Q4 2022 Bread Financial Holdings Inc Earnings Call
[laughter].
Good morning, and welcome to bread Financial's fourth quarter earnings Conference call. My name is Charlie and I'll be coordinating your call today at this time all parties have been placed on listen only mode. Following today's presentation. The floor will be I can feel questions to register your question. Please press star followed by one on your telephone keypad.
It's now my pleasure to introduce Mr. Brian there.
Head of Investor Relations at <unk> financial the floor is yours.
Thank you copy of the slides, we'll be reviewing in the earnings release can be found on the Investor Relations section of our website on the call today, we have Ralph and dry dock, President and Chief Executive Officer of Breath financial and Perry Beaver men Executive Vice President and Chief Financial Officer of bread financial.
Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the.
You can see also on todays call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website at Brett financial Dot Com.
With that I would like to turn the call over to Ralph in dry dock.
Thank you, Brian and good morning to everyone. Joining the call we set ambitious goals in 2022 and I am extremely proud of our associates for moving our company forward by executing on our initiatives to achieve these goals.
I'll begin on slide three which highlights several major accomplishments achieved in 2022 as part of our ongoing business transformation.
To begin we rebranded from alliance data systems to bread financial a tech forward financial services company, providing simple personalized payment blending and saving solutions to consumers'.
Following a multi year corporate transformation bread financial has emerged as a more modern nimble and streamlined company backed by leading technology and custom platform solutions that empower today's consumer.
Coinciding with our rebrand we launched our direct to consumer bread Cashback American Express credit card and we branded our buy now pay later platform to Brett Peg, which all of his installment lending and split pay solutions through an omnichannel approach.
We also rebranded our retail deposit platform to bread savings.
These enhanced products.
<unk> products provide industry, leading benefits and complement our existing suite of financial offerings, ensuring our customers across generational segments have access to payment and saving solutions.
We continue to sign new iconic brand partners, including AAA and the NFL, while renewing valued long term relationship like Victoria's secret, we have secured renewals with brand partners, representing approximately 85% of our year end 2012.
Two credit card balances through 2025 after adjusting for the anticipated sale of the Bj's portfolio.
We also saw success with de Novo program launches in 2022, such as being H photo, which exceeded our initial performance and growth projections for the year.
We look forward to working with our new and existing brand partners to drive incremental sales growth and customer loyalty through our sophisticated data and analytics capabilities enhanced value propositions and comprehensive product suite.
In 2022, we invested more than $125 million.
A technology modernization digital advancement marketing and product innovation major achievements included transitioning our credit card processing services to fiserv converting to the cloud and integrating a very a state of the art solution that enhances the productivity of our customer care and collections efforts.
Our digital advancement continue to progress as well as we expanded mobile and web based customer servicing capabilities and launched a virtual card with a web to wallet provisioning to provide our customers a more simplified user experience.
These upgrades supported our transformation enhanced our strategic differentiation and are essential to driving operating efficiencies and innovation, we remain committed to ongoing technology investment with a focus on further digital advancement.
As part of our investments we increased our marketing investment in 2022 to bolster spend through joint marketing campaigns with our brand partners.
Eloping strong collaborative relationships with our partners has underpinned our decades of successful growth as these investments build loyalty with both our partners and their customers as well as expand sales opportunities.
Additionally, by leveraging our sophisticated data and analytics capabilities and efficient targeting channels. We were successful in driving new acquisition and engagement with our bread Cashback American Express card credit card bread pay at bread savings offerings, we will continue to invest for the future to deliver value for our brand partners customers.
As shareholders.
Finally, I'm proud to announce that bread financial was recognized for our prioritization of environmental social and governance across our entire business, earning a spot or newsweek's 2023 list of America's most responsible companies our commitment to advancing our ESG strategy objectives, and accountability as evidenced with the org.
Innovation remains core to our sustainable business practices.
Turning to slide four we are pleased to have achieved our 2022 financial targets.
Driven by organic growth from our existing brand partners as well as addition of our new brand partners and product offerings average loans grew 13% compared to 2021 revenue growth exceeded average loan growth at 17% year over year pre tax pre provision earnings increased 19% versus 2021.
Highlighting the quality of the growth we are generating and the underlying value. We are creating we remain disciplined generating more than 200 basis points of positive operating leverage for the year as we managed our expenses and our line in alignment with our revenue and growth outlook, while continuing to invest in our future our net loss rate.
A five 4% remained within our full year guidance range and below our historic average of approximately 6%.
Along with accomplishing our 2022 targets, we significantly strengthened our balance sheet and bolstered our financial resilience through greater product and funding diversification, we increased loss absorption capacity and growth in capital and tangible book value retail to retail deposits on our bread savings platform.
Increased to $5 $5 billion or 72% year over year, we plan to build on these achievements in 2023 through continued execution of our long term strategy.
Moving to slide five I'll highlight some of our most recent business development success I am pleased to announce that we have signed a new long term credit card relationship with hard rock International.
Well recognized hotel casino in restaurant, operator hardware attracts a broad demographic given its diverse offerings further expanding our reach across generations, we will off of hard rock customers, a new way to pay while incentive loyalty and brand affinity through our co brand credit card during the quarter we.
Once a new agreement with the New York Yankees.
This exciting relationship rewards Yankees fans for their purchase and provides enhanced benefits to our New York Yankees co brand credit card, while further diversifying our brand partner base.
Also during the fourth quarter, we signed a multiyear renewal with long term partner Hillsboro diamonds, underscoring our strong market share position in the jewelry space <unk> diamonds has more than 100 years of diamond expertise and operates online at over 200 stores nationwide.
And 200 stores nationwide, we will continue to leverage our advanced data and analytics to enhance the shopping experience to hillsboro customers.
Turning to bread pay we continue to add new brand partners to our platform and importantly, we have now extended nearly 50% of our current loan origination volume with new long term renewals because these contracts historically have been short term in nature, having long term extensions were reduced volatility and promote long term sustainable.
Growth. Additionally, our strategic relationship with several continued to outpace our expectations with now more than 200 live merchants and installment loan origination volume exceeding our initial goal.
We are pleased with our many accomplishments in 2022 and plan to build on this momentum in 2023, our business development pipeline remains strong and we are confident in our ability to grow responsibly in 2023, despite a more challenging macroeconomic landscape as always we remain vigilant and responsibly drive.
Sustainable profitable growth pay we will outline our specific 2023 financial targets.
Which include continued strategic investments aligned with quality and revenue quality loan and revenue growth. Our 2023 outlook assumes continued inflationary pressures and gradually rising unemployment levels headwinds that we expect will result in a full year net loss rate above our long term historic average.
Of approximately 6%.
This corresponds with our expectations at net loss rate will hover above our historic average during more challenging economic periods and dropped below historic average during more favorable economic periods.
Three decades of experience, our differentiated and tested underwriting and credit risk modeling is purposely structured to navigate the full range of economic scenarios focused on producing positive annual earnings and a strong risk reward margins even during periods of economic stress with the changes we have made over the past.
Three years to strengthen our credit profile, we remain confident in our long term guidance of a through the cycle average net loss rate below our historic average of 6%.
Our seasoned leadership team is experienced in managing through credit cycles. In every cycle is different some factors like inflation are impacting all consumers and cannot be fully controlled or mitigate it.
We will manage what we can control in these instances we run our business with a long term focus as we have done effectively in previous downturns.
We have and will continue to proactively adjust our underwriting and credit line management to account for the anticipated challenges faced by consumers, we manage our business with strong governance and controls intact and remain aligned and confident on our objective to deliver long term value for our stakeholders.
With that I'll turn it over to Perry <unk>, our CFO to review the financials.
Thanks, Ralph Slide six provides our fourth quarter financial highlights.
Brett financials credit sales were up 16% year over year $10 2 billion.
Average and end of period loans were each up 23% driven by our new program additions as well as new products and organic growth from existing brand partners revenue for the quarter was 1 billion, increasing 21% versus the fourth quarter of 2021 resulted from higher average loan balances in <unk>.
Proved loan yields while total noninterest expenses increased 28% as anticipated as.
As we signaled previously EPS was materially impacted this quarter by the higher provision for credit losses, reflecting seasonal loan growth in the quarter, coupled with the required upfront seasonal reserve build from the acquisition of the approximately $1 5 billion AAA.
AAA loan portfolio.
Turning to slide seven I'll review, our full year 2022 financial highlights.
Bread financial credit sales were up 11% year over year to $32 $9 billion and average loans increased 13% rare.
Revenue for the year was $3 8 billion, an increase of 17% compared to 2021, while total non interest expenses increased 15% driven by portfolio growth inflation and ongoing investments in technology modernization digital advancement marketing and product innovation as Ralph I discussed earlier.
<unk>.
Income from continuing operations was 224 million and diluted EPS from continuing operations was $4 47 for the year, both of which were materially impacted by the higher provision for credit losses in the year as a result of our strong loan growth portfolio acquisitions, and a higher reserve.
Right.
Looking at the financials in more detail on slide eight total interest income was up 30% from the fourth quarter of 2021, resulting from 23% higher average loan balances coupled with improved loan yields.
Noninterest income was primarily includes merchant discount fees and interchange revenue net of the impact from a retailer share agreements and customer awards was negative $97 million.
Noninterest expenses increased 28% from fourth quarter of 2021, driven by three primary factors first card and processing expenses related to incremental card issuance volume second information processing and communication expenses as a result of the transition of our credit card processing services and other.
Software licensing expenses.
And third higher employee compensation and benefit costs additional.
Additional details on expense drivers can be found in the appendix of the slide deck.
Overall income from continuing operations was down $195 million for the quarter versus the fourth quarter of 2021 as the improvement in pretax pre provision earnings or <unk> was offset by a higher provision for credit losses in the quarter, including the previously discussed upfront seasonal reserve impact from the <unk>.
Ripple a portfolio acquisition in the quarter, taking out the tax provision impacts we are pleased that our PPR improved 13% year over year, making marking the seventh consecutive quarter that we have generated year over year double digit growth in <unk> as we have said we remain focused.
On making responsible decisions to produce quality earnings.
Turning to slide nine.
The left side of this slide highlights, our earning asset yields and balances the fourth quarter loan yield increased 80 basis points year over year, driven by the increases in the prime rate, but decreased 120 points sequentially due to seasonal seasonally higher balances in the quarter. The addition of the lower yield higher.
Quality AAA portfolio, and an increase in reversals of interest and fees revenues from higher gross losses.
Net interest margin increased 30 basis points to 19, 1% year over year as the benefit from loan yields more than offset the increase in funding costs.
On the liability side, we saw funding costs increase in the fourth quarter in line with our expectations given the fed interest rate increases through December of 2022, as you can see from the stack bars on the bottom right. Our direct to consumer deposits continued to grow and now represent five 5 billion or <unk>.
6% of our total interest bearing liabilities.
We expect that our retail deposit balances will continue to increase providing a stable funding base as retail consumer deposits become even more meaningful portion of our funding over time.
Moving to slide 10.
Starting in the upper left with delinquency rate.
Fourth quarter rate of five 5% was slightly below the third quarter rate following typical seasonality.
On the upper right. The net loss rate was six 3% for the quarter slightly better than our earlier projections due to lower than expected losses in November .
Our loss rate in December of six 7% was more in line with our expectations given continued payment rate pressure.
If we think about where the consumer is today.
You have to look at how we got here.
Earlier in 2022, we still saw some of the benefits from the late 2021 stimulus aid coming through in terms of both spend and very strong payment rates. If you look at a trend line from our low point in three Q 'twenty one to today, you can see the upward movement or normalization of loss rates from both the wind down of stimulus which is large.
We run its course and the influence of elevated inflation.
We saw lower scoring and lower income cohorts normalized one.
However, given the broad impact of inflation, we're seeing impacts across the full credit spectrum and all income groups. As you would expect we continue to proactively manage risk reward decisions at the margins for both new account underwriting and existing account line management. This is an ongoing and evolving as the Mac.
<unk> economic environment unfolds.
Moving to the bottom left the reserve rate increased 10 basis points sequentially from the third quarter to 11, 5% as a result of continued elevated inflation.
Increasing consumer debt levels, and weakening macroeconomic indicators pulling down the base case scenario outlook. This was modestly offset by the addition of the higher quality AAA portfolio and seasonal transact or balanced growth in the fourth quarter. Our intention is to maintain a conservative weighting of economic scenario.
In our credit reserve model in anticipation of the increase in macroeconomic challenges and the expected potential impact on our credit performance metrics, we estimate that our reserve rate could increase up to approximately 100 basis points due to the continued macroeconomic trends seasonality and the impact from the.
The sale of the better credit quality Bg's portfolio.
In nominal dollar terms, we would expect a meaningful decrease in our allowance balance.
And therefore, a provision for credit losses relief in early 2023 again due to the anticipated sale of the <unk> portfolio as well as projected seasonal decline in loan balances from urine.
Our credit distribution improved from the third quarter with economic consumer headwinds offset by the benefit from the AAA portfolio acquisition, we would expect our overall portfolio. Our overall proportion of $6 60, plus vantage score customers move down when we exit the bj's portfolio.
A fundamental element built into our business model includes having controls in place to manage our risk tolerance with the objective of ensuring that we are properly compensated for the risk we take to underwrite and manage our portfolio. We closely monitor our projected returns with the expectation that we generate strong risk adjusted margin above peer levels at.
As Ralph alluded to previously we remain confident as a management team and our ability to manage for credit risk and drive sustainable profitable growth through the full economic cycle.
Slide 11 provides our financial outlook for the full year 2023.
For the full year average loans are expected to grow in the mid single digit range relative to 2022, our expectation includes projected new and renewed business announcements visibility into our pipeline the anticipated sale of the Bj's portfolio and our current economic outlook. The range is contingent on credit strategy.
Actions that will lever on macroeconomic conditions.
We expect revenue growth to be consistent with average loan growth in 2023, excluding the anticipated gain on sale with a full year net interest margin similar to 2022 full year rate of 19, 2%.
The first quarter NIM is expected to be below our full year guidance given the inclusion of the lower loan yield bg's portfolio and a larger headwind from the reversal of build interest and fees related to expected elevated first quarter credit losses.
Our outlook assumes additional interest rate increase by the Federal Reserve will result in a nominal benefit to total net interest income.
We expect to deliver nominal positive operating leverage in 2023, excluding anticipated gain on sale as Rob highlighted we will continue to strategically invest in our business to fuel growth opportunities and create operating efficiencies while balancing these investments with responsible revenue grew.
In order to achieve sustainable profitable growth first.
First quarter 2023, total expenses are projected to be sequentially down from the fourth quarter of 2022 benefiting from seasonally lower transaction volume transaction volume and lower marketing expenses at this time from a dollar perspective, we expect the second half 2023 total expenses to be flat to down from the <unk>.
First half of the year, driven by lower intangible amortization expenses and improved operating efficiencies related to our technology modernization efforts.
We anticipate the full year 2023, net loss rate will be approximately 7% as you can imagine there is a broad range of outcomes for net charge offs for the year based on potential economic scenarios.
Given persistent inflation and rising interest rates borrowers are making decisions to pull back on discretionary spend and drawing down on savings pressuring their ability to pay despite low unemployment moderate income households are increasingly noting payment difficulties during the collections process.
Our outlook assumes inflation remains elevated.
And that these pressures will persist throughout 2023 at the same time, our outlook contemplates a gradual increase in the unemployment rate in 2023, we will continue to closely monitor macroeconomic indicators as we gain clarity on the feds efforts to tamp down inflation, we will update our expectations accord.
Okay.
We expect the first half 2023 loss rates to trend upward given the current inflationary pressures as well as the impact of the sale of the Bj's portfolio. Our first half net loss rate is projected to be above 7% inclusive of the impact from the previously discussed customer accommodations we.
Made in the second half of 2022 in connection with the transition of our credit card processing services.
Finally.
We expect our full year normalized effective tax rate to remain in the range of 25% to 26% with quarter over quarter variability to timing of certain discrete items.
Looking forward, we intend to host an analyst event later this year, we will further highlight what we believe are the strategic differentiators and competitive advantages of our business model, including the capital generation and potentially create.
At that time, we plan to provide new long term financial targets as well as more detail around our capital priorities and capital allocation going forward rig.
Regarding current parent capital levels, our TCE to Ta ratio temporarily dropped in the fourth quarter of 2022 due to the timing of the acquisition of the AAA portfolio given the anticipated sale of the Bj's portfolio, our TCE to Ta ratio is projected to increase to a level above the <unk>.
22 figure of 8% after the sale.
In keeping with our business transformation over the past three years, we made strategic decisions to enhance our financial resilience as indicated on slide 12.
We improved our credit quality.
Product and funding diversification loss absorption capacity through our loan loss reserve and capital positioning and increased our tangible book value.
Our tangible book tangible equity plus credit reserve ratio as a percent of loans is up nearly 200 basis points. Since 2020, our parent level debt is down more than 33% over the same time period.
These enhancements and improvements to our underlying credit portfolio mix strengthen our confidence in our ability to sustain more challenging economic outcomes and outperformed our historical results through an entire economic cycle.
Our experienced team will continue to manage our portfolio proactively.
Utilizing our recession readiness playbook for both new and existing accounts with a heightened focus on open to buy authorizations and helping consumers manage their credit lines and balances in a healthy manner.
We believe that our improved risk profile, coupled with our more diverse portfolio and brand partner base make us better positioned than ever to manage through a recessionary period.
We look forward to building upon our successes from 2022, and we will continue to make strategic decisions to create long term sustainable value for all our stakeholders.
Operator, we're now ready to open the lines for questions.
Of course, ladies and gentlemen, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Change your mind, Please press star followed by two alright.
Alright, so I'll ask a question. Please ensure you're finding some muted locally as a reminder that staff by one on your telephone keypad now.
Our first question comes from Sanjay sack Ronnie of K BW Sanjay. Your line is open. Please go ahead.
Thanks, Good morning, I guess I have some questions on the loss assumptions and reserve rate Perry you talked about the reserve rate, possibly going up another 100 basis points in 2023, So I'm just making sure I got this right. So you think by the end of this year, we're probably closer to 12 and a half.
And then the 7% charge off rate for the year can you maybe just separate what the processing conversion impacts are versus sort of the deterioration you are seeing as a result of normalization.
Sure. Thanks, Amit So let me start with the reserve rate first.
We're always trying to give our best thinking based on our current visibility into our portfolio and the economic landscape as I mentioned earlier, we expect the rate to increase in 2023, given the sale of the bgs portfolio and potential continued economic width.
Weakness.
So when bj's exit that's going to cause a step up in our reserve rate because today, that's on the portfolio at a lower than the current average that we have.
And then you look at the I would say that a lot is going to happen in the first quarter plus then you've got seasonal impacts that can also affect the first quarter, specifically regarding the risk overlays.
I think you guys can see that we are proactive in getting ahead of what we deem to be future potential weakness, which is what the seasonal economic risk overlays help us to achieve.
And one thing we recognized early on was that all industry loss models have been calibrated historically on changes in unemployment and there was unemployment led recessions.
This elevated inflation environment Thats currently creating strain on consumers is not with these.
Models are calibrated so it requires a different degree of judgmental overlays, which is when you hear us talking about hey, we're leaning into.
More of those more severe scenarios.
I will tell you for our severe scenarios.
Severe has a.
Reaches an unemployment rate of seven 8% over the next 24 months or peaks and then the severe adverse peaks at eight 9%.
I don't think those are realistic outcomes are what's going to happen, but we lean into those four weightings to care for that inflation components, you can decouple that hey, there's a judgmental piece, but then there's also the unemployment.
This is kind of a new environment for these models to careful.
So when we get to the end of this year, we're thinking that we're going to exit the year with a mid to high 4% range for unemployment, so thats kind of the target.
So I gave you quite a lot more on that with the reserve rate and then I'll answer the second the first part of the second part of the 7% loss outlook.
That's an increase of 150 to 175 basis points year over year.
And there's three components that are in that right. There is the macroeconomic pressures that we're seeing in the consumers and we expect throughout the year there'll be the continued impact of inflation than maybe in the back half of the year that starts to abate, but then you start to pick up some elevated unemployment.
Then you also have the second piece in there thats contributing to the increase of $150 or basis points is bj's, which has a lower NCL rate than the rest of the portfolio that's going to cause all but a lift and then the third piece for US is we do have some trailing conversion relating related items that from customer accommodations that was simply that.
Timing of credit losses that would have been in 2022 that are pushing into the first half of 'twenty three.
Are those equally weighted or.
On equal like is there a more prominent impact from one over the other.
It's a macro is definitely the.
More than half.
Okay.
And just maybe one follow up question for Ralph just on the processing conversion I'm. Just curious are all the residual impacts over at this point all the Kinks ironed out.
I'm just wondering if we should think about anything else.
Thanks, Andrew how are you.
I think that.
I think a lot of the <unk>.
Growing pains are in the rearview mirror.
And now we're going to reap the benefits of the <unk>.
Why are we moved quickly to market better capabilities.
No.
The less expensive to operate so.
Unfortunately.
We have these things, but I think a lot of that is in our rearview mirror and we're focused on continuing to stabilize.
The system and then take.
Take use of all of the capabilities that we signed up for it.
Okay. Thank you very much.
Thank you. Our next question comes from Robert Napoli of William Blair.
Your line is open. Please proceed.
Thank you.
A question on your target capital ratio, what do you. What is do you have a formal target and when do you expect to.
When do you target reaching that target.
Yes, so what we've been communicating is that we're striving to get to 9% TCE to Ta ratio is a good low end mark.
First priorities of our capital is remain.
To provide and support profitable growth in the second priority is to pay down debt and we will provide more information about our capital priorities and plans at the Investor event later this year.
Thank you.
We wouldn't see buybacks until you hit that alright, sure capital return until you hit that target.
I don't want to give specifics, but again our priorities are the same.
Our growth get our capital levels up and then.
Start to pay down our debt.
Thank you and then can.
Can you give any color on the competitive environment, there's been a lot of portfolios, obviously that have changed hands and you guys that we signed a lot you've added a lot.
What's going on with the competitive environment and the returns that.
You and your competitors are requiring for.
For deals.
Yes.
Sure.
I think no matter what the economy is a competitive environment is always always.
Hi.
Anyway, so that never changes, but when we look at things we look at things.
Can we grow the portfolio for the partner can we do it profitably and does it contribute to growth for us in the right.
Great way, that's how we look at portfolio. So our portfolio has changed as the portfolios.
<unk>.
We signed an acquired.
A lot of confidence that we will grow those portfolios will grow them responsibly and we will have good consistent growth.
Great. Thank you.
Thank you next question comes from Moshe Orenbuch Credit Suisse. Most your line is open. Please go ahead.
Okay, great. Thanks.
One of the things you talked about a little bit in the prepared remarks.
Consumer spending.
Can you talk a little bit about how you formed your expectations for receivables growth in terms of what youre seeing in consumer spending and payment rates and how those two interact over the course of 'twenty three.
When I started out as Perry to chime in so we saw a good consumer spending and we're seeing good consumer spending in January .
But given the <unk>.
Given the environment there is pressure on sales.
That will offset some of the payment rate improvements.
The macro environment, we're going into.
Yes, and I'll add into onto what Ralph just said with that context of decelerating spend consumers, making choices within category to deal with the inflation.
And then there is a rising cost of debt overall for them. They are pulling back on spend too. So we do contemplate that coupled with you think about elevated.
Losses credit losses through the year that also Dampens your growth.
One, 5%, where the prior year that impedes growth by one 5% and then on top of that we're being more thoughtful about credit strategies and we have pulled back online and underwriting so that affects that and then as well it may throttle, what we do with marketing because the <unk>.
Marketing returns look a little different for certain cohorts now so there's a combination of things that go into our receivables outlook on all of those things are contemplated how much the last thing I'll say is.
Our book is changing and.
With the spend shift too.
Non discretionary to essential.
Years ago, we would've been able to catch that because we didn't have the products. We now have the products and co brands and buy now pay later and other things that are.
Direct to consumer we're catching just general spend but we would've called that before.
Grandma brand launches and new products are going to also help us.
Five.
Right.
Sales growth over the course of the next year.
Great.
Follow up you mentioned kind of an unemployment outlook.
Four and a half to upper fours.
How do you think about the variability around that if unemployment is either better or worse than that.
As we sort of think about.
Economic performance.
Just beyond 'twenty three as well.
Yes.
Okay.
<unk> is always a leading indicator of credit worthiness. So.
If it's.
The rate is better we would expect.
Credit to perform a little bit better obviously, if the rate is worse, we would expect it to perform worse, but.
We don't expect a spike in 2023, I think where we're feeling.
What we have.
While we forecast that we feel that as well.
<unk>.
Yes.
As an exit rate for 2003 that will impact Q4.
Okay. Thank you.
Thank you. Our next question comes from Vincent <unk> Stephens Vincent Your line is open. Please go ahead.
Thank you for taking my question wanted to ask about late fees.
Two part question.
One being.
Just your overall thoughts about that given potential.
Regulation that might challenge late fees just share your thoughts on what the potential impact is and how to.
How you can kind of maybe move around that and then follow up question is so saw that this quarter part of the yield decline quarter over quarter was from the reversals of interest and fees. So I'm just wondering if you might be able to quantify that.
What are your thoughts on that for 2023.
It wouldn't be an analyst call without a question about <unk>. So.
Im happy to address it.
Look at this is no different than <unk>.
Card Act the industry was able to adjust we adjust it accordingly.
And we'll lean into any regulation that is out there in <unk>.
Quarterly around this I will say.
That as we think about late fees.
Any other regulatory changes, we have the ability to work with our brand partners too.
To negotiate renegotiate terms if that's appropriate.
And then there's other levers to pull so.
We will adjust accordingly, just as we did with card Act, Greg Let me take the second yes. So as it relates to net interest margin, which is where late fees reside for us.
When we see some delinquency increasing you see the late fees materialized in net interest margin early and then when delinquency manifest itself into elevated charge off the reversal of some of those interest and fee occur in that period. So if you have a period, where you're going to be above.
<unk>, 7%, which is what we've indicated for the first half you should expect that youre going to have some more.
<unk> interest and fees impacting that quarter relative to the prior quarter, where.
Losses were lower and you had less.
And fee reversals. So you actually had a little bit higher net interest margin. So that is going to be the dynamic throughout the year and that's normal when youre going through periods of rising and falling delinquency and then.
The charge I'll follow up.
Okay. That's great very helpful. Thank you.
As a reminder, if you wish to submit your question. Please press star followed by one on your telephone keypad now.
Our next question comes from Jeff Adelson of Morgan Stanley Jeff. Your line is open. Please go ahead.
Hi, Thanks for taking my question.
Hey, I just wanted to dig into the new law Sky.
I think a lot of your competitors are still at or below their cycle averages and youre not guiding to something thats above that.
I know, we've got the noise coming through the portfolio, but you talked about some of the changes you've made.
Over the past three years.
Kind of enhanced the credit profile of that book just wondering what gives you confidence that that's going to drop back down to below 6% level.
By the end of the share after this year.
So.
I'm going to make sure I heard the question correctly.
He has two parts. One is why are we guiding higher I mean, I think our the increase in basis points is probably in line with what we're hearing across the board.
What we're seeing with our portfolios, we did normalize faster and it's simply every company has a different composition of its portfolio, we're more of a full spectrum lender.
As we communicated well over a year ago, we expected normalization to occur faster than our portfolio as consumers use their stimulus early.
And then that would start and they would normalize faster and that has happened and then as you mentioned, we do have some noise in our numbers because of the the.
Bj's departing and then some.
Some trailing impact of timing of losses from customer accommodations that we did.
But when you talk about the confidence to get at.
At or below I think I heard you say at or below six I think the the thing is to have a six handle back on the back half of the year. It's because we do have front end of the year noise that with the economic assumptions.
Again, there's a range of outcomes for the second half of the year, depending I mean, if it's a mild year.
If inflation starts to abate and then you have a slow increase in unemployment I think that could be where things fall, 6% average that we talk about is through the cycle. So youre going to have periods, where you are below 6% years, where we're below 6% and youre going to have years, when youre above 6% and when youre in a recessionary environment.
You've got to be above 6%, if you're going to have a through the cycle average of six and Thats, where we are and I think the question. Then is for all of US is okay. How long is this recession recessionary environment will get officially labeled with debt or word or we're not at a deep does it go and how long does it stay right.
In short then you get back towards that the reversion to the mean faster.
Yes, I would say I think to remember is we have it.
Improved our portfolio and over the last three years, but our portfolio is still a bit riskier than our competitors because we underwrite deeper that said, we get paid for that risk and managing that risk as we move forward. So although we've improved our portfolio still casting a wider net and others and we get paid for them that we cast.
Got it. Thank you and then just in terms of the credits that was this quarter I'm just wondering how much of the.
Bruce that you started the credit sales Mr. Mitra <unk>.
Yes that was a.
A significant amount of the increase I mean, there was a slight increase in credit sales.
If you were to exclude AAA.
Thank you.
Our next question comes from Bill <unk> of <unk>.
Research. Your line is open. Please go ahead.
Thank you good morning, Ralph impairing.
<unk>.
I wanted to.
Wanted to follow up on your comments around legacy credit models, having been built around the concept of rising unemployment and not necessarily some of the inflationary pressures that consumers are facing.
You have that delinquencies are going to continue to rise, but because labor markets remain exceptionally strong we will see them flat out once we get to some sort of a quote unquote normalized pre pandemic levels.
Are you expecting.
Given given that point that you made that delinquencies could continue to trend higher sort of above.
Normalized levels because of these inflationary dynamics, even though labor market conditions could still remained pretty strong just wanted make sure I understood understood what you're the point you were making correctly yes.
Yes, the point I was making on.
The models was more on <unk>.
Pension income gainful employment.
There that they have on other issuers.
So that's all goes into that but yes.
Raise exactly the one of the key points and why inflation is that that the theme of the feds trying to tackle it as a regression regression Harry type tax rate and so moderate income middle income families are feeling the pressure of that so yes, while they are gainfully employed and yes, Walter is wage growth that wage growth is not.
Keeping up with things that are putting pressure on their on their families and you see that with increasing leverage and all of this impacts eventually ability to pay and that's where customers can fall behind and if you even think about inflation as what we're seeing today, while its moderating a little bit.
It's some of it is good news in there, but it's really driven because there's lower fuel prices and lower used in new car prices, which certainly helps people cars, but not everybody does but on the flipside shelf.
Shelter cost food prices and utility costs are up significantly month over month and year over year. So while.
Inflation debating this is still a concern or most Americans, even Wilder said, it's a job pool environment and.
They are doing their best but theyre, making choices on spending so I think you're starting to start see some deceleration in overall spend and we see some shift from discretionary to non discretionary but all these things put pressure for folks.
Understood that's super helpful. Thank you and separately.
Ralph I want.
To follow up on your commentary I appreciate all the color, but I wanted to ask.
If I could follow up on the comment you made last quarter that the safe Harbor you thought surrounding late fees was more likely to be reduced rather than eliminated is there any way you could give us an update there and maybe frame the potential magnitude of any reduction or impact that.
You think we could see.
I know what you know from the CFPB.
That was just.
What I would suspect that happened in the third quarter.
I don't want to I don't want to guess on what will happen whatever will happen, we're ready for it we will lean into it and we will manage accordingly.
Understood. Thanks, again for taking my questions.
Okay.
Thank you. Our next question comes from Mihir Bhatia of Bank of America Merrill Lynch Your.
Your line is open. Please proceed.
Excuse me good morning, and thank you for taking my question.
I wanted to go back to the credit guidance.
Following up a little bit on Jeff's questions.
Earlier I just wanted to better understand the reason you have.
Degree of confidence that the back half of 'twenty three would be below 7% at least.
Just given the implied guide of one H about 7%.
So, but given the high unemployment you had BJ is coming out.
Understand you have some noise in the first half, but if I recall, that's about a <unk> 35 bps impact there.
Bob.
What why wouldn't the backlogs come in below the first half just given the macroeconomic pressures.
Pointing to right with unemployment increasing throughout the year and then Relatedly just.
In terms of your delinquencies and losses like when do you expect delinquencies to beat and in terms of losses, given you've normalized faster than fields do your lawsuit speak before you'll appeal as we've all talked about bad happening maybe in 2020 for any additional color you can help us with some of that thank you.
Yes, so I want to be more clear right. When we say losses could be approximately or around 7% that does not necessarily imply that the back half of the year will be significantly below the first half of the year. So it could still have a seven handle on it.
It could be slightly below it could be still slightly above where it could be flat. So I wanted to moderate.
The expectation that the second half will be.
Materially lower.
And I think you said theres a lot of economic uncertainty in the back half of the year and what continues to happen with inflation.
And.
Appointment, so I think there's a lot of speculation and we will continue to update those expectations as we as we March forward in terms of normalization.
Well, we peaked sooner.
I hope so.
So normalization of the higher end consumer is lagging and when you think about the.
Where we do the full spectrum.
Managed losses, very carefully and that.
And lines carefully where they are.
You mentioned, a low line with a lot less.
Open to buy compared to if you were in that Super Prime space, We have large lines lots of open to buy some when unemployment is youre taken for a large loan for US you don't have as much open to buy so it was unemployment comes through we have less severity risk as a way to think about that so we may be less volatile.
Okay.
Thanks for taking my question.
Okay.
Thank you next question comes from David Scharf with JMP, David Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my questions most have been answered.
Perry I guess I just wanted to follow up.
On the NIM outlook.
Which is effectively flattish.
First quarter throughout the year.
I mean I believe historically.
The company has always had sort of a net asset sensitive model.
And notwithstanding the abrupt rise in rates.
I'm wondering.
Given the fact that deposit funding has continued to increase.
Part of the mix.
We've successfully had a number of months past now where.
We can flatten out that impact.
The impact of the abrupt changes the abrupt fit.
Rate rises in passing it along to consumers.
Why wouldn't throughout this year, especially if we're not.
Looking at any price increases from the fed beyond the current outlook why wouldn't there be a net positive impact to NIM is it primarily related to.
Expectations at late fees.
First get reversed out with higher losses, and maybe temporary kind of a late fee modeling as well based on what the CFPB might propose.
What I'd say is at the.
Our outlook doesn't contemplate anything with the CFPB changes because as Ralph said, we can't speculate on what that means but as it relates to.
Net interest margin you kind of touched on it is we have been slightly asset sensitive our objective is to be close to neutral.
And then as you think about NIM.
There is many components from the asset mix, meaning the product mix risk Mexico that goes in there and then when you enter a period of.
Rising loss as you kind of said it is at the.
The increase in late fees that you get or rollover is partially dampened when the losses come through because of the reversal of build interest and fee. So it's all those things together and then on top of that we will have a changing funding mix throughout the year.
We have worked through our debt stack and then you continue to shift.
To more deposits and other things so we're just giving guidance for what we.
Takes a good way to model our base case for it.
Understood I appreciate the detail and then just a quick follow up I know.
I am sure on the upcoming Investor event will get.
Updated background on kind of the vertical mix and other ways to sort of slice and dice the portfolio profile, but I noticed in the slides on new signings. It was another jewelry.
Vertical retailer.
Can you update us on kind of what percentage.
Ban.
Balances are associated with that vertical which has always been so prominent for ya.
Jewelry specific.
Yes.
Probably for us low double digit.
In terms of receivables.
Got it perfect. Thanks, so much that's all I got.
Thank you.
Thank you. Our next question comes from Dominick Gabriele of Oppenheimer. Dominic Your line is open. Please proceed.
Great. Thank you so much for taking my questions.
I want to talk about the spending trajectory throughout 2023.
And do you think it would make sense that the consumer would continue to slow their spending.
Given what we're seeing in inflation coming down because that's going to hurt nominal dollars right the grow over effect in nominal dollars being dampened.
And really the fact that would you expect spending to slow down.
Through the period before up until we hit peak unemployment and then I just have a follow up thanks.
Yes, I think thats.
That is our speculation a little bit as we're starting to see some decelerating spend.
So I think when you think about that.
That's impacting the individual consumers as is.
We talked about earlier, if you think that their utilities costs and food costs have gone up a $100 a month, where they've got to slow down spend elsewhere.
I do think Thats a factor for us as a company we've continued to add partners in 2022 and.
Increase our marketing so for US we'll continue to see.
Overall spend growth.
<unk> growth, even with the departure of Bj's, but.
That is a.
It was a high transaction portfolio, so for us that will slow our growth a little bit more than what it might have otherwise, but overall.
Again, it's still I think I said earlier.
So gainfully employed jobs to be had small business or hiring even though youre reading about layoffs with big companies.
Lots of jobs out there. So that's what gives me encouragement that we're going to move through what will be more of a mild economic scenario.
I kind of mentioned it before.
The shifts in our portfolio helped us maintain spend alright.
If they move from discretionary discretionary and non discretionary we have products and services that the spend will be sticky to us.
Alright, great.
I really appreciate that and.
I just want to walk through this.
This formula with you guys. If you think about growth math and the fact that alone.
On your chairs Ive seen some really significant growth.
Over the last few years that puts that that kind of growth, Matt Matt seasoning.
Through the Python.
Dynamic right on the front book.
But if we have unemployment rising that would affect the front and back book.
And so I.
I feel like that would have almost like a doubling of not pure double but increase additive effect on the net charge off rate. If you have that pig through the Python and the back book is getting worse because of unemployment does that makes sense to you or am I getting something wrong.
No I think in general terms sure, but I'll speak specific to us.
When you think about the growth that we've taken on for over the past year.
A good chunk of that was due to two portfolio acquisitions of the NFL and AAA in 2022, those are already seasoned portfolio. So when you hear others talk about all this growth and they've got vintages. They are going to get peak losses in the next 24 months, that's not the case for us because it really came in season, we're taking losses in the first month they wanted to be.
So start with that for US and then if you think about the product mix that also influences. This debt growth math seasoning concept because of the degree that we have private label card.
Start to season and peak.
Month, 12 to 18 months, whereas many of those co brands and other things peak 24 to 36 months so hours within the first 12 to 18 months.
Peaked in season, so we seasonal faster.
I would say too is we haven't been sitting still we've been proactively managing the back book and the front book.
The right line assignment right right.
Treatment for for card members, alright underwriting for four four right.
Vantage score so we've been managing our recession Handbook for the last two and a half years and so as I think about it puts us in.
And could shift to know what's in the book.
Where to focus.
Great.
That's really really helpful. Ralph maybe just really quickly one more for you just you have really great co brand and private label portfolios. How do you see the dynamics playing out between the two and as far as net charge off rates and where you may decide to pull back in your underwriting one versus the other.
In the downturn. Thanks, so much for everything yes.
Obviously with the private label portfolios have terrific margins, but they also have a little bit more risk in them, while the co brand portfolios have good margins, but the risk is less so if you think as you go into the economy.
We certainly want to be fair with all our partners. It's important that we work through and make sure that we are doing the right thing by all of our partners.
But to me, it's really a balanced approach.
And making sure that we're taking the right risk for the right reward.
Thanks again.
Thank you next question comes from John Hecht of Jefferies. Your line is open. Please go ahead.
Good morning, guys. Thanks, very much for taking my questions.
Just your newer partners with the NFL the Yankees AAA, yes. It is.
Different it's a different I guess characteristic relative to some of your older traditional retail counterparts. So I'm wondering given that there.
Represents slightly different kind of associations.
There are different characteristics with the usage of the credit card or the credit relationship with the customers from those different channels.
Yes, so there some of those cars are top of wallet card and so when you think about it right. So I think about AAA through top of wallet card.
Make sure you have the right line for the for the right people its higher use it.
Discretionary spend.
Non discretionary spend that's their products. So make sure that we have the right treatment for those for those for those co brand card, which may differ a little bit from the treatment you have with a private label card, but diversification for US is key and we don't treat every card equally we treat a based on based on.
The habits of those people in those products.
Is is the general line extension and utilization rate consistent with some of the other platforms or is there anything to point out there.
Okay.
Yes.
It depends on the credit worthiness of the individuals right. So that's how we look at it we don't look at it on a on a portfolio basis, we look at it within the portfolio and the performance of the individual and their credit worthiness.
Okay. That's helpful. Thank you and then.
A follow up we've heard from some of the other card issuers that maybe there is a decline in the pressures ongoing pressures on deposit prices.
As seen that or is there any commentary just over the past few weeks and what youre seeing in the deposit market.
Yes, so for us.
<unk> remains a direct to consumer deposits remains a key component.
The pressures are out there in terms of pricing is competitive and we've been helping to lead the way on that competition because.
For us it's a great source of funds, we are variable priced and we have terrific loan yields that can absorb the increase in the Prime Minister is prime goes up if we were to pass that through our deposit pricing we get it on the topside revenue. So yes, it's a real opportunity for growth for us we have low overhead and really helps our funding capabilities.
I guess the question is.
As we go into this year or is it similar competition to the last few months or given the new rate outlook might be changing or are you seeing mitigated card.
Mitigated competition, but maybe less aggressive pressure on incremental rates.
It's the same.
Okay wonderful thanks, very much guys.
Thank you. Our final question today comes from Reggie Smith of Jpmorgan Chase Ritchie. Your line is open. Please go ahead.
Thanks, a lot.
Cause Boeing kind of late and appreciate you taking the question.
Little bit I guess, a different subject a lot of focus has been on credit quality.
I was curious.
I was hoping you guys could probably answer this.
What proportion of your.
Today, whether thats been the revenues would you say is it.
Is it related to spread and that can be.
By announcing later it could be the amex card.
We actually expand beyond us and that just bread, but anything like modern so.
Digital first card what I'm trying to understand is it feels like it's probably a story within the story.
That may be getting missing. So I was curious if you could share.
How large that business is maybe how fast it's growing because I would imagine that over time that that's going to be.
A bigger piece in the NT.
C P C store.
Well you know the card business right things take time to grow right. So we've got we've been with those both of those products a year or last year, just about a year, but I can tell you that 40% of our new accounts are digital channels right, So and I expect that 40% to grow.
Given our new capabilities given the capability given the capability, we're going to put in place. So we expect those digital channels to grow in and we do expect direct to consumer to grow.
Think that American express product, 2% Cashback is a really good quality product out there.
The virtual card with just introduced that will have some <unk>.
Traction in 2023 2024, so while it's not the biggest part of our portfolio today. It is a growing part of our portfolio.
Got it and then if I could sneak one more in and you guys ever provided.
I guess a longer term target for efficiency ratio I know you talk about margin expansion.
And that's been a theme every year you kind of mentioned that but is there a long term target.
That you're driving towards.
We talk about in terms of positive operating leverage for now as.
As we think about the future potentially but right now we talk about positive operating leverage which also.
Helps our efficiency ratio and we have some internal targets, but primarily we're looking at is making sure that our expenses outpace R. R.
Revenue outpaces our expense growth.
Thank you.
Thanks Richard.
Thank you all I know, we ran a bit over but I think it's time well spent.
Well I really appreciate the interest in <unk> financial and look forward to talking to you all soon.
Everybody have a good day.
Ladies and.
This concludes today's call you may now disconnect your lines.
[music].