Thanks everyone for being here this afternoon. We have a fireside session here, Perry Beberman from Bread Financial Holdings. Appreciate you being here, Perry. Brian's here in the audience as well. He's chosen to stay there, but well, it'll be Perry and I having a conversation. I think most people are familiar with Bread, but we're finding more generalist interest in the space, believe it or not, despite the pessimism. But give us a 30,000-foot overview quickly, you know, what is Bread? What do you do? And help us understand the company.
Yeah, Bread Financial is a full-spectrum lender in credit cards and payments, tech forward. So we offer from co-brand credit cards, proprietary credit cards, private label credit cards, buy now, pay later, with offerings of both, installment loans and split pay. We're really not doing too much in the split pay space. And Bread Pay used to be Alliance Data Systems and has gone through a major transformation over the past couple of years, both in terms of our, the company's focus, but also now, you know, really being focused on being a financial services firm.
You can see that in the way we look at our financials, who we view as peers in the space, and, you know, in terms of fortifying and strengthening the balance sheet, we've really done a lot of work on that front to de-leverage the company. Have paid down 55% of our debt in the past two and half to three years. We've increased our tangible book value at a compound annual growth rate of 30% over the past three years as well. And so, you know, really making good strides on that front, and I think we're in a real good spot financially coming into, you know, where we're this macro environment.
Mm-hmm. Yeah, you guys have done a lot of work. We can go on forever about that.
Just a little bit of work, yeah.
We can go on forever about that, but you get a good look at the economy, more broadly, spending trends and what consumers are doing and spending money on. What's your assessment of how the economy is tracking, and what are you generally seeing?
You know, the best characterization of the economy, what we talk about internally, it's like you got Wall Street, and you got Main Street, right? The people who are really driving the economy overall are the people who are more affluent, by the K economy, right? They're spending. They're not really being impacted by what's going on with the economy in terms of the amount of inflation, the elevated inflation, the persistence of inflation, higher interest rates, and the amount of leverage. You think about the Main Street people, you know, moderate to lower-income Americans, they're feeling the pain of inflation. Every day they go to the grocery store for things, insurance is going up, rent's going up. So that's where the challenge is happening.
So it's really a tale of two stories with what's happening in the economy and for the people we serve, who are more middle America. So what we see is a slowing of spend on discretionary items, more going to non-discretionary, and people—you can see more leverage coming in and payment rates slowing, and you see that in the form of, you know, what's happened over the past, you know, 18 months: rising delinquencies, increasing losses. And through our own credit actions, we're starting to see some improvement in early-stage delinquency, but people, once they go delinquent, are still having a very hard time getting out of delinquency.
Mm-hmm. Okay, good. And anything surprise you about that?
No. I mean, I think last year we were probably talking about the same thing, what the effects of persistently high inflation was gonna do to the economy. Everybody was getting so focused on unemployment, unemployment. Well, that's one thing. Unemployment, if unemployment went from 3.5%-5%, okay, it's 1.5% of Americans up and down the credit spectrum, including people in this room, could lose a job, but you probably have means to get through it. Inflation affects everybody, so you've got this whole swath of America feeling it, and it... That's gonna take some time to normalize out, you know, some periods of elevated growth relative to the price of goods going up. So it does surprise me, but this is the outcome.
And when you think about why the Fed is so focused on trying to get inflation under control, it's exactly that. It's a, I'll say, a progressive, regressive tax on most Americans.
Yep. I think you did say that last year, by the way, but-
I may have.
Yeah. No, you did, and I think we were sitting right over there. But it was, there's a lot that's happened in the last 12 months, but I, but I, but I think it's probably a pretty similar message.
It is, and it's still something that concerns me. It's just like how the everyday American household, you know, gets things back on track. I mean, they're curtailing their spending, which is why my commentary with, you know, what we're seeing in the first part of the year already, that, you know, January, February, spending is down in general, and we're seeing it across all categories for the people we serve. And, you know, so that's again, a demonstration that people are trying to moderate and make do with what they have, and that's resulting in lower loan growth than what you would ordinarily have in this environment, on top of us tightening the credit buy box. But with that, you know, lower spend, you think about what it means for the quarter, and we'll get a little into that.
Yeah
... is, you know, it's coming in a little softer on originations, a little softer on loans. That also then means, you know, for things like big ticket purchases are down, and that impacts not only interest income, less so, because that's a lot of times, those are under promotional plans, but more so into non-interest income, and that's comes in lower. So, you know, it affects the P&L up and down, for that. So we'll see. I mean, right now, we, you know, we still feel like we're in a, you know, managing to really good returns, and that's important.
Yeah.
But the consumer certainly, you know, feeling it, and then we're also doing things to help them moderate by, you know, I'll say, not giving as many line increases, some line decreases. That means credit line increases or decreases-
Mm-hmm
... to also manage exposure and their ability to even take on more debt.
Mm-hmm. You think this reverses at all, or you think it's, it starts to improve as the year goes on, or you're... You haven't promised a lot-
Okay
... on growth, and I know that, so I don't think we're plowing new ground here, but you expect things to stabilize and maybe improve?
I do. I think stabilizing is probably the right word. And when things stabilize, it means we'll start to see some improvement in optics because you have the, I'll say, inflation not going up as much. I don't expect to see a lot of unemployment ripping through. I think that everyone's done a good job at continuing to create jobs, so I don't think it's gonna be a jobs issue. But as we're starting to see it with some early-stage delinquency improvements, that gives me the confidence and expectation that, as we had expected, that the losses kind of peak midway through the year. Because the early formation of delinquency now is what's going to result in charge-off six months from now.
Mm-hmm.
You start to get into early Q3, we should start to see some optics improvement.
Okay. Okay. Yeah, we could go there on credit, but I do wanna talk about late fees, and I just don't want to get too sidetracked.
Well, as consumers get less delinquent, we'll have less late fees. Is that what you mean?
Well, it could be. It could be. I like that answer. So-
What else is there to talk about?
Yeah, so the... It's interesting. I don't know if it's a black cloud over me or the conference or whatever it is, but, you know, we had some action at the end of our last conference. We have a little action today in the banks, and then, you know, yesterday, of course, the late fee rule dropped. Much anticipated late fee rule. You know, it dropped the same week as the State of the Union, but we'll just let that pass. But explain the late fee rule, what kind of an impact that you've publicly disclosed, and then we can start to get into how this kind of litigate, mitigate strategy that you and the industry are going after.
I like that, litigate, mitigate. Yeah, interesting, right? It was exactly the week before the State of the Union last year that the rule was proposed, and funny how the final rule comes out the week of the, next State of the Union. Non-political. But with the, the late fee itself, it's, it's largely as expected. And there were a couple things with the late fee rule, where they, they took the late fee from what it was under their own rules, the safe harbor, which is one of the things that I still find, a little hypocritical with this, is they call it a junk fee, or they're wrapping it, wrapping it up with all these other things, when in fact, it's the same- it is the fee that the CFPB regulated since CARD Act, so for the past 14 years.
So when it goes down to the $8, they took away that 25% of min due, which was helpful because I think what that means is that it's an easier change to execute when we have to put it in place. 'Cause had they started to put in the things like a min due calculation, like a the fee can be no greater than 25% of the minimum balance due, or some additional grace periods, those types of things, it would make it a lot harder to execute. So it could've been a 9-month implementation. By just going to a straight rate, it makes it pretty clean, so you have an ease of executing that through.
They did leave in some provisions around, you can still charge a higher late fee, but there has to be math to support it, which means the evidence and the cost. So the devil's in the details of that. I mean, to be candid, the lawyers and then other people are gonna work through those details to see what costs are permissible in that calculation, what's not. I know anything post-charge-off is not per their rule. So we're gonna work through that and see, you know, if that's worth pursuing something higher, but it's too early to tell on that front. Your point on litigation, fully expect the U.S. Chamber and whoever else to file suit, shortly. Don't know what that shortly means. And then see if we can get the stay put in place.
That's the industry expectation. I'm sure you've read the same things I have on that. You know-
How, how do you feel about that? Is that, do you think that's, probability-wise, a high probability?
A high probability of
That a stay is-
Oh, I think so. I mean, from what they say, I mean, it's typical.
Mm-hmm.
How long that lasts, I don't know. I think the expectation people say is that you may have a stay, and if so, it might cross over when the Supreme Court evaluates the CFPB's funding mechanism, if it's even viable. My personal view is it's probably gonna be, you know, ruled that they are viable to be funded the way they are, and then it's a question of, how long does this case take, and what's the outcome? That's anybody's guess, but we're not going to speculate and wait on mitigating items while the litigation's going on.
Right.
You have to run a dual path of whatever needs to be done. If there's support that we can offer, makes sense for litigation, sure, but more so, we're focused now on mitigation.
Mm-hmm.
The rule's out. You know, we took some early action, starting to test some higher APRs in places, 'cause it takes time for higher APRs to burn into the portfolio. But now that it's out, you start moving faster on some of those. And, with the over 100 partners we have, some were early adopters, say, "Yep, as soon as the fee drops, let's go. Let's make changes." Others, now it's real. Now, you know, we'll work with them to figure out how can we continue to make sure that the partnership is, you know, economically viable for both parties?
Mm-hmm. What, what's the timeline on this? Brian has a great slide, you know, and it's got, like, some swoops in it out-
I like that.
... to a couple of years. Yeah. So talk about the timeline and kind of the, you know, the magnitude of the business that you can adjust immediately-
Yeah
... and then over time, how does this, you know, play out?
Yeah, so we thought that slide was a good illustration to, you know, allow investors and others to see. The existing portfolio, because of CARD Act, has an existing loan balance that cannot be repriced, so only new transactions or new purchases going forward could have the higher interest rate if we go higher on APRs. So it takes time, and it could be a few years for that existing balance to get fully run off because of payments. And the way payment hierarchy works within the CARD Act requirements, it goes to the highest APR first before paying down the lower APR. Now, the MIN DO can flip, but that's generally the rule, so it could take years before fully mitigated to on the APR side. On the converse side, for new fees that might get introduced, those can happen much faster.
So there'll be some things that happen sooner, some things that take longer. The partner arrangements where some partners may be accommodating to, you know, give some concessions on some things to make sure we're still able to underwrite as deep, because that's the unintended consequence. And the one thing that, you know, I don't think you're going to hear about in a State of the Union speech when they talk about all the fees that are being saved, but reality is, most of the revenue impact to banks will be recaptured through higher pricing, new fees, and for the amount that can't, those customers will not be underwritten. So there'll be lack of access to credit for, I'll say, millions of Americans as a result of this rule.
Mm-hmm.
That is the, you know, the unfortunate part because that's where, you know, we'll try to keep underwriting as deep as we can, but you gotta get the right return on capital for those cohorts. And where we may have some room is with a partner. If a partner has high margins and they say, "Hey, we'll offer a higher merchant discount fee," if you continue to underwrite there, it may still make that a viable population to underwrite, but that's where the devil's in the details working with each partner.
Mm-hmm. How are those discussions like with the partners? You've had lead time-
Yeah
to talk with them. Now, it's live, it's real. Anything changed?
Nothing's really changed. I mean, like, some-
After day two, I guess.
Well, but some are very motivated, who if there's a strong revenue share, and they realize this is happening to us together, this isn't something Bread Financial is doing to the partner and vice versa. So it's, you know, the CFPB that's doing this. So some are more motivated to quickly jump in if they have more of a revenue-based, a revenue share agreement. Others who are more, you know, getting paid on a, or comped on a, percent of sales, they're probably less motivated. But when they realize that we're going to contract underwriting or have to do some other things because of safety and soundness and whatever else it be, it brings them to the table. And again, it's about a long-term partnership.
How can we invest in the program to continue to grow and help them unlock sales and create loyalty for their, for their, customers?
Yeah. Okay. Like other sessions as well, if anybody has questions, feel free to raise your hand and ask it.
So twenty-five-
Hang on one second here. He wants to... Yeah.
So the 25% guidance that you were talking about last, so could you just delve into this now that the rule's out here? That really scared a little bit of the market. Could you just delve into what do you think the actual mitigation factor when you have these discussions with the partners? How much leeway are they willing to give? Some of them, you know, rely pretty heavily on some of these cards for income. How should we think about that? Is that ultimately mitigating into the teens of a loss of revenues or how do-
Yeah
... how do we think about it?
So one, I'm surprised by your opening comment that it scared the market, 'cause I, I was nervous about putting it out there candidly, because we're like, "Oh, we gotta get some transparency to the marketplace around what could happen." So I was expecting the stock to decline 10, 20, so who knew what? Instead, it went up by 10, 15, but I don't remember what the number was. So it did the exact opposite of what it- we thought it was going to do, because I think it gave a floor to what it could be. The way we talk about it is, that is, I'll say, the downside situation before we get through the progress of talking to the retail partners and if there's some mitigation that occurs through that.
It's for what we knew at the time, and what we believed was executable, and what that impact would then look like if the rule went into effect as of October first. Because we had a comparable quarter to compare to, which is why it was a good quarter to use that. Every quarter thereafter, that percent of impact to revenue goes down. Your question around, you know, if you took it two years out, how mitigated is it? I don't know yet, but it may never get 100% mitigated because we won't be underwriting as deep, so you may have some revenue loss from not underwriting as much, but that also means you have some expense benefit, you have some CECL reserve benefit, and then you may redeploy that capital into other adjacent type of products.
I may grow more in a co-brand or more proprietary card or personal loans or something, you that will put that capital use in other places. So you'll look different. So it's hard to speculate how far you can go until you get there, but that's where our commentary has been. You know, our commitment is to getting back to strong returns. You know, and I think those returns will look a little different because of the changing product mix and risk mix of the resulting business three years out.
Just following up on that, do you think for the industry, it's like the industry goes back to sea level, or do you think that there'll be adjustments in terms of getting the full mitigation for it?
You know, if you are a prime and super prime-only issuer-
Mm-hmm
... to offset the impact of the late fee, it doesn't require a lot of pricing change to recapture. And, you know, 80% of the people are gonna pay for the 20% that didn't pay on time. So 80% of the pay on time, we're gonna pay more for credit.
Mm-hmm.
Everybody's gonna end up bearing that, and maybe that's some of the goal of, you know-
Yeah
... the regulation does. But I think when you start to look at issuers who do underwrite in that near prime, subprime, in lower lines. So you think about a late fee on a low balance has a much greater yield impact than a late fee on a $10,000 average balance or a $1,000 average balance. So, it's gonna vary, and so where everybody's thresholds are will move around a little bit, but a number of companies don't really underwrite as deep as we do. I mean-
Yeah
... we're a full-spectrum lender, and so, but others are gonna end up with the Basel III, you know, changes. So the B3 changes are gonna impact them, and that means they're gonna hold more capital, so they may- their hurdle, their, their, you said C level-
Mm-hmm
... is gonna rise on them of where they're willing to go.
Yeah.
It's gonna be interesting, 'cause what gets cut out of somebody else could become attractive to us.
Yes.
So we'll-
Yeah, it'll be interesting.
It'll be-
I mean, it kind of comes down to what kind of returns a company is willing to accept, right?
Right.
For these programs.
It may be there's less competition for some of the brand partners who used to be... there was more competition for, so there could be opportunity.
Okay. Okay. Can you talk a little bit about the progress you've made in optimizing the balance sheet? I mean, you've done a lot of work on that, and maybe that sets you up for some alteration in your business model, but talk, talk a little bit about that.
Yeah, it's something we're incredibly proud of. I mean, from the time I started, and Ralph Andretta, our CEO, started, you know, the TCE to TA ratio was anemic. I think it was sub 3%, and now, you know, we're approaching 10% TCT, and we're getting close to, you know, peer levels of capital ratios. So that's, you know, 3x-ing that over just a three year window has been tremendous. At the same time, paying down over $1.8 billion of parent debt, so 55% of the debt from when I had started, you know, while building reserves, you know, to be in a good position.
So our balance sheet is as strong as it's ever been in this company's history, and for us, entering into or being in the midst of a challenging macro environment, and with the CFPB thing happening, we're in the best position possible to be dealing with that now, and expect, you know, in 2024 to still have another, you know, solid year. Take the Q4 out of the equation, if that's when something, you know, plays into effect with the CFPB change. But, you know, we are generating strong earnings, even in a challenging macro environment, which is one of the things that we were talking about last year.
When you look at the financial resiliency of this business, with the strong risk-adjusted margins, the way we focus on return on capital, that we are positioned to weather through this macro environment, I think this was gonna be a perfect demonstration that we know what we're doing, and we're able to navigate. Again, you got the late fee thing to contend with, but-
Yeah
... outside of that, the transformation has been strong on that front. Continue to invest in digital capabilities and the technology. We've not let up on that. We recognize how important that is, particularly as we focus on what we call operational excellence, which is just continuing to find, you know, ways of work that drive more value for the firm, and that can be anything from looking at opportunities to deploy generative AI in terms of agent-assisted call representatives who serve in the call centers. That will deploy at some point over the next couple years. You look at chat or deploying mobile apps, there's so many opportunities we have to improve our efficiency and effectiveness. So I don't want to just say it's an efficiency play, 'cause I've seen that not play well in place, right?
It's got to be about effective. How do customers want to be served? What can we do best to serve our brand partners? We're committed to, you know, spending capital on that front to make sure that we are meeting our clients' needs and our customers' needs, how they want to be served.
Mm-hmm. Okay. Maybe a Herculean, if I pronounced it properly, efforts in your back office in terms of getting yourself on a new platform and moving forward. What kind of expense pressures do you have? What kind of expense growth rate do you think is appropriate for the company over time, and where do you need to make these investments?
You know, I'd say we'll give probably more long-term targets at our investor event later in the year. But we are striving for positive operating leverage. And, you know, we can lever up and down some of the investments in the business, but that's probably more the growth levers. You know, the beauty of operational excellence and that focus is we continue to find ways to be more efficient at doing the work and deploying the emerging technologies to outsource the finance workers, right? You know, just making sure we get the right tools in place to work smarter, faster, be able to deliver more value to the business. Yeah, I think the opportunity is definitely ahead of us to keep bending that curve down without having to do anything radical-
Mm-hmm
... which is, which is the goal, is just to... And that's just being always on type of a approach to, to how you work. And I know that's just what good companies do, and that's now a focus. Like you said, we went through a herculean effort to convert off of an in-house processing for all of our processor activities for card and moved it to Fiserv, and we also moved to the cloud. So we did a big lift in the tech modernization in the past 18 months, and now it's, you know, you're starting to reap the rewards of that environment.
We had a new Chief Technology Officer, who has been fantastic, has a great strategic vision of where we want to take the company, and that as well, is gonna pay tremendous dividends in terms of how we deploy technology faster, more efficiently, with greater value, and then also where we deploy, right? Trying to leverage-
Mm
... you know, our site in Bangalore, we have a captive, and so it's, we have a lot of opportunity ahead of us.
Yeah. You're in a better spot. Good. On credit, you talked about maybe peaking second, you know, peaking later in the year in terms of delinquencies and charge-offs. Talk a little bit about your level of confidence in that, you know, and some of the factors that you think through when you give that guidance.
Yeah. So when we gave guidance, again, it's, I will caveat it, it's macro-dependent. Everybody's outlook has an improving second half of the year.
Mm-hmm.
And let's go with that assumption being true. We have good line of sight into certainly the Q1, Q2, where we're gonna have the elevated loss rates in that mid-to-high 8% range. Certainly, in February, March, that'll persist into the Q2. But with what we're seeing in early-stage delinquency right now, that gives us confidence that the credit actions are taking hold, and that should result in that inflection point, even without an improving economy. If the economy stays kind of neutral, we should start to see a little bit of a improvement, sorry, in the Q3. But then, if you have an improving economy, that then gives you a little more tailwind as well to some improving optics.
Okay. You touch on this is more of a generalist question that I'd picked up, but the comment that your charge-offs have gone up even though you've talked about potentially peaking, but the unemployment rate has remained relatively modest, and people are fully employed. You know, why is that, and again, how do you get back to being comfortable in terms of this stuff finally peaking?
It goes to the conversation you and I were having just a little bit earlier. The causality of the elevated losses that we're experiencing right now in elevated delinquency, right? Consumers are more highly leveraged today than they were two years ago. They came off that big windfall from government stimulus. They've drawn down their savings. Inflation has been persistently high, causing them to, you know, use all their excess savings, and now re-lever back up on their credit cards and other things, and they're just having a harder time, you know, making payments. This is not an unemployment-driven stress that's happening to middle America. This is really about inflation. It's about now higher interest rates. You know, think about what it costs to get a home loan, you know, versus just three years ago.
You know, you're catching loans at 7-8% versus 3%-4%. That's a huge difference in somebody's mortgage payment, so it-but this is what's driving this. It's, it's the- And this has been where we've been underwriting even tighter, and yet you're still seeing the pressure in there. So it's, it's, it, it is a very different macro environment. I think every cycle has different elements to it, right? The Great Financial Crisis of 2010, that was really about a housing issue that went upside down, and you saw a lot of strategic defaults, where people were defaulting on their mortgages, and they took out their credit card loans and defaulted on those, too. But then you also had the spike in unemployment.
Yeah.
So those were those two things combined. What we're seeing now is not that type of cliff shocks, if you will. This is more that slow, steady burn of rising inflation that's creating the pressure on the, you know, middle America.
Mm-hmm. Okay. Couple minutes left. I want to ask two more questions here. One, we hear this, Perry, is financially conservative, pretty consistently, but the reserve level, what does it take to eventually start to bring the reserve levels down?
I don't know who tags me as conservative. Is he in the front row? Yeah, I like to say responsible, but he's certainly more conservative-leaning as it relates to, you know, the way we think about reserving. The one thing you want to do is, for me, you want to get ahead of something before it happens, and then by the same token, when we would reduce that reserve, I want to have all the indications that the tougher time or the healing is... Well, one, the tough time's behind you, and the healing's in front of you, and it, it's a combination of two things. One, what goes into a reserve, it's what your portfolio credit quality is, right?
It gets plugged into the model, point in time, the accounts, their credit scores, their recent behaviors, and you're trying to figure out what's the expected losses, the life of loan losses on that pool of loans. Then you put in the—So if delinquencies come down, that should produce a lower reserve rate. Then you look at the macroeconomic situation. Do you believe the macro assumptions that are feeding into the model? And some of the times, you know, we, when we use, like, Moody's outlooks and so forth, I don't believe them all the time, because they're sometimes too rosy-
Yeah
... and they don't capture the effects that we intuitively know from being in this business, what this high inflation period was gonna do. And so while unemployment was low, I leaned into some of those scenarios as a compensating adjustment to make sure that we were capturing what could happen, and we did that over a year ago, and it looks like it played out as expected. What I would say is, as we come out of this, we'll probably be a little lagged in bringing it down just to be sure we don't get a head fake that the economy's improving, when in reality, it whips the other way on us. So we just want to be very thoughtful about when to take it down.
Okay. Okay, last one. I don't know if Brian will let you do it, but any sneak peek at what you want to talk about on the Investor Day, or what's important for you guys to cover as a, you know, at that event?
I think really it's gonna be about three to five year targets, you know, for what we can do for returns and continue to establish what our priorities are. We've accomplished an awful lot over the past three years, and we have you know, with regulatory changes in front of us, just to give, you know, the investors the confidence that we know what we're doing and where we're gonna get to.
Okay. Good. We're out of time. I want to thank everybody for being here today. Thank you, Perry and Brian. Appreciate it.
Thank you.
Thanks, John.