Hey, good morning, everybody. My name is Jeff Adelson, Consumer Finance Analyst here at Morgan Stanley. Appreciate you all being with us today. Before we get started, just gonna read some quick disclosures. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. So, very happy to welcome back Perry to our conference. Perry, thanks for coming in today. CFO of Bread Financial.
Glad to be here. Thank you.
So, Perry, you come with some good news today. Thank you for saving it for our conference. Why don't we get right into it? Two big updates this morning. Maybe, maybe we'll start with the Saks portfolio you announced this morning. What, you know, what can you tell us about that? What brought you to them? Why they picked you? And, you know, talk about some of the characteristics of that relationship and portfolio.
Yeah, we're very excited to welcome Saks to the Bread Financial family that they chose us to partner with. I think one of the things that resonated with them during the process was our focus on partnerships. You know, we don't have a big branded portfolio. We're not about promoting the Bread Financial brand the same way some of these competitors are promoting their own brands. And I think that really attracted, you know, Saks to us. You'd have to ask them exactly. But I think it was the personalization, the attention that they could see they were gonna get, the way we'd use analytics to help grow their portfolio, and the track record when they spoke to some of our existing partners where some partners who have switched from other issuers to us saw a lot of success in their first year with us in terms of the number of new accounts that came on and what they were able to see in terms of stimulation with their portfolio. So not to say they were unhappy with where they were, but clearly they made the choice to come to us, and we're thrilled to have them.
And is that in the, you know, mid-range or sweet spot you talk about? I think you talk about like $100 million-$500 million sweet spot.
Yeah, it's, it's definitely in the sweet spot. I would say it's in that $300 million-$400 million range. We'll know as the, portfolio settles out, when it converts later this year exactly what the, the amount will be.
That's probably more in the, you know, co-branded, higher credit quality, higher spend type portfolio.
Exactly. I mean, Saks is a luxury brand, retailer, and you would expect the consumers have a better than average credit quality and, with some higher spend in there. But it'll be a combination of co-brand for the higher-end consumers and for those that are newer to credit or a little bit riskier credit would be offered the private label.
So, so what else should we expect here? What else is in the pipeline? I mean, are you now focused on trying to go after more of these higher quality opportunities or what else?
You know, each deal that comes through is unique in and of itself. So we're focused on making sure we get the right returns for our shareholders. You could think about it as a differentiating capital that gets assigned based on risk, operational risk, credit risk, and the like. And, so if there's a path to finding something that's good for our shareholders, we'll pursue it. The pipeline is robust right now. It's good as what it has been. There hasn't been a big pullback in the opportunities. It's just being selective and leaning in on the ones where you say, you know, it's a good fit for us based on our diversification aspirations, but also one where we're always ensuring that we're taking care of the returns that we require.
Okay, great. That all sounds great. And, you know, the other big thing you put out this morning was the credit update for May. Looks like the delinquency formation trends look pretty positive this month. You also saw a pretty nice step down in the charge-off formation rate and maybe came in a little bit better versus the 9% you were talking about peaking out here. That peak playing out and talk about maybe what you're seeing there.
Yeah, so when we published the loss rate this morning, it was a little lower than what we had previously guided, but not a lot lower. But it was definitely, it's a tad lower. So where we had said it was going to peak, I think now we could say the Q2 is the expected peak for the year. And, you know, if you do, anyone could do the math, if May's now the peak at 8.8%, that means the quarter will come in slightly under 8.8%. And then that should bode well for the rest of the year. As you mentioned, the delinquency formation came in positively. Now, I do expect some seasonal movement, and really the back end of the year is gonna be macro-dependent. So the degree to which it improves from here is really gonna be dependent.
Does inflation come down? We got some decent numbers this morning. Well, it's still what it came in, like 3.3% CPI, below 3.4% last month. It's still high if you think about it as a compounding impact. But we're optimistic. But I do think you're gonna be in this period of time where you have higher rates for longer. Inflation's seeming a little stickier. And so long as, you know, unemployment stays benign, I think the second half of the year will continue to show some signs of improvement. It's just, I don't, I'm not expecting dramatic step-downs on the back part of the year.
Okay. And, you know, we heard from another issuer yesterday, card issuer, that, you know, there's maybe a little bit of an uptick in minimum payers out there. There's maybe some noise in seasonality now with the tax refunds being slower than versus pre-pandemic. I think you've sort of highlighted some of this before, so maybe you could just touch upon your, what you're seeing there and whether that's something that's changed or accelerated or if it's just still kind of, you know, in line with your expectations at this point.
Yeah, when you, when you made the comment there, it kinda caught me by surprise because there's really not a lot of new news there. We've been seeing that for the past year and calling that out, that we were seeing more min-pay folks, you know, when they're making payments where we're here, when we're working with them in our collections team to figure out how can we assist them in getting payments in. The period of time that we've been going through with this persistently high inflation for what feels like the past couple of years has really impacted middle Americans and lower-income Americans. So maybe it's starting to creep up deeper in some other peers' portfolios. But I'd say, you know, the observation we've been calling for the past year, you see more people, once they get delinquent, you know, roll through charge-off. So you're seeing those called roll rates at peak levels. That really hasn't moderated yet, so that could be a tailwind if that starts to improve. But we're not seeing big shifts in min-pay compared to what we've been seeing.
And as you think about that trajectory, obviously this is all very macro-dependent.
Yep.
Is there anything that you're seeing maybe in like the new vintages you're doing today versus 2023, 2022, 2021, etc., that gives you a sense of how the outlook is gonna shake out in late 2024 or into 2025, like improvement or stability or maybe something better or?
So unlike some others in the industry that put on really sizable, larger vintages coming out of COVID, we had a playbook in place that had tightened things up and have remained tight and then tighter as we worked through last year. So our vintages have been better risk mix, better credit quality, and smaller in size as we've been stepping through this period of time. So we didn't get caught up in the, I'll call it, risk score migration upward coming out of COVID. And now as they're migrating back down, we've been in a position where we've continued to tighten. And we're gonna remain cautious on the credit actions until we find a period of time where there's, it's really a little brighter outlook, and then we'll ease into those changes. That will be a tailwind for growth. But, no, I don't really have anything specific to call out related to any specific vintage. They've all felt stress, I'll say, similarly, but the newer vintages are certainly a little better credit quality than the ones that, you know, from just a couple of years ago.
And then if we just take it to the consumer health, and some of the spending trends you see there, you know, you've talked about this pullback in discretionary and big-ticket spend for a bit here, and you've talked about the K-economy for probably at least a year now, right?
Yep.
You know, we starting to see some of that show up at the retailers in recent quarters. I guess what's your response to that? It doesn't seem like you're seeing any further deterioration at this point than what you've talked about, but maybe just highlight the trends you're seeing, maybe any sort of particular verticals of strength or weakness too.
Yeah, I'd say that the consumer is doing the best they can in this environment. They're remaining resilient. They have, as you mentioned, pulled back on big ticket, and we're starting to see a little bit of, I'll say, moderation there. We're now maybe seeing a little bit of month-on-month improvement in some categories. Not that it's gonna provide for a year-over-year positive comp, but it's something where, yeah, I think we've seen stabilization through self-moderation by the consumer and through our credit actions. And, and hopefully that remains stable, and then we start to see some improvement as we march on to the exit of the year.
And where are you seeing that slight uptick? Maybe you were just talking about there some?
It's in, I'd say, in probably more beauty, even some of the apparel. I mean, it's 'cause some of these have really pulled back. But still, it's the non-discretionary spend where consumers are continuing to spend. And what you're seeing is consumers are making more frequent trips. So you're seeing lower transaction size, but more transactions, I mean, more trips to the stores.
Got it.
You know, to make their money go further. Candidly, that's what people do when they're going paycheck to paycheck.
And so it sounds like you know you're basically painting a picture of the consumer getting through, managing. What would get you more concerned about the pullback here? I mean, what are some of the first signs you'd look for?
Well, I think if inflation really went much higher, back up towards 5%, that would concern me. If for some reason the Fed starts to crank interest rates up and that drove greater unemployment, those things would concern me. But as I see things today, I think our proactive credit management, the diversification that we've put in place with our product set, the risk mix we have, you know, and everything I'm seeing with the economy, I think we're gonna be in a slow, gradual improvement phase as we go through the year and that we should be able to navigate it pretty successfully.
Maybe while we're on the topic of credit sales, is there any sort of quarter-to-date trend you wanna put out, you know, point out to? I think there's some noise in there with BJ's from a year ago coming out, but yeah, anything?
The BJ's exit was February of 2023. The year-over-year comp, that should already be out of the noise. That we should now be in a clean year-over-year comparison as we look to.
Okay.
And so, no, there's really not a lot to talk about with the credit sales. It's just more macro of what we're seeing and, and,
Okay.
With the joy of the consumer.
Is there anything else you'd wanna talk about for the quarter? We discussed charge-offs. I think you talked about more like an 8.8. You know, you talked about some weakness in them on the reversal dynamic, maybe slightly less so because of the charge-off picture, but not too much. And then anything on expenses, maybe?
Yeah, so net interest margin will be lower than the Q1. You got a little seasonal movement, but also we're still a higher peak loss rate in the Q2. So that will drag net interest margin down further as a result. While, yes, a little less than what it would have been, should have been a 9% loss rate, but it will still be more than what it would have been, the effect on the Q1. Expenses, we're continuing to remain very disciplined on expenses. You know, you're in a period where we're not growing a lot, so you wanna pull back and make sure, you know, we talked about the second half of the year that we're well-positioned for the second half of the year.
But I would tell you that when we look at the trends, right, the first part of last year, the whole industry got impacted by some elevated fraud. That got under control in the back part of the year and has continued to maintain good control across us and I believe the industry at this point. We benefited from the completing the amortization of some software and system stuff at the first half of last year. That benefited us on the second half and obviously continues to benefit us now. And then with the volumes, the way they are, we're maintaining strict discipline. We've focused on operational excellence, what we call it, which is finding ways to automate, simplify, find efficiencies, invest in the business. And so even through this, we're not letting up on our investment in technology and digital investments that are required to serve our customers and drive further efficiency automation. And that will continue. So we're, you know, right now I think things look good and we'll continue to look opportunistically for appropriate investments. But right now, things are pretty stable on expenses.
And is that dynamic you highlighted of the lower ticket, big ticket spend impacting some of the interchange or the other revenue, is that still kinda flowing through?
It does, right? So when you have less big ticket, you have less merchant discount fees.
Yep.
A little bit less fee income.
Yep. Maybe we'll switch to late fees. I guess last quarter, you know, you, you lowered your estimate of that impact in the October 1st implementation scenario, 20% versus the prior 25%. Can you just remind us why you decided to lower that? Was that a result of better-than-expected progress with your conversations with retailers? And how has that trend sort of continued into this quarter as you start to work through those change in terms and ex and so forth?
Yeah, great question. I mean, really the, there are two factors that had us revise the 25% down to 20%. The first is the final rule came out.
Yep.
The original rule had some caps in there around what fees could be relative to min due. Then they came out with the hard $8. There were other things that were not included. So it was part, the fact that the final rule came out in its, I'll say, simplified fashion at $8, and then rules around how to calculate cost to collect, and then the continued progress we had made with partners and things that we had confidence we would have in market by that point in time. Now we do continue to have progress with partners, but I would not say that there's a revision to the guide that we have previously put out there.
You know, for the larger offsets you're maybe holding off on at this point or, or maybe haven't fully rolled through, how meaningful do you think those could be versus what you've done already? And, and is there a path to Bread eventually offsetting this and becoming ROA, ROE neutral in all these changes? And, and what's the timeline like to get there?
Consistent with what we've said, I mean, the biggest impact is going to be APRs. Right, getting pricing up. And due to CARD Act, that takes time. So it's really the degree to which your existing portfolio churns and the payment rate moves and cycles that through. And for us, we have a lower payment rate because of the consumers that we serve. And it's gonna take some time for the existing portfolio to reprice to the higher APRs. We started putting higher APRs in the market in that back half of 2023, took a step up. Then when the final rule came out, you're seeing us take another step up. But that's gonna take some time, and that's the, we've talked about it could take a few years for that to fully, I'll say, burn into the portfolio. Other things are shorter term, like you saw us go out with the $2.99 statement fee. Again, that will be for many partners that will continue to roll out throughout this year. That I almost think is temporary because if I'm signing up for a credit card and there's a fee for that, I'm gonna go paperless and digital, which has been one of our objectives anyways.
To get more of our consumers to adopt digital interaction with the consumer with us as a company because that lowers our cost to serve. They can self-serve themselves. It gives an opportunity for cross-sell. So we see great opportunity there, and this is an accelerant to that. But it's more of a near-time benefit. And with some of these actions that we're taking near term, we're sharing some of that back with partners who agree to, you know, I'll say, allow us to work with them to put these things in place sooner. Others wanna wait until the late fee change actually goes into effect. I mean, well, there's an agreement in place. They just wanna time it a little differently. So again, when you're serving over 100 partners, they all have different timing of the strategies. But to your last point, you know, we've said it before, we fully expect to get back to strong returns. Those strong returns will be a combination of continued focus on, you know, the new business we put on, you know, getting the pricing in place for the existing business been impacted, as well as that focus on operational excellence that will continue to drive benefits to this firm going forward. And there's lots of opportunity across all of those, but we'll definitely get back to strong returns. And we'll talk more about that next week at our Investor Day.
Well, we'll look forward to that.
That you unfortunately won't be able to join us, that apparently someone's getting married or.
I'll be there in spirit.
Okay.
You, next time you'll have to check with my admin on the calendar.
Yeah, I know. Hey, Brian, what?
Hope you're doing very well.
Yeah.
Oh.
It's all good? So I guess one other thing that's going on is, you know, there, there's questions about how the consumer behavior is gonna be in response. That's the biggest wildcard, obviously, right? possible to perfectly predict. But how has that reaction function been so far from the consumer? And you've talked a little bit about how you've lifted the soft APR caps. You've obviously had the Fed hiking rates. So the consumer has already absorbed a lot of that. But, you know, how have they reacted to the statement fees? Is there an increase in complaints or, you know, etc.?
Well, no consumer likes fees, right? When they have late fees.
Of course.
They pay late. They call, complain about it. If there's any type overdraft, you know, they didn't have money in their account, they wrote a check, they bounced the check, they get a returned check fee, they complain about it. So, you know, that's gonna happen. Now, the good news is when it comes to the statement fee, there is a path to free. And obviously, we'll put waivers in place in the beginning to make sure that as, as consumers adapt. And my expectation is, you know, the vast majority of consumers will go paperless. So that's a benefit to our expense plan long term. We had a lot of that built into our long-range plan previously. This helps to accelerate it. So, you know, again, we plan for increased calls, again, easy path to avoiding that fee. As it relates to the higher APRs, again, consumers always complain about APRs and the interest they pay. But this is an unsecured credit. We do underwrite deeper. There seems to be some inelasticity there in that, you know, when you look at what a low balance account is and what that amounts to, if you had a $500 average balance, 300 basis points, what is that, $15 over the course of a year?
Yep.
Divide that by 12, right? It's just not a lot of dollars when it really comes down to it. So I think there's a little bit of that inelasticity around the consumer that we're not seeing, you know, a pullback right now. And it's hard to isolate it because you've got so much going on with the macro environment and what's happening with overall leverage, their ability to pay, that these pricing changes aren't material in the grand scheme of what else they're, you know, they're dealing with.
And speaking of underwriting deeper, you know, you characterized, I think recently, the underwriting change dynamic as our response to the late fee rule as a last resort. But how drastically would you need to cut back on your, or enhance your standards rather and shrink your credit box in response to all of the late fee caps there?
You know, it will be partner-dependent, right? So there's a lot of things, like we talked about, all the pricing changes, fees, trying to make sure we return every cohort, risk cohort, back to profitability. And at the end of the day, the partnership we have with the, the brands is to unlock sales for them. So it is, as we said, the, the last resort, the last thing you really wanna do. And it may be in some cases that the partner will forego bounties or, or their partner compensation on these risk cohorts because they wanna continue to, for us to underwrite to unlock the sales for them so they can make their margin on the sales. Where that's not possible, we will need to, you know, change the underwriting practice for that population. Where we see it, it's going to be more in probably soft goods where it's harder to find the solve with that higher, highest risk customer, the lowest balance. And that's where, where there may be some more pullback. But when you look at the grand scheme of what it means to total originations, total loan impact, it's not going to be, entirely, you know, that material. And then it allows us to lean in on other partnerships and elsewhere into our pipeline of opportunities to redirect capital.
I guess what I'm hearing is for those more affected retailers where, you know, there's more at-risk shoppers, they may be a little bit more dependent on that shopper coming in the door to the store and giving them credit access. If they wanna maintain that, they're gonna have to maybe share in a little bit of the economics with.
Yes.
On that.
That's right. And that progress is undergoing. I mean.
Okay.
Look, this is something where this regulatory change is happening to us, to them. It's not something we're doing to them, right? It's happening to both of us in this partnership. So we're working together so we come up with a successful outcome for both parties.
One response we've heard of from some retailers is they'll, you know, launch a co-brand card, try to, you know, dilute the offset of the impact of late fee by going more up, you know, upstreaming the quality of that consumer and that borrower. But, you know, there's only so many co-brand cards that can go around. Again, not everyone can have a top-of-wallet credit card. So I guess what's your response to that when you hear that from some retailers?
No, I think that's, you know, for the retail, I think that's a fair thought because if they can, to your point, it doesn't have to be top-of-wallet. But if they can capture more everyday spend than just being in store, it means the balance is bigger. There's some points that the customer earns for that particular retailer. And then the better credit quality within the credit spectrum of who you're offering, you can go a little down, a little further down and offer some co-brand in there. And so it's a good approach. I mean, you're still gonna risk-based price, right? But it means that the program can be more top-of-wallet or closer to top-of-wallet and you get more everyday spend. And that, that's good for the retailer and for us clearly as that, it helps, you know, diversify the spend a little bit more.
If we think about more of the bull case here, you know, let's just pretend rule gets blocked, never goes through. How should investors be thinking about the potential upside from maybe some of the offsets you've already put through as we look to 2025 and 2026? Are you gonna maybe leave some of them in or reevaluate, talk to your retailers?
So we have a phased approach to these offsets going in place. The mitigation strategies, they're in flight. As I mentioned earlier, some retailers are holding back a little bit. You know, what I have observed in this industry for the past 30-something years is the competitive forces work really well. And if there's stickiness in the APRs, they'll hang around. The partner will wanna get revenue share around that. If they view that as, geez, others are lowering their price at the APRs, you know, the competitive forces will have those APRs coming down. The statement fee is one which, you know, we've introduced that will drive paperless. Again, I think that's transitory in nature. You know, if we start introducing things like promotional fees on big ticket and you don't need it to achieve the return hurdles and the merchant really prefers not to have that, that would unwind. So I think it's gonna be a mixed bag of what happens. But at the end of the day, you tend to find in a competitive marketplace that the returns get to a certain point for the banks. We're all rational in that. And then the retailer obviously wants as much of the share they can get from the program as well.
You know, when you were talking to Saks and, you know, they probably have a little bit less of an impact on late fee given the quality of their shopper. But how did late fee come up in that conversation? Like where, you know, what was the pain point there? What was the agreement there?
It's an interesting question because the late fee rule in proposal came about while we were evaluating that partnership. Now, this partnership has been inked for a while, but so there's a period of time before we can make the announcement. And it was, I wanna say partway through that where we had to make sure we were really focused on the profitability constructs that we had protections in there. If this late fee rule went into effect, we had the ability to take certain pricing actions and with the profit share construct that we were gonna make sure we got the right returns. And that's true of what you're seeing in all the RFPs in motion right now. And that's where, you know, different partners are coming to market. There's definitely a lot of focus and consideration to ensure that the protections are in place for both parties.
Was there anything to that discussion that maybe you were, you know, you're noticing your peers doing differently on late fee with those to the extent you can talk about it?
I don't think so. I think everybody's kind of, there's only so many levers to pull on.
Okay.
It, it's.
Right. Okay. And, you know, thinking of these retail partner contracts, if we look at your existing partners, I think you have your top five locked up through 2028, and then you've got another 85% through 2025, if I have it right. Something around that?
Sounds about right, yeah.
Brian says yes.
I'm looking at Brian for the.
Anything we should be aware of in the 15% that's not locked up or anything that's in that 85% that's sitting in the 26-27 bucket or?
No, there's nothing major there, right? This is just normal, you know, the normal contract cycles, renewals. I mean, look, when you have over 100 partners, you're always looking to renew the best partners. And some you look at and say, you know what, it's not working out and you trim and you prune. And that's being responsible. And so I think every year is a couple year, you prune and it's, and that's good, and that's good for the company and good for the shareholder.
When the partner chooses you or chooses to stay with you versus the partners that leave, where are you finding the key point of differentiation? Is it, is it economics? Is it?
Well, they all want economics.
Right.
Right? But it's about who can grow their portfolio and the things we can do in using our data analytics, marketing capabilities to give insights back to them and vice versa to help grow the pie. And you've heard our CEO talk about that. It's about growing the pie for both parties. And that's where our team is really good at.
Okay. And, you know, if we think about deposits, you've, you've got that goal out there of getting half your funding to the consumer direct deposit base. And I think you're still pretty close to the top of the league tables on deposit rate right now. How do you think about the trajectory of your, your funding costs at this point given that you still wanna grow that book, but the Fed's about to cut and some other, you know, your peers have started to cut their rates too? Should 2Q maybe be the peak? More to go there in terms of your average funding costs?
You know, so it goes back to the, the mix of what we have, right? So we're taking direct to consumer deposits that we view as very attractive with the, you know, the, the lower average balance compared to a wholesale or brokered CD. And, you know, so it's really substituting for that as a funding instrument. And, you know, so it's an attractive cost of funds. We'll continue to grow it, as you mentioned, getting up to 50% is our target. We're over $7 billion today and made tremendous progress on growing it. You know, I expect the, the cost of funds to be, you know, I'm of the camp the Fed's gonna hold, you know, I'll say higher for longer. That's been our position for a, a long time is we didn't believe inflation was gonna come down that fast. And it hasn't come down that fast. So the higher for longer means, you know, the cost of funds is gonna stay up there a little bit. You know, we're monitoring every week the deposit pricing team meets and figures what we're gonna do with the pricing and make sure we have just steady little inflows coming through, continue to grow our base, not trying to go for outsized funds coming in. So with the higher for longer, that's good. Now, when rates start coming down, we'll get a little bit of NIM compression 'cause the assets will come down, assets will come down a little faster.
I think the market might be disagreeing a little bit with you today post the CPI print. So we'll have to see if that prediction comes true, but.
Yeah, we'll see.
Yeah. Yeah. You touched on expenses a little bit already. But, you know, relative to your guidance or specific to your guidance rather, you know, you're talking about that declining, low to mid-single digits this year. You already touched on some of the big drivers, but just maybe talk about that. What's driving it, what the outlook is? How much of that is coming from just slower volumes and changes in underwriting versus actual productivity and efficiency, and enhancements?
Yeah. It's a, it's a combination. Like I mentioned earlier, we had a couple of nice little tailwinds in lower amortization costs this year.
Yep.
Versus last year. Fraud coming in better. And the team's done an amazing job continuing to tighten up fraud controls. And, you know, with, with that, you continue to evolve and advance your fraud analytics and capabilities because one way to, you know, reduce fraud is you really constrict originations on the front end. And so you try to really get sophisticated and make sure you're not affecting top-line growth. But the fraud activity has been a positive, but something you never take your eye off of. You, you mentioned that, yeah, lower volumes coming through have naturally lowered some of the cost base, right, because of all your variable costs.
As I mentioned earlier, staying focused on operational excellence where we can continue to drive efficiencies that allow us to pour back in money to fund the investments that we're making that fuel more growth, more capabilities, and further efficiencies in the future.
Maybe any update next week on your views of efficiency over time or over the next year?
It gets better.
Sorry? Gets better?
It gets better.
Okay. How much better?
I don't know. Every year I say we're gonna try to deliver positive operating leverage.
Okay. All right. So while we're on that topic, you've got the Investor Day next week.
We do.
I won't be there, but you will, you will. Maybe a quick.
I can tell you right now what I was gonna say since you're gonna miss it.
Yeah. You just gotta give me exactly everything right now. Brian said he's working on it, so. Oh, so, so what should we expect or what?
Oh, oh.
What you're gonna talk about?
What you're gonna hear. You'll hear from each of our executive leadership team what's happening in the business. You know, I think we'll highlight a lot of the tremendous progress that we've made over the past 3-4 years. You can see it in our results. We talk about it every quarter. You know, really proud of the team and how we focus on being disciplined, taking care of the balance sheet the way we have. Then we'll, you know, then I'll share what to expect in terms of financial targets over the medium and long term.
Okay. Maybe something on capital return. I mean, I know.
Yes.
There's, you know, some CET1 seems to have improved a lot, but there's Tier 1, Tier 2 opportunities there as well. Okay. And then anything else in the quarter that we missed so far that?
I don't think so. I think you didn't ask me about our reserve rate in case.
Oh, yeah. Let's talk about that. So what's it gonna do?
Don't know.
Okay.
You know, the reality is what we do is that, you know, last month every quarter, you run your reserve models based on what, you know, the portfolio looks like at that time. You know, I think we hopefully are, you know, gonna be flat to steady. You know, I don't anticipate a tick up based on what we're seeing with delinquency and expecting that we've peaked. You know, encouraged by the trends that we're seeing and the fact that it seems like the economic scenarios that we would be using should remain pretty stable.
And, and.
What I would expect is this, you know, delinquency remains stable and losses start to come down throughout the year. That should allow for the reserve rate to drift down over time.
Day 1, that's more of a longer term?
There's so much that goes into that, right? The team that built Day 1 is different than the team here today. Say that out loud. Different models are going to be used. You know, different portfolio mix. You could be lower, you could be back at it, you could be slightly higher. Just really depends on methodology, composition of the portfolio, and the economic outlooks. You know, do you put any weighting into something that's more of a down scenario than up scenarios?
Okay. I think that's all the time we have for today. Thank you, Perry, for joining us. Sounds like you have some really nice things going for the business right now. So we're looking forward to catching up and good luck with the Investor day next week.
Well, thank you. We'll have as much fun as you'll have next week, but it'll be fun.
Yes. I hope so.
Thank you.