a partner. I'm not trying to be specific. But like maybe just talk about what the competitive landscape kind of looks like for renewals? Is it getting more intensive like when these kind of like renewals come up?

So yes, I've been doing this for over 30 years, and this has been a part of the business that entire time. Anytime you have co-brands, partnerships, there's always some partner out there that they think they're going to get a better deal by going to an RFP. And the switching cost is high. If somebody wants to leave, it's -- you may run the risk of some attrition at the time of moving the portfolio or they have to leave the portfolio behind. So it really is in the benefit of both parties to come to a mutual agreement to extend if you have a good program. Now there's always some programs coming to market for RFPs. That's how we win a number of the deals that we are because the partner is not happy with the incumbent issuer. And for whatever reason, they might have been deprioritized and not getting the attention and service or customization that they're looking for, for their program. And as we've been gaining our footing over the past 5, 6 years under Ralph's leadership, we're getting a look at a lot of different opportunities that early on, maybe we didn't get a look at. So the key is continue to advance your own internal technology capabilities. The relationships are so important in terms of how you respect and you listen to what the partner needs, and that's our business. So what's out there in terms of a pipeline, it's a very good pipeline. We'll have more announcements coming in the future. But again, some of the wins we have are de novo programs. So programs that just come to RFP, meaning that it's a new program in the marketplace. Others are RFPs where there's an incumbent who maybe with the existing issuer is not as much a priority for them, and that's how we won some of the furniture vertical spaces. And so that's a place where we'll continue to play. But competition generally tends to be pretty rational. We're all trying to target something in a similar range of returns. Once in a while, you do get a couple of issuers out there who maybe are a little more hungry to need to grow to meet their growth commitments or fill a hole because they lost the portfolio. But over time, I would tell you that you generally have people leaning in and out, but generally pretty rational with the return targets.

Got it. That's helpful. Where do you see the most attractive opportunities in terms of kind of spending verticals or products that you may want to kind of emphasize or focus on?

Excellent question. It's one where you look at where the consumer wants to spend. I think for us, the greatest opportunity is continue to expand our co-brand parts of the card business. So before I think we've talked about this, where before programs used to be private label only and didn't have that co-brand component. Now when you look at retail programs, it's not just a private label, there's actually a retail co-brand such that like take Ulta, you're able to use a co-brand, you can earn points everywhere they want to spend. So you're picking up more of that everyday spend where the consumer then is earning their ultimate rewards. And then the private label may be more of the downsell. So I think the opportunity for us is continue to shift some of these programs more up -- I won't say upscale, but more of that the higher-end consumer that they would have had anyways, but giving them more of that co-brand feature and it's driving more spend. That's why I said 1/3 of our spend that you -- 1/3 of our growth that you saw last quarter was because of the strong co-brand and part of it is because of the upgrades that we're doing to offer that Visa, Mastercard or Amex type product that benefits both our retail partner and the consumer.

Got it. So we'll switch gears and maybe just address NIM. NIM has expanded year-over-year, but lower late fees and unseasoned loans have limited the extent of that improvement. How can we think about NIM in the medium and longer term and particularly the mix of Bread Pay within the portfolio to grow?

Yes. NIM is one of those ones that is always the hardest to calculate. You heard we talk about noninterest income and all the puts and takes in there. Net interest margin is one where again, for the year, we're expecting to be flat to slightly up versus last year. You get seasonal movements in net interest margin expected to increase in the third quarter versus second quarter. So it's just -- it moves around. We've got a lot of those levers in there. The pricing changes have largely ran its course. You're going to have continued product mix shift to the point you just made. If it's not private label, it's coming in with a lower APR than if it was just pure private label. And as those products mix, it could put a little pressure on top line APR, particularly if it comes with lower late fees or higher average balance because even the same late fee will have a lower yield effect. And as you're seeing improved delinquency, we end up with a trending of lower late fees. But as you have improving delinquency, maybe a little less late fee, but you also then down this road, have less reversal of interest and fees from lower charge-offs. And so we're really focused on what is total risk-adjusted revenue looking like or risk-adjusted net interest margin, and those should still be pretty stable as we look forward. 0

Got it. And if we were to think about rate cuts versus hikes, I think when we came into this year, we're pricing in maybe 3 cuts now, maybe 3 hikes. What's the impact to NIM if we were to get those 3 hikes? And also maybe just talk more broadly about how the balance sheet is positioned for hikes versus cuts?

I would say the impact is probably the inverse if there were 3 rate cuts. But no. And so the narrative that I've said, regardless of the rate decreases or rate increase that we're slightly asset sensitive. And that meant if the rate cuts were to happen, we'd have a little bit of a detrimental impact. If there's a rate hike that occurs, we should be a slight benefit. But I say slight is the word I would circle underlying bold. We've done a really good job of getting ourselves as close to neutral as possible. And we are not trying to make money by betting on which way interest rates were going to be. So as I've been told, we are about as neutral as any financial institution as some of our colleagues here have worked with.

Okay. Just want to touch on the repurchase. Bread's repurchased about 10% of its shares outstanding year-to-date. You've also issued preferred shares twice in the last 12 months. Remind us how the prefs are helping optimize your capital stack? And what benefits do you get for your CET1 ratio?

Yes. So the -- we're pretty pleased with the preferred issuances that we've gotten done to date. We still have one more leg of preferreds to do. We can have preferreds on the balance sheet of about 1.5% of our risk-weighted assets. So we've got about another $100 million plus that we can do before we're fully optimized. And what that does for us is it reduces our CET1 target from 13.5% -- so from 13% to 14% down to 12% to 13%. So think about that around 12.5% -- and so that's beneficial. We've said probably no sooner than fourth quarter, that's going to be approaching soon and what will be opportunistic market conditions pending and what that would do. But that should unlock the full optimization of the balance sheet and that CET1 target.

Got it. That's super helpful. Maybe just turning back to the consumer and just talking about gas prices. Is there some level of gas or oil prices that creates a pressure point? Like I guess at what point like does the consumer start getting into stress from those inflationary prices?

Yes. I think it depends where you are on the credit spectrum or income spectrum. Obviously, lower income households are going to feel that pressure faster. So I think their breaking point or tipping point for the price per gallon, if you use that as a proxy for energy is lower than, say, most people in this room, the tipping point is much higher. So it really depends where are you in your leverage point? And then how much do you have the ability to make adjustments to your household budget. But I don't have a specific number in mind. I think what you've seen to date as the fluctuations have happened, they've been able to absorb it, make adjustments to their family budgets, choices. You heard me talk about the choiceful consumer. And then that's still playing out. So I mean, that's why we're very pleased with the progress that you've seen in our reported credit metrics is despite higher fuel prices, you are seeing us outpace even our own internal expectations of how credit would improve.

Got it. Okay. So you've been targeting mid-teens ROTCE longer term. Maybe just talk about your confidence level in achieving that? And what additional steps you would need to take before you reach that target?

Yes. So our stated ROTCE target is mid-20s. And that we have a high degree of confidence. And when we put those numbers out there, it contemplated renewals, it contemplated new business coming on. The three levers that are going to get us there are: one, the smallest lever of that is finishing out the capital optimization, that last $100 million plus of preferreds. Two is getting our loss rate around that 6% level. There's still some more room to go on a full year average for that to happen. And then the third is continuing to scale and continue to drive down our efficiency ratio. And I think you've seen we've done a really good job of managing our expenses and continue to make progress there. We got to deliver on that commitment of positive operating leverage year in, year out. And those three things combined will deliver those mid-20 ROTCEs. Now if you have a year where you have outsized growth for some reason, your ROTCE will be lower because you've got a bigger CECL growth tax. If you have a year where you grow low single digits, while you're not going to have as much CECL growth tax, you might deliver a higher return. So I think some of it will fluctuate, but we have a very clear line of sight and path to get to the mid-20 ROTCEs.

Got it. A few minutes left. I'll open it up to questions from the audience, if there are any. It looks like there are none. So I'll keep going. Maybe just talk to us about how you're thinking about AI and technology investments like going forward?

Great. Yes. AI, personally, I am super excited about the opportunity that AI presents itself for our company. One of the things in way I say I'm excited is we've been on an operational excellence journey for the past few years. And operational excellence, I know it may sound corny to some, but it's a mindset of a culture. So within our company, we've had a lot of people trying to find new ways of working to simplify the way they work. And we talk about like if they embrace operational excellence, it will make their work lives better, and it has. And it's created tens of millions of dollars per year of benefits for our company. And what we've been able to do is reinvest that into newer technology and things. So when this AI -- these AI opportunities present themselves, we have people with a mindset, "Hey, I want to try that. I want to try to find any way. So personal productivity is way up. And they're able to do things far faster, add more value, innovate faster and people are excited about it. And you have to have a culture of people who want to embrace this, and we've got that. So AI in that regard, very exciting. I'm seeing that pull-through in personal productivity. Expect that to deliver maybe 5, 10 hours a week to people who can do more or even have to work 60 hours into the late night. But it depends where they are and what they're doing, but produce a lot more value for the firm. And so we don't have to hire as much going forward. So that's going to play through. It can transform every function that we have from collections where we're able to do more personalized communication with customers, giving them self-service opportunities, and we're seeing payment rates increase where people are selecting payment plans because think about somebody who's going through a hardship. It's difficult to get on the phone with somebody and say, here's what I'm going through. It could be a little embarrassing at times. I lost my job, whereas if they can do that, online themselves, we're actually seeing a pickup in payments. Personalized marketing is a great opportunity. But it all starts with good foundational data, good tech stack, and that's still the modernization process that we're going through. But AI is accelerating the ability to migrate to the cloud. I mean it is going to improve everything we do and allows us to reimagine how we serve the customer, how we target new customers. It's -- so again, like I said, I'm pretty bullish on the opportunity. But again, we've got to deal with a real focus on ROI that we just don't try everything. You don't carpet bomb and just try -- because then you're not going to do anything well. So we're being very disciplined. We have a very centralized approach to approving new tools, new applications, new use cases to make sure that we are going to deliver value for our shareholders through the deployment of AI.

Great. Just like 2 minutes left. Just maybe in closing, what's the key message you want investors to take away from this presentation? What are you most excited about? The stock is up like 40% year-to-date. Anything the market is underappreciating?

Yes. Well, I appreciate the opportunity. One, I'm super excited about our company, about the leadership team, the people of our company who have gotten us to this point, and there's better days ahead. I mean we are just hitting our stride in terms of winning in the marketplace, putting new capabilities out there. You talk about AI, our approach to AI. And really, it's just continuing to do what we said we're going to do. And I think we have a track record of doing that. We've got more to do. We're going to stay focused. We're going to stay disciplined. And our promise is we're going to deliver that value back to the shareholder and deliver those returns that we've said and put good growth on the board. And I think there's a lot of upside in our company's stock.

Okay. Great. We'll end on a good note there. Thank you very much.

Thank you. Appreciate the time.