BREAD FINANCIAL HOLDINGS, INC. Q3 FY2024 earnings call

• The company repurchased $262 million of convertible notes, which impacted GAAP results. - The funding mix improved with direct-to-consumer deposits growing to $7.5 billion and wholesale deposits being reduced. - The company launched the Saks Fifth Avenue credit card and the Hard Rock credit card program. - Consumer spending patterns remained consistent with lower transaction sizes and more nondiscretionary purchases. - The company is executing mitigation strategies in response to the CFPB's credit card late fee rule. - The capital allocation strategy focuses on funding responsible growth, improving capital metrics, reducing parent debt, and driving long-term shareholder value. - Product and portfolio diversification is employed for stability and risk management.

In the third quarter, credit sales totaled $6.5 billion, a 3% year-over-year decrease. Average loans stood at $17.8 billion, marking a 1% year-over-year increase. Co-brand and proprietary products account for over 50% of total credit card sales, with travel and entertainment being the largest vertical at 32% of total credit sales. Adjusted net income was $93 million, and adjusted diluted earnings per share were $1.83. Tangible book value per share was $47.48, and the common equity Tier 1 capital ratio was 13.3%.

• For 2024, average loans are expected to decrease by low single digits. - Total revenue, excluding gains on portfolio sales, is projected to decline by low to mid-single digits. - Net interest margin is anticipated to be lower than in 2023. - Adjusted expenses, excluding the impact from repurchased convertible notes, are expected to decrease by mid-single digits. - The net loss rate is expected to be in the low 8% range for 2024. - Hurricane-related actions will shift approximately $10 million in losses from the fourth quarter of 2024 to the second quarter of 2025. - The full year normalized effective tax rate is expected to be in the range of 25% to 26%.

• Uncertainty surrounding the CFPB's final credit card late fee rule litigation. - Macroeconomic uncertainty affecting consumer spending. - Impact of hurricanes on customers and subsequent shifts in loss timing.

Q: Maybe to start, I just wanted to get big picture. Look, you made some comments on losses and expecting seasonality from here. But I think you also mentioned that you expect your credit actions to get better. So I guess the big question everyone is trying to answer is, are you close to peak losses right now? And will 2025 losses be better than 2024 losses if the macro stays stable?

A: Mihir, thank you for the question. I think it's really going to come down to the macro environment. It's -- we'll give guidance, obviously, in our January call. Right now, what we're seeing is stability in our delinquency. So what I'm expecting is I'll say, future quarters to follow historical seasonality with some -- a little bit of inflation from some of the customer-friendly things we did to support our customers through the hurricanes and that will pass through into 2Q. So you got a little bit of noise in there. But the rates in general are going to be -- I expect to be stable to improving. But it's really going to come down to the macroeconomic landscape. And that would, encouraging consumer spend that will help with our loans. But again, beyond that, I'm expecting slow gradual improvements in consumer behavior over a prolonged number of quarters. Given that these consumers are still trying to dig out from nearly 3 years of persistent high inflation, high interest rates on cards, autos and home loans. And then that's just going to take time to unwind. So there's no fast fix for, I'd say, the typical American household. So it really is going to come down to, I think, a gradual easing through next year. I mean I'd say is our baseline hypothesis, but that is more of what it is on the macro sentiment. And I could give more views on the economy, but it's really going to be economic dependent.

Q: Sanjay, just to go back on the credit stats. I guess when we look at that second derivative of the year-over-year change in delinquency that does steadily continue to improve. I guess based on your comments, do you expect that to just stabilize as we move forward? I know there were some comments on like the late-stage delinquencies not necessarily seeing a lot of improvement. Has that changed in any way? I'm just trying to think about any tightening that you guys would have done and how that sort of impacted the credit metrics. Shouldn't that positively help your credit metrics as we look into next year?

A: Yes, Sanjay, very fair point. The credit actions that we've taken certainly have -- I'm sorry, here some feedback on the line is benefiting our actions. As you think about the stability that we've seen in the delinquency. Despite our credit actions over the past couple of years, this is still where we're at. Now, I think you've seen and we've all seen that our delinquency has probably stabilized more than many peers and that is a result of the credit actions we've taken. I mean the economy is still very challenging for the consumers we serve. But I do believe that a combination of an improving or stabilizing economic outlook in combination with the effects of our mitigations and the continued credit risk mix from the shifting products a bit away from private label towards other products, co-brand and proprietary products will again also aided that continued improvement. But again, I think it's going to be a long road to get back to -- or through-the-cycle target. But we are fully expecting improvements throughout next year. It's just the degree of improvement is really going to be macro dependent in combination with the effect of our credit actions.

Q: Vincent, First one, I wanted to talk about your perspective on the fourth quarter, particularly the holiday sales season. What's your perspective on, first, how the consumer is feeling and will be doing in terms of the holiday sales? And then additionally, in terms of the merchant engagement you're experiencing perhaps on promotions or other merchant discussions you're having in terms of fourth quarter sales?

A: Yes. This is Ralph. If I think about it, we've not seen a change in consumer behavior from the second quarter to the third quarter. And我 really don't expect a change in consumer behavior in the fourth quarter. I think you'll see consumers self-regulating. There'll be more frequent visits. And they probably smaller baskets, but they will be out there. I think our partners are doing what they think they need to do to attract consumers in terms of sales and fair prices. I think that's appropriate. I think it will be a moderate sales season. I think given the macroeconomics, a little bit of the uncertainty out there. But I'm not anticipating a very robust fourth quarter, just probably fourth quarter that will be in line with the second and third quarter spend that we've seen.

Q: Perry, I appreciate all the guidance on the losses and the impact from the hurricanes. I was just wondering if you can put a finer point on that. So I think in the past, we were thinking about fourth quarter charge-off rates of the 8.3%. So $10 million benefit would be 20 basis points lower. But then first quarter typically has a higher charge-off rate. And then you're talking about second quarter as well. So I don't know if you could maybe help us with the finer numbers in terms of how to think about the fourth quarter versus your prior guidance and then how to think about the first quarter and then rolling into the second quarter that would be super helpful.

A: Yes. I think the way you just characterized it is right. I mean we're expecting a seasonal increase in 4Q to low 8% range. And that the fourth quarter will see that $10 million net benefit from the actions that we took to support the customers in the hurricane-impacted FEMA zones. But that's not sizable enough to impact our full year guidance. I think you've quantified it in the range of what I would have expected. And then going to first quarter, we did comment that there typically is, seasonal increases when you go from fourth quarter to first quarter. And the reason why we thought that was important in the past to make sure we've reminded people of that. We actually saw a number of models that had losses going down in the first quarter and didn't want people to be surprised when it actually does follow some seasonal trends. Now there's, lots of credit actions out there. We're taking -- doing things that will hopefully mute some of what maybe historical rise has been, but there is going to be an expected increase. And then things should then follow some seasonality from there as well as then it's macro and credit action dependent upon how much it can improve beyond that point, adjusted beyond -- for that then the $10 million hitting into the second quarter. But take that aside. That's the best I can give you at this point. We'll obviously put a finer point on that as we get closer to it. And we give you the January, guidance in January.