Thank you, everyone, for joining. I'm Nick Holowko, the Consumer Finance and Midcap Bank analyst here at UBS, and I'm pleased to welcome Perry Beberman, Chief Financial Officer of Bread Financial, which is one of the largest credit card issuers, primarily focused on private label, co-brand, and general-purpose credit cards. Perry, it's great to have you here, so thank you for joining us.
Thank you for having me.
Maybe to get us started this afternoon, let me start by asking about the state of the consumer through the lens of Bread. We've heard a lot this week about the K-shaped economy and how consumers have been managing through this inflationary environment over the past few years. So what have you observed over the past year or so in the health of consumers in your portfolio, and what are you starting to see, if any, changes at the margin?
Yeah, I think when we look at the consumer who we serve, we really serve Middle America. And we've been talking about the K economy now for a few years, and it's really, I think, no more prevalent than now. And when you think about who we serve, we really don't serve the top end of the K, which is high net worth, high spenders. And then we also don't serve the bottom end of the K, that long part of the tail, which are really the lower income, people on government subsidies, more debit-only, non-creditworthy. We serve, I'd say, the middle part of the K, and that's your near prime to prime customers. As an example, the new vintages we underwrite have around $95,000 of average income. The whole portfolio might be just under $80,000 of average income. So that's kind of core Middle America.
What we've seen over the past few years is these families and individuals have really been contending with this period of elevated inflation, I think 30%-35% compounded inflation over that period of time post-COVID, and they've done a really good job adjusting their family budgets and their household budgets to accommodate these higher prices. So while inflation is still a little elevated right now, and it's not down to the target rate of maybe around that 2%, it's a lot better than where it's been. They've taken the time to adjust. And what we're seeing is a, I'll call it, resilient customer and even a choiceful one, and meaning that they're making choices around what they're purchasing, when they're purchasing it, and trying to make their budgets go further. So we're not seeing as much strain.
I mean, there's still a little bit of strain in the portfolio, but continued improvement, a little encouraged by, hopefully, if the inflation continues to moderate on the back part of the year, jobs remain constructive. Obviously, we saw a new job revision this morning, which is kind of what we've been seeing is that jobs have been stable. I mean, so the labor market's been okay, not creating any disruption for our consumer base, and we just expect to see a continued improvement as the year goes on on credit quality and resumption of spend.
Makes sense. And we saw your January data earlier this week, which showed some continued progress on the credit front. And your 2026 outlook anticipates some continued improvement on the credit losses that you're expecting for the year. Can you maybe help us contextualize the January numbers and think about how that translates into your full year outlook?
Yeah, so January was good numbers. They came in right around what we expected. In February, you will see a spike back up seasonally, while it will be improved year-over-year. We're saying that we expect them to get near 8, so not all the way to 8%, but definitely up more than what you just saw. And we were flat on growth year-over-year, and that's an improvement for us. So that kind of starts to inflect to the story that we've been saying, that we expect this year to inflect to some growth and some nice growth throughout the year that will end with higher ending loans and even the average loan guide that we gave in that low single digit. Credit overall is going to be comprised of a couple of things improving.
1, the existing portfolio, called the back book, continues to see some gradual improvement throughout the year from our credit strategies, just a consumer that's adapting, and probably a little bit of a tailwind from some of the tax refunds. We didn't put an overly big bet in what that would mean, whether consumers spend it or use it to pay down debt. And then the new vintages that we've been putting on have a lower loss rate than the existing portfolio, so those are starting to average in, and that should continue us on a glide path down as we go through the year.
That makes sense. And like you alluded to, good to see loan growth turning flat during the month of January. Maybe just as a follow-up, though, one topic that's come out throughout the week has been the impact of potentially higher tax refunds. Maybe you could just talk to us a little bit about how you're thinking about that, how it's factored into your outlook for the full year.
Yeah, so the tax refunds are, I think, this should be a tailwind to the consumer. For our space in particular, it'll get used in one of three ways. The consumer will use some of it to pay down debt, which will help improve our delinquencies, and that we see every year. The timing of that is the piece that's always something that we watch carefully because that bleeds in a little bit post-the tax refund season, so you may see it closer to March, even past April into May. You also have consumers who may use that tax refund and spend on things that they've been waiting to spend because they've been, like I mentioned earlier, budgeting carefully.
So they may take the opportunity to purchase something that they've been holding off on or do a family trip or whatever it be, and others will save. So it will be dependent on where are they in their income level and their, I'll almost say, risk band, where they are with their current debt levels and what they're choosing to do. But we're going to watch it carefully. I think starting at about a week or two, we'll start to get some early reads on some of the refunds coming in, but it should benefit our consumer base.
Got it. Maybe as we're thinking about loan growth for the full year, expecting average growth in the low single digits, like we said, January flattish, tax refunds will be a variable, but how do we think about the other building blocks to the loan growth outlook for this year?
Yeah, so as we look at loan growth, there's a number of factors that are in there, but one of the biggest things that will create the tailwind for us are the new partner launches that we had last year. So we've got a good stable partner base to billed from. So the partner launches that we put on last year, whether it's Raymour & Flanigan, Cricket Wireless, Vivint, and others, are starting to—they've launched, they're starting to bring in some good loans. That will continue throughout this year, as well as some yet-to-be-announced new launches. And again, the guide that we put out there does not assume any inorganic growth. So there's no portfolio acquisitions assumed in there. We do assume increasing payment rates as delinquencies come down, that the inverse of that is higher payment rates.
As the credit mix of the portfolio improves with putting on more co-brand cards, they come with higher payment rates. So all that is contemplated into our guide.
That makes sense. I guess you touched on the partners that you've added throughout 2025, adding to that foundation for this year. I think you've also talked about having the majority, if not all, of the top 10 of your programs locked up through at least 2028, potentially some opportunity to add some new partners here in 2026. Maybe can you talk a little bit about the competitive environment and what that could look like in terms of adding inorganic opportunities throughout the year?
Yeah, I got to tell you, I am incredibly proud of our business development team, and it's one of the things that I still, to this day, am impressed with, just the number of new opportunities that are presented to us from really, really large ones that you would expect that we look away from just because too big, too much concentration risk for us, and the returns would be too thin. So we really try to find the deals that are in the sweet spot for us, and there's always a constant pipeline of opportunity.
We win what I'd say is more than our fair share of those opportunities, and you have some competitors that are leaning in or leaning out depending upon their strategic priorities, and I think there's going to be some opportunities in the next year or two for us to continue to sign some good new partners.
Got it. Maybe turning over to buy now, pay later, exciting area. That's been topical for quite a while, starting to gain share or continuing to gain share as a percentage of consumer payments. You have Bread Pay, now around 2% of your outstanding loans and sales, and we continue to hear about the growth of this platform. Maybe can you just talk about buy now, pay later, and what that means inside of Bread and what you see in terms of demand from consumers for the product set, demand from merchants, and how that can contribute to loan growth over time?
Yeah, I think buy now, pay later has certainly been an area that has had good growth across the payment ecosystem, and really is for people who want to get something now and pay for it over time, but often aren't credit-worthy in the traditional sense. So a lot of that comes from traditional debit spend. So if you look at the total payment ecosystem, they straddle between debit and low-end credit, largely. And for us, it's another product in our product suite. We like it, and now we're at a point where we're working with brand partners and saying, "Would you like to have something that's white-labeled for you?" So it keeps the consumer in their ecosystem, or we're doing some enterprise-type buy now, pay later offerings with Vivint or Cricket Wireless and even Home Depot. We've launched in stores with some of their stores.
These are larger tickets, a little bit longer loan durations. We like the economics, so those are places that I think you're going to continue to see some growth in our consumer loans in that regard.
That's great. Maybe switching gears to focus a little bit on revenues. You've talked at length over the past quarters, months, years about the margin outlook. It's always evolving. For 2026, credit will be a big consideration as we're thinking about where that can go. But maybe isolating some of the pricing changes that you've implemented in recent years, is there any way to think about or frame how long of a runway those factors can be a tailwind and how long it will be before those get fully reflected in your loan yields that you're earning?
So it's an excellent question and a point that we have made pricing changes back as early as in early 2024 when prime rate had risen rapidly. We needed to lift what we had was basically an APR cap that we wouldn't go above 29.9, but that was going to if we didn't increase pricing, we would have started to see some real NIM compression. So the first leg of pricing changes that moved up was to care for that, and then some additional pricing change that happened early last year to portions of the portfolio. That has continued to work its way through the portfolio and through last year, and you'll see that continue to come through this year. And that's how we were able to guide our net interest margin to flat to slightly up because without that, you would have seen basically declining net interest margins.
We're slightly asset-sensitive as our deposits won't reprice or other sources of funds won't reprice as fast as variable-rate loans. And second is the product mix improvement that we're seeing. When you do risk-based pricing, you're putting on some new accounts and others that have a lower APR, so you would have that. You also have improving delinquency, which means you get lower build late fees, which means lower yields. So all those things together, without the pricing changes we'd put into effect, you would have had a declining net interest margin in this environment. So those pricing changes should help out throughout 2027 to help mute some of those impacts. So I think by the time you're into 2027, you've largely probably ran its course.
Okay, that's helpful. Thank you. Maybe turning the page on the other side of PPNR, we have expenses, anticipating another year of positive operating leverage here in 2026. How should we think about the opportunity for efficiency gains and how much of that is going to be on the revenue side versus remaining opportunities on the expense side?
So culturally, we established operational excellence at our company, and it kicks off $ tens of millions of new opportunities in year every year since we've done this for the past couple of years. Expect the same this year. And again, next year, they actually have run-rate benefit, and then you find new opportunities, and the whole company's engaged this and embraced it. So we're able to take those savings and pour them into investments in other investments for whether it's technology, it could be a little bit of AI investment, it funds things like migration to the cloud, but it allows us to not have to have these major step-up in expenses to fund critical things as it relates to operating the company.
And then to your point, the fact that we're inflecting to growth this year and we'll have that low single-digit growth, and we said revenue will follow, that helps create more of that operating leverage. As now we're growing, expenses will grow this year, but our objective is to obviously have it grow less than revenues. And the degree of positive operating leverage will be largely dependent on the degree of revenue growth.
That's helpful. Okay. Maybe pulling up a little bit and thinking about the transformational stretch you all have had at Bread over the past couple of years and efforts continuing to show up in the results over time. As you look forward to your mid-20s ROTCE target, are there any other big strategic actions left to take, or is it more about just chipping away at this point, getting more scale by growing the loan book, experiencing that continued credit normalization, or anything else you would call out?
Yeah, I think you've hit it really. When I think about it, there's really three or four things in there that have to happen to achieve the mid-20s ROTCE, and I'd say we're going to have a clear line of sight to that, and this year will be a really nice step in that direction. First, we have to continue to drive efficiency at the company, which comes from two things. One, getting a little bit of scale, and I mean that getting that low single-digit, hopefully that starts to get up to the mid-single-digit growth rate that gives you your revenue scale, containing expenses, so delivering that positive operating leverage, which will drive down the efficiency rate, so that will improve your ROA. Then you also have to, as you noted, we have to continue to drift down towards that 6% loss rate range.
That's the second leg of that ROTCE improvement. The third, but to a much lesser degree, is the final stage of capital stack optimization, which would be issuing up to $300 million of preferred stock, and that helps to get to that optimal cost of or the optimal capital.
Makes sense. I know earlier we were talking a little bit about the balance between pursuing growth, pursuing returns, but it sounds like in most environments, you'd likely to be more focused on optimizing your returns rather than pursuing growth at the expense of your return thresholds.
That's right. It's an and, right? We need to figure out how to grow, grow responsibly, grow profitably, and put the right type of growth on that's going to deliver the returns that we need to make sure that we get the right return on capital.
Got it. One thing that I know you've talked about in past years, and it sounds like you've taken another step on this journey, is looking at potentially doing some optimization around the structure of your banks, two banks today, Delaware and Utah. Can you talk to us a little bit about any updates on that process and what you might be considering?
Yeah, I mean, when you think about the transformation of this company over the past six years since Ralph has joined and even a little bit before that, they've really tried to simplify who we are and be more of a pure-play financial services, consumer finance company. And with that, today, we have two banks that are legacy banks. One is a Utah Industrial Bank. One's a credit card issue-only bank out of Delaware. And we have different funding capabilities in each because of the bank charters. So we're able to take direct-to-consumer deposits out of our Utah Bank, which we can't do out of the Delaware Bank, but we do have a public ABS out of the Delaware Bank that we don't have in the Utah Bank.
So the idea is that if we can put those two banks together, it gives our treasury team full funding flexibility for the company. And so we did put an application in December to merge the two banks into the Utah Bank, and we'll build out a public ABS in Utah, but then it allows us to continue to fund the way we want to and continue to grow those direct-to-consumer deposits up to, what I'll say, more pure levels, which is probably closer to 70% over a number of years. It won't happen quickly, but it gives us that flexibility. So it really helps with liquidity risk management, capital management, and funding flexibility.
That makes sense. And do you envision any? You obviously highlighted the funding aspect. Would you anticipate any cost savings or revenue synergies as a function of that kind of action in merging the banks, or is that something longer tail and it's just more operational efficiencies and kind of the things you highlighted?
It's really nominal. If anything, you might get some cost-of-funds benefit in there. A little bit of less time responding to two banks' exam questions, it's one. The consolidated reporting is already, we're going to do a combined reporting, so there's really not a lot of efficiency from an operating standpoint. It's more about the funding and a little bit larger-scale bank with better capital and risk management.
Okay, makes sense. Another big topic this week in the last couple of weeks, thinking about how companies across the economy are leveraging AI, especially in financial services. We talked a little bit about AI over breakfast and speculating there. Maybe you could start just by sharing a little bit about where you're playing in AI today and what you see as the greatest opportunities for use cases within Bread Financial.
Yeah, AI certainly seems to be the hot topic nowadays across all industries. It's changing fast. And what I love about our company is the way they embrace change. They embrace new ways of doing things. So we've been leveraging AI, like machine learning models, for years. We have over 200 machine learning models in place across our enterprise. We've deployed bots that have saved our company over 1 million hours of, you call it, work time. And these are all ways to do things. Now the next generation of AI is out, and you can imagine the different use cases. We've got over 60 use cases or initiatives in flight that are deploying AI from small things where the worker's able to use Copilot to help with their day job, or you're turning on audit functions within our expense management tool for travel expenses.
There's always little things, but then you also have the big things where you're able to have agent-assisted tools that are AI-generated to help the service agent have something to help them answer and respond to questions. You're using AI to optimize call routing within the when the customer calls in around voice response. There's tons of applications, and there's nothing that I think I'd say so far is massive disruption, but continued migration of efficiency of trying to serve the customer in more of a digitally engaged way so that they don't never have to talk to a person on a service side. There's also ways to optimize collection efforts and have the person, the customer, interact in that way.
So I think we're not going to be on, I'll say, on the bleeding edge of this because we're not going to invest $ billions to find the use case, but we will fast follow on AI and feel really good about our positioning. Clearly, we're thinking about it. Our clients are thinking about it, and we're making sure that I mean, we were out with our client partnership team this past week, and they're saying if they're not hearing that word agentic AI three times a day in almost every call, the merchants or retailers are thinking about it, and our goal is to make sure that we're able to help them in their purchase path unlock their sale, so we're staying in lockstep with our retail partners.
Understood. Maybe just as a follow-up, thinking about AI and as it relates to the consumer, and we hear people ask, especially as we're kind of traveling and speaking with people from outside the U.S., what AI could mean for the health of the consumer and the job market and the economy in the U.S. Any thoughts you'd like to share on where that could go and where we stand today?
Yeah, there's a lot of speculation, and it's really hard to know. For our customers that we serve, we serve a lot of Middle America, teachers, electricians, plumbers. I mean, it depends where will this efficiency come from and which jobs might get dislocated. Does it create more jobs? Right now, you got to imagine there's a ton more construction jobs going on, and I think it's a little too early to call, and I don't want to speculate on where that will go.
Wait and see a little bit. Okay. Maybe shifting over to the policy front. Lots of headlines in the credit card world over the past couple of weeks. I think those are beginning to fade a little bit, but maybe a couple of questions related to the topic. First, on the credit card rate cap discussion, I think most people are recognizing that that's not likely something that's going to get implemented. But do you have any perspective that you'd like to share on the topic? And does the administration's focus on issues tied to affordability impact the way Bread is thinking about maybe some of the sustainability of the pricing changes made over the past couple of years?
Yeah. Look, as it relates to price controls, price caps, it's not something that I think would be a good policy or practice in the way the country runs. And I think what I'll tell you is we're very much in line with the industry and the larger players who have already commented on this, that it would be restrictive of credit for the vast majority of Americans. It would hurt middle-sized businesses, small businesses, and it would be detrimental to the overall economy. So not thinking this is going to go that far, but then when you think about overall, we think regulation is good, and I think regulation should be very constructive. So we're actually, I'd say, more bullish on this administration and the way they've thought about regulation and the way they've been thinking about bank regulation in particular.
When it comes to affordability, again, their focus on affordability is real. We talked about earlier, our consumers, what they've been contending with on prices being up as much as they have been over the years. Anything they can do to make the everyday costs of things that our consumers need, whether it's farm goods, household goods, or prescriptions, or cars, whatever it is, if prices can come down, including interest rates, they're all good for our consumer. And that affordability focus will help our consumers and our delinquency and losses and hopefully be able to unlock more credit for them.
Makes sense. Maybe just another note on the regulatory front, maybe another item that's just less likely to go through than not, but the Credit Card Competition Act has been another point of discussion. Any thoughts on how impactful that would be or could be for your business, especially as it relates to rewards and the ability to offer cards that can operate on multiple networks? I know you guys are one of the few banks that issues a card on a network outside of Visa and Mastercard, so would love to get your perspective on that process and any risks you see related to potential litigation there.
My understanding of that rule right now is that that would apply to only banks over $100 billion in size, so we would not be impacted by that. Then more broadly on that topic, if consumers were purchasing or that legislation went into place where they could purchase on different networks, the consumer's not going to benefit. This is going to benefit the retailer. This is something where the banks could end up lowering rewards. You just don't know where it's going to go, but the take that I have right now is that it's not something that is going to benefit the consumer. It's more of a merchant play.
Makes sense. As a marker of the progress you've made over the past couple of years, capital levels have really started to expand meaningfully at the company. CET1 now at 13%. You've been buying back stock. How should we think about capital priorities heading into 2026 and your comfort with where you are and continuing to push the button on the buyback?
Yeah, well, I thank you for the recognition of the progress that we've made on capital. It's one of the things that we were really proud of. Since I joined the company and Ralph as well, we have stayed focused on our capital priorities, and they have not changed. One, first and foremost, we're going to support and fund profitable, responsible growth. Two, we're going to invest in this company to make sure that we're moving forward with our tech priorities and other priorities. We're going to pay down our debt and get that locked in, which we've now done. We've got that paid down from $900 million to start last year down to $500 million to end the year. We introduced subordinated debt. We did our first leg of preferred stock at the end of the year.
And so we finished the year and we started to buy back shares, and that was the last piece being able to return capital to shareholders and doing it after we built up capital and hit those targets. So it was a real inflection point starting in third quarter of this past year and into the fourth quarter that now we can do all these things simultaneously. So we finished the year with still 240 million of share authorizations outstanding. So you should expect as we go through this year, we'll continue to make sure we maintain our capital targets in that 13%-14% range, go about a midpoint, and then try to return excess capital beyond that if we're not holding capital for future growth or other investments. But I would expect that type of discipline to persist going forward.
Makes sense. Well, I think it's pretty clear, all the progress that you've made over the past couple of years. It's an exciting time to see you returning to growth mode. Any parting thoughts you'd leave with us as we're heading out to the rest of the first quarter and looking out to see what happens exactly as we play out 2026?
No, I appreciate that. I'd say overall, we are very, I'll say, cautiously optimistic, but excited for 2026. After the culmination of this multi-year transformation of the balance sheet, our tech stack, and that's always going to be on, we talked earlier, we get to focus on growing the business, winning where we deserve to win with new partnerships, focusing on the customer, continue to accelerate the development of capabilities that are going to help our merchant partners as well as serve the customer. We're excited about that and looking forward to, again, continuously credit improvement.
I think we're going to be in an environment where, while the economy's uncertain, generally, our view is probably a little more constructive in that while the trade policies of the administration can rankle some feathers, the intent is to create more jobs in the U.S., create more demand for our goods through the trade deals, and get more investment here. Even with today's revised jobs report, you're starting to see an acceleration of jobs, even though the revisions are always tough to understand, but the investment that I expect to see in jobs in the future, if this plays out, should create opportunities. Again, I think the labor market's going to hold up. Inflation, by again, the back end of the year, it doesn't look like the tariffs have been as impactful in terms of driving up inflation as some had thought.
Now they're tamping down that expectation. The consumer's resilient. So really encouraged about what's happened with it. We'll get slow, steady progress on the asset quality front. So everything's really coming together and excited about what this is going to mean for 2026 results.
Awesome. We are excited as well, but I guess we've reached the end of our time. Thank you very much, Perry, for joining us here in Key Biscayne.
Well, thank you.