Q2 2023 Bread Financial Holdings Inc Earnings Call

July 27, 2023

Based on a listen only my age following today's presentation. The floor will be opened for your questions to Register a question. Please press star followed by one it is now my pleasure to introduce Mr. Bryan <unk> head of Investor Relations at <unk> financial the floor is yours.

Thank you.

Copies 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 bread 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 SEC.

Also on today's 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 bread financial Dot com with that I would like to turn the call over to Ralph Indra.

Thank you, Brian and good morning to everyone joining the call I'd like to start the call today by welcoming Joyce Sinclair a veteran financial services senior executive to our board of Directors Joyce. Most recently completed a successful 30 year tenure with Northern Trust we are.

We're thrilled to have her serve as a member of our board as well as on our board's compensation and human capital and risk committees. We look forward to the value. She brings to the board through our extensive insights perspectives and experience.

<unk> with the key highlights for the quarter on slide three we achieved another major milestone towards our long term financial goals in the second quarter refinancing of reducing our parent unsecured debt by more than $500 million.

Our management team has made it a priority to reduce our leverage at the company took another meaningful step forward this quarter in that regard.

Tangible book value per share exceeded $38 at quarter end importantly, we continued to deliver improved tangible book value for our shareholders with growth of 23% versus the same period a year ago.

Earlier today we.

Early today, we announced we will provide a private label credit program for Dell technologies, a leading technology provider with the industry's broadest technology and services portfolio.

The definitive agreement to acquire <unk> consumer portfolio is expected to close in the fourth quarter of this year.

They'll pay program will include a broad suite of payment solutions and expands our position in the consumer technology market we.

We will continue to leverage our deep financial services industry expertise.

<unk> technology is our fifth decade of data analytics and analytics capabilities to drive value for our partners.

Moving to the economy, numerous macroeconomic headwinds, including prolonged high inflation rapidly rising interest rates and a tightening job market have weighed on our consumers and influenced a slowdown in credit sales. These headwinds tend to disproportionately impact moderate to low income Americans, including our customers spend.

<unk> decisions.

In certain areas like beauty and travel and entertainment. We are seeing continued strong year over year growth. However in other areas like specialty apparel spending has softened declining year over year.

Given the ongoing macroeconomic pressures facing consumers, we continue to proactively and responsibly tightened our underwriting and credit line management.

Even prior to the pandemic, we proactively managed our exposure by tightening approval rates pausing line increases and implementing line decreases where prudent we will continue to closely monitor consumer health and spending behaviors and adjust to changing economic conditions.

Turning to slide four our current focus areas for 2023 are growing responsibly strengthening our balance sheet, optimizing data and technology and strategically investing in our business. Our management team is committed to driving sustainable profitable growth that will dilute.

Long term shareholder value, we continue to selectively pursue new partnership opportunities that will be accretive to our business considering both de novo and partners with existing portfolios and Hyatt enhancing our balance sheet remains a top priority and is integral to our long term strategy as I mentioned, we have made additional progress building capital.

And reducing our parent unsecured debt in the second quarter, coupled with strong free cash flow generation, our balance sheet management actions further enhance our financial resilience and provide additional fixed flexibility for capital utilization, including supporting continued business growth debt reduction.

Reduction in few of the future capital distributions, we will continue to build our capital position refine and improve our funding structure and proactively manage our credit liquidity and interest rate risk to build our balance sheet strength.

On the data and technology front, we continue to leverage innovative capabilities gained from our platform conversion system enhancements and expanded product portfolio. We have successfully utilized machine learning for many years to build strong credit risk models to enhance underwriting line management and collections, we will continue to invest in a range of tech.

Knowledge innovations from data and customer analytics to self service and digital capabilities as we continually strive to deliver exceptional value and experiences for our customers.

Our goal is to continuously generate expense efficiency to reinvest in our business to support responsible growth and achieve our targeted returns.

Slide five includes financial highlights, resulting from the prudent balance sheet management actions over the past three years since I've joined the company.

Starting with funding we have diversified our base with direct to consumer deposit growth of $4 $8 billion. Since the first quarter of 2020 as we have reached <unk> $6 billion in consumer deposits at quarter end, we remain confident in our ability to efficiently fund our long term growth objectives and further broadened our funding base.

<unk> growth from direct to consumer deposits going forward.

As mentioned previously we have made great progress executing our parent debt plan in the second quarter steps included successfully refinancing our term loan and revolving line of credit complete completing our convertible notes offering executing our tender offer and receiving bank board approval for a $500 million dividend.

To the parent company to facilitate debt reduction.

As a result.

Since 2020, we have reduced our parent level debt by 55% paying down more than $1 7 billion.

Additionally, since the first quarter of 2020, we have more than tripled our TCE to ta ratio.

Finally, while our reserve rate remained steady to last quarter, we expanded our credit loss absorption capacity.

Reserve rate 300 basis points higher than our seasonal day, one right in 2020.

<unk> significant account sequential over the past three years demonstrate our success and strengthening of our balance sheet and managing our business responsibly to deliver long term value for shareholders.

Overall, we are pleased with our second quarter results and the progress we have achieved our associates continue to navigate through a changing environment with confidence and tenacity and achieving our goals winning new partners strengthening our balance sheet, gaining efficiencies and providing a positive customer experience.

Leadership team appreciates their hard work and their dedication on behalf of our many stakeholders together, we remain focused on driving our performance to achieve sustainable profitable growth that build shareholder value over time now I will turn it over the periods discussed the financials for the quarter.

Issue.

Finally, while our reserve rate remained steady to last quarter, we expanded our credit loss absorption capacity with a reserve rate 300 basis points higher than our seasonal day, one right in 2020.

These significant account sequential over the past three years demonstrate our success in strengthening our balance sheet and managing our business responsibly to deliver long term value for shareholders.

Thanks, Rob.

Slide six provides our second quarter financial highlights.

Brett financials credit sales were down 13% year over year to $7 1 billion driven by the sale of the bgs portfolio in the first quarter, coupled with moderating consumer spending.

Overall, we are pleased with our second quarter results and the progress we have achieved our associates continue to navigate to a changing environment with confidence and tenacity and achieving our goals winning new partners strengthening our balance sheet gaining efficiencies.

This was partially offset by our continued new partner growth. Additionally, we have taken action over the past year to responsibly tightened our underwriting and credit line assignments from both new and existing customers given the economic uncertainties in the economic pressures affecting a larger portion of our customer base.

Average and end of period loans increased 4% and 1% respectively year over year. These increases were driven by the addition of new partners as well as further moderation in the consumer payment rate, mostly offset by the sale of the Bj's portfolio.

Revenue for the quarter was $1 billion up 7%, resulting from higher average credit card balances and non interest income, partially offset by increased reversals of interest and fees, resulting from higher gross losses in the quarter.

Total noninterest expenses increased 12% year over year.

Looking at the financials in more detail on slide seven total net interest income was up 1% from the second quarter of 2022, and with NIM nearly flat year over year total.

Total noninterest expenses increased 12% from the second quarter of 2022, you have declined 3% sequentially.

The year over year increase was partially the result of higher employee compensation and benefits costs due to increased hiring to support to support our investment in both technology and digital capabilities. We also incurred elevated collection costs as well as higher card and processing costs, including fraud.

The sequential decline in expenses was driven by lower variable costs from lower sales and strategic credit tightening and expense efficiencies, we expect certain expense efficiencies to continue in the third quarter, resulting in lower sequential expenses in the third quarter, including an approximately $12 million sequential decline in depreciation on the <unk>.

Amortization costs additional details on expense drivers can be found in the appendix of the slide deck.

Income from continuing operations was up $52 million for the quarter versus the second quarter of 2022, reflecting a lower provision for credit losses, while P. PNR marginally increased year over year.

Turning to slide eight loan yields continued to increase up 110 basis points year over year loan yields benefited from an upward trend in the prime rate, causing our variable price loans to move higher in tandem both loan yield and net interest margin were pressured by an increase in the reversal of interest and fees relate.

To elevated credit losses funds.

Funding costs continue to rise and remain in line with our expectations.

As you can see on the bottom right graph, we continue to improve our funding mix through our actions to grow our direct to consumer deposits, while maintaining the flexibility of secured in wholesale funding the reduction in secured borrowings this quarter as a result of the sale of the Bj's portfolio in February as.

As Ralph discussed we are pleased with the progress we made during the quarter and executing our parent debt plan, including refinancing our term loan and revolving line of credit extending certain of our debt maturities and reducing our unsecured debt.

Turning to slide nine we are proud of the success and funding diversification, we have achieved from growth in our direct to consumer deposits are direct to consumer average deposits grew 51% year over year to $5 8 billion for the quarter with current balances standing at over $6 billion.

These deposits, which are over 90% FDIC insured represented 33% of our total funding mix versus 22% a year ago, notably we experienced net positive inflows of direct to consumer deposit balances during each week of the second quarter.

As expected we are seeing more competition in the online deposit space, we will remain opportunistic yet prudent as we continue to grow our direct to consumer funding given.

Given the repricing characteristics of our credit card portfolio and low deposit gathering cost we are able to offer very competitive rates to drive growth and maintained balanced stability.

Moving to credit on slide 10, our delinquency rate for the second quarter was five 5% down slightly from the first quarter as expected with the impact from the transition of our credit card processing services abating.

The net loss rate was 8.0% for the quarter, we estimate the second quarter rate was elevated by approximately 100 basis points from the customer accommodations made last year related to the transition of our credit card processing services.

The reserve rate remained flat sequentially at 12, 3% as key forward looking macroeconomic indicators began showing signs of stability.

We intend to maintain a conservative weighting of economic scenarios in our credit reserve model in anticipation of ongoing macroeconomic challenges and the consequential impact on our credit reserves from what we've seen now both in terms of the internal credit quality characteristics of our loan portfolio and the macro outlook, we believe the reserve.

May have peaked and we will now hold steady for a period of time.

Additionally, our credit risk score distribution mix improved modestly from the first quarter, our percentage of cardholders with 660, plus credit score remains materially above pre pandemic levels, given our prudent credit tightening mix and a more diversified product mix with co branded proprietary cards, representing a larger portion of the portfolio.

Turning to slide 11.

We have continued to enhance our financial resilience by taking a number of actions as.

As Ralph mentioned in his remarks, we continue to proactively manage our credit risk to protect our balance sheet in the face of more challenging economic conditions consistently managing our risk tolerance ensures we are appropriately compensated for the risk. We take we closely monitor our projected returns with the goal of generating strong risk adjusted margins above our peers.

<unk>.

Additionally, we continue to responsibly manage risk return tradeoff by tightened credit, which includes pausing credit line increases and implementing credit line decreases when necessary.

We remain confident in our disciplined credit risk management, and our ability to drive sustainable value through the full economic cycle.

We are committed to delivering responsible profitable growth, even if it means slowing growth during more uncertain economic periods.

Moving to slide 12, Ralph already touched on the notable improvements we've achieved in our capital metrics and debt levels. While we have made substantial improvements to strengthen our balance sheet. Since 2020, we still have some additional opportunities ahead, specifically, we aimed to build our total company capital.

<unk> closer to those of our peers, while reducing our double leverage ratio from where we are today, we will balance achieving these targets with continued investments in our business and responsible growth aligned with our capital priorities.

Our actions over the past three years provide greater financial flexibility to support our long term growth plans, which we will detail during our investor day in 2024.

Before moving to our 2023 outlook I would highlight the improvement in our tangible book value per share as shown on the graph on the right side of slide 12, we have generated a 33% compound annual growth rate in our tangible book value per common share since the first quarter of 2020 and given our strong.

Cash flow generation, we expect to continue to further grow our tangible book value over time.

This growth combined with our meaningfully improved financial resilience and a strengthened balance sheet should yield a company valuation as a multiple of tangible book value. We remain confident in our strategic direction and will continue to execute on our initiatives to build long term value.

Finally.

Slide 13 provides our financial outlook for the full year 2023.

Our financial outlook has been updated to reflect slowing sales growth as a result of both self moderated consumer spending and our targeted credit tightening.

For the full year average loans are expected to grow in the low to mid single digit range relative to 2022 based on the latest economic outlook impacted consumer spend our credit strategies and current new partner pipeline, including the announcement of the Dell consumer credit portfolio acquisition, which is expected to be.

Which is expected to close in the fourth quarter of this year. The Dell acquired portfolio is expected to be less than $500 million, which is in our historical sweet spot for portfolio acquisitions and is projected to drive strong risk adjusted returns.

We expect revenue growth to be slightly above our average loan growth in 2023, excluding the gain on sale from the portfolio sale with a full year net interest margin similar to the 2022 full year rate of 19, 2%.

We continue to expect second half 2023 total expenses to be lower than the first half of the year with third quarter expenses to be lower than the second quarter, driven by improved operating efficiencies related to our technology modernization efforts and lower intangible amortization expense.

With a previously capitalized software development project, reaching the end of its useful life in the second quarter, we forecast depreciation and amortization expense to decline in the third quarter to a run rate below $25 million per quarter.

Yes.

We have refined our net loss rate outlook as we now anticipate the full year 2023 rate will be in the low to mid 7% range, including impacts from the transition of our credit card processing services.

While our tighter underwriting and credit line management should benefit future loss performance. These actions create a near term headwind for the remainder of 2020 threes loss rate by lowering our projected loan balance which forms the denominator in the net loss rate equation.

Our economic outlook assumes inflation remains elevated but moderates with a gradual increase in the unemployment rate for the remainder of 2023.

We expect the third quarter net loss rate to be around 7% with July representing the last month that is anticipated to reflect an impact from the transition of our credit card processing services.

Our full year normalized effective tax rate is expected to remain in the range of 25% to 26% with quarter over quarter variability to timing of certain discrete items.

Finally, this morning, we announced that the board approved a share repurchase authorization intended to offset share count dilution in 2023, bringing our weighted average diluted share count back closer to 50 million shares for the second half of 2023.

In closing, we are prudently managing risk return trade off through a challenging macroeconomic environment, while continuing to strategically invest and drive long term value for our stakeholders.

Operator, we are now ready to open up the lines for questions.

Thank you.

Ladies and gentlemen, thank you I would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by K Okay.

To ask a question. Please ensure you're fine is unmated lately.

Our first question today comes from the line of John J Zaccone with K B W.

Sanjay. Please go ahead.

Thanks, Good morning, and good results in a tough backdrop.

First question for Ralph.

As it seems we're moving towards this final rule around late fees.

Pretty much it seems at the same level as the preliminary proposal, maybe you could just give us an update on the plan to offset the impact and what kind of feedback you're getting from your partners.

Yes, Hi, Jeff side, I'll, let Perry I'll, let <unk> chime in we've been anticipating this for a while and we continue to look at.

Alternative ways to to close the gap to stay open and our.

With our organization so the themes Havent change we're looking at that.

APR is we're looking at fees.

Fees for credit and we're looking at other things such as where do we draw the line on an underwriting for credit.

All things that we've been looking at since the beginning and will continue to look at.

As we move forward.

Anything to add Perry.

No as I say similar to what you're probably already aware of and you've heard.

The rules arent final.

Expecting something profitably in October expect those rules will likely be challenged in the court by industry Association and that could result in a lengthy process before any new rules become effective and I think Ralph talked about all the different things but throughout this.

The team is working closely with partners and our objective is to really try to make sure that our partner economics are not impacted from this side. We're in this together is what's called a partnership.

Okay, and then just a follow up for you Perry the slower growth.

I assume a lot of this slower growth is being driven by your.

Tightening the box a little bit I'm, just curious is that the right assumption or are you actually seeing diminishing demand for loans and then maybe also help us think about the capital return.

Good positive step the small capital return, but at what point can you ramp it up in terms of the TCE ratio. Thanks.

Yes so.

Related to the outlook, we gave on the consumer loan growth I'd say, it's a combination of two things one our own credit tightening, but also when you think about things we've talked about with the K economy and people who are most impacted by inflation theirself moderating their spend so we are seeing some slowing and moderating span.

And that's built into our outlook. So it's a combination of those two things that are impacting loan growth as well when you have periods of elevated gross losses that also.

We're seeing demand for loans and then maybe also help us think about the capital return.

Tempers the growth by five percentage points and this time at this time.

It's a good positive step the small capital return, but at what point can you ramp it up in terms of the TCE ratio. Thanks.

As it relates to the.

Capital returns I think Ralph stated very clearly in the past what our capital priorities are we're going to continue to strengthen our balance sheet to make sure we improve our capital ratios.

Yes, so related to the outlook, we gave on the consumer loan growth I'd say, it's a combination of two things one our own credit tightening, but also when you think about things we've talked about with the K economy and the people who are most impacted by inflation theirself moderating their spend.

As we set those targets continues capital pay down debt support growth in the business. So really this repurchases as nothing more than what is already in our capital plan and we'll call. It good housekeeping and keeping our share count around that $50 million range.

So we are seeing some slowing and moderating spend and that's built into our outlook. So it's a combination of those two things that are impacting loan growth as well when you have periods of elevated gross losses that also can temper the growth by five percentage points. This time at this time.

Great. Thank you.

Our next question comes from Robert Napoli with William Blair.

Please go ahead your line is open.

Thank you good morning.

And congratulations on the dramatic improvement in the balance sheet, that's really appreciate it.

As it relates to the.

Capital returns I think Ralph has stated very clearly in the past what our capital priorities are we're going to continue to strengthen our balance sheet and make sure we improve our capital ratios.

Pretty.

Pretty substantial.

So on your in your presentation.

Welcome Perry you do kind of reiterate.

As we set those targets continues capital pay down debt support growth in the business. So really this repurchases as nothing more than what is already in our capital plan and we will call. It good housekeeping and keeping our share count around that 15 range.

Youre comfortable with 6% charge off rate through the cycle.

We're about 6% now.

It gives you the confidence in that and it looks to me like your subs.

Your mix from a couple of years ago has actually become a little bit more subprime.

Great. Thank you.

So I just would like to understand how you have confidence in that type of the charge off rate through a cycle.

Our next question comes from Robert Napoli with William Blair.

Yes, I think the way to think about it is when you look at through the cycles and when we've evaluated cycles cycle can be a 10 year from peak to peak trough to trough 10 to 15 years. So you're going to have periods of time would you say, we're going to run through the cycle average of 6% youre going to have.

Please go ahead your line is open.

Thank you good morning.

And congratulations on the dramatic improvement in the balance sheet, that's really appreciate it.

Pretty good.

Pretty substantial.

So on your in your presentation.

Welcome Perry you do kind of reiterate.

Years quarters in years, where you are above 6% and then you're going to have.

We're comfortable with 6% charge off rate through the cycle, what we're about 6% now what.

When you are below 6%.

Our credit profile continues to improve compared to where we were pre pandemic and some of the movement that you. Just noted when you look back say a year ago was we had bj's in our portfolio, which was a greater mix in there so that had a better than average credit score so that coming out new partners coming in.

What gives you the confidence in that and it looks to me like your subs.

Mix and from a couple of years ago has actually become a little bit more subprime.

So I just would like to understand how you have confidence in that type of charge off rate through a cycle.

<unk>.

Yeah, I think the way to think about it is when you look at through the cycles and when we've evaluated cycles cycle can be a 10 year from peak to peak trough to trough 10 to 15 years. So you're going to have periods of time would you say, we're going to run through the cycle average of 6% youre going to have.

Each partner has a different set of credit profile, but we are managing this over time to achieve that 6%. So really in terms of when we come back below 6% is going to be much dependent on when the economy improves and then expect a prolonged period that will be at or below 6% and you blend back out.

Years quarters, and years, where you're above 6% and then youre going to have.

I hear you, but unemployment is pretty low so I mean, thats kind of the challenge I don't know that we get unemployment much lower than it is today.

Here is when you are below 6%.

In the future.

And just on the DAU when it's nice to see that so maybe a commentary on the pipeline.

Of.

Potential new business centers now come with a portfolio.

Yes.

In.

As Ralph Yes, Dell com for the portfolio around our sweet spot.

So we're very excited too.

On board them in the fourth quarter and the pipeline remains.

Very robust and its robust up and down the line from de Novo's too.

Those partners with portfolios in.

One of the things that we are really excited about is we can compete up and down that that line for the for the $100 million portfolios and a $500 million portfolios and above because we have an array of products now that can address all consumers' needs. So we're excited about it we're getting invited to a lot of.

No I hear you, but unemployment is pretty low so I mean, thats kind of the challenge I don't know that we get unemployment much lower than it is today.

But.

And just on the DAU when it's nice to see that there's maybe a commentary on the pipeline.

A lot of Rfps and business development continues to be strong.

<unk>.

Potential new business centers that will come with a portfolio.

Hey, Bob.

Following back up on your point about.

Yes.

As Ralph yes, they'll come to the portfolio.

Unemployment is low right now that is absolutely a fair point and I think that we've talked about for the past year, what's driving our loss rate up right. Now is the elevated level of inflation in that persistently high inflation that consumers are experiencing rate I mean, if you think about what consumers have experienced.

Our sweet spot.

So we're very excited too.

On board them in the fourth quarter, you know the pipeline remains.

A very robust and its robust up and down the line from de Novo's too.

Those partners with portfolios and one of the things that we are really excited about is we can compete up and down that line.

Recently to the average American earned $67000, while their monthly Bill is up $250 from a year ago and $750 from two years ago, and that's what's putting pressure on the consumers and their ability to pay so while unemployment's low.

<unk> for the for the $100 million portfolios, and a $500 million portfolios and above because we have an array of products now that can address all consumers' needs. So we're excited about it we're getting invited to a lot of.

<unk> inflation and persistent inflation thats impacting moderate and lower income Americans. So that's why we're all so focused on what the fed is doing or are they going to get inflation under control as inflation eases that is able to put give relief to the consumers and that's what you would expect then wage growth outpaced inflation and then consumers.

Lot of Rfps and business development continues to be strong.

Hey, Bob.

Wanted to follow back up on your point about.

You know that.

Unemployment is low right now that is absolutely a fair point and I think that we've talked about for the past year, what's driving our loss rate up right. Now is the elevated level of inflation in that persistently high inflation that consumers are experiencing right. I mean, if you think about what consumers have experienced.

So.

These are all different periods, when you're going through different economic cycles and this one is really inflation driven that's causing the pressure. So over time, that's why I said earlier I expect inflation to come down which will create some really for our broader consumers and then yes unemployment may tick up that could replace some of that but I don't expect it to be a compounding impact.

Recently to the average American earned $67000, while their monthly Bill is up $250 from a year ago and $750 from two years ago, and that's what's putting pressure on our consumers and their ability to pay so while unemployment's low real problems inflation and persistent inflation thats impacting March.

Thank you just to sneak in one more student loans, what's your affect our view of your analysis of the effect on your business from the repayment of student loans.

And lower income Americans. So that's why we're all so focused on what the fed is doing or are they going to get inflation under control as inflation eases that is able to put give relief to the consumers and that's what you would expect then wage growth outpaced inflation and then consumers.

Yeah. So we have good line of sight to that.

Around student loans.

When we underwrite customers, we who have stood alone we can see that we monitor their performance and then we'll take action as necessary and what I'd say is less than a quarter of our portfolio have a student loan, but what I think is going to happen. While we expect there we know what happened with.

So.

These are all different periods when you're in a different economic cycles and this one is really inflation driven that's causing the pressure. So over time, that's why I said earlier I expect inflation to come down which will create some relief for our broader consumers and then yes unemployment may tick up that could replace some of that but I don't expect it to be a compounding impact.

The ruling that they can't forgive.

That outright the administration is working to come up with other ways to give some relief to consumers and that's something that we're watching I think youre seeing the department of education has within their rights to recalculate.

Thank you just to sneak in one more student loans, what's your affect our view of your analysis of the effect on your business from the repayment of student loans.

How the payment requirements are determined in terms of minimum.

<unk> as a percent of discretionary income so they are able to look at pay what how they calculate their income and then moving from 10% of discretionary income to pay down student debt to 5% and then making it $0 for people who have minimum wage or waiving.

Yes.

We have good line of sight to that.

And student loans.

When we underwrite customers, who have a student loan we can see that we monitor their performance and then we take action as necessary.

It's less than a quarter of our portfolio have a student loan, but what I think is going to happen. While we expect there we know what happened with.

Entirely for people with 20% to 25 years of it so.

I don't think its going to have a large impact, but it's something we actively we will monitor.

The ruling that they can't forgive.

Thank you.

Our next question comes from Mihir Bhatia with Bank of America Merrill Lynch. Please go ahead. Your line is open.

How the payment requirements are determined in terms of minimum.

Good morning, and thank you for taking my questions.

Maybe I just wanted to start with the second quarter and like you know what what changed during the second quarter.

Payment as a percent of discretionary income so they are able to look at pay what how do the.

Discretionary income and then moving from 10% of discretionary income to pay down student debt to 5% and then making it $0 for people.

Specifically is there something youre seeing in the data, that's giving you pause because it sounds like you've tightened underwriting further in the quarter, which is leading to slower sales growth.

Have minimum wage or waiving that entirely for people with 20% to 25 years of it so.

Then.

There you go with the slower loan growth you also uptick give credit guidance again, I think that some it sounded like paki denominator effect in there, but I guess what changed in the past three months.

I don't think its going to have a large impact, but it's something we actively we will monitor.

Thank you.

Cotter just come in a little below your expectation that you are seeing something in the macro something in your own data.

Our next question comes from Mihir Bhatia with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Just trying to understand.

What's different today versus.

Good morning, and thank you for taking my questions.

Three months ago, because I think most people like.

Most investors are talking up soft landing right. So just what's changing in your data and what you'll see.

I just wanted to start with the second quarter and like you know what what changed during the second quarter.

Yes.

Specifically right is there something youre seeing in the data, that's giving you pause because it sounds like you've tightened underwriting further in the quarter, which is meeting the slower sales growth.

Really good question, So let me.

Start by Tomo, what's going on with the economy more broadly and then how that informs the way we think about credit and then how that how we're seeing that play itself through in actual performance of consumer so.

And then from there you go with the slower loan growth.

Also uptick dip credit guidance again, I think there's some it sounded like paki denominator effect in there, but I guess what changed in the past three months.

When we think about the economy.

I think the economy and the consumer is resilient. So we'll start with that but a lot of uncertainty in terms of how they are dealing with this persist the persistent headwinds are out there and while some of the signs are steadying and even showing signs of improvement. The economy is starting to slow I mean, if we look at U S retail sales year over year since March.

Quarter, just come in a little below your expectations are you seeing something in the macro something in your own data.

Like just trying to understand.

What's different today versus.

Three months ago, because I think most people.

Most investors are talking up soft landing right. So just what's changing in your data and what you'll see.

They are only up 1% to 2% and thats with inflation north of 3% that means real spending is down.

Yes.

The lowest level since 2019, and you think back to that point, that's significant because a lot of economists were concerned about a potential recession back then before it was preempted by the pandemic.

Really good question, So let me.

So during this period of time inflation has remained elevated while it's been improving.

When we think about the economy.

If you think about shelter and food they are still significantly up year over year and you think about the comment I made about that average consumer make 67000, and how much more of their payments and their monthly bills today.

The economy and the consumer is resilient. So we'll start with that but there's a lot of uncertainty in terms of how they are dealing with this persist the persistent headwinds are out there and while some of the signs are steadying and even showing signs of improvement. The economy is starting to slow I mean, if we look at U S retail sales year over year since March.

We're seeing.

Some headlines out there that's more layoffs coming you see the impact of higher interest rates are starting to pull through consumer sentiment fell in April and may but yet the good news is you're starting to see okay. We had June sentiment improved wage growth outpaced inflation for the first time since February of 2021, but that.

Were only up 1% to 2% and thats with inflation north of 3% that means real spending is down.

That's the lowest level since 2019, and you think back to that point, that's significant because a lot of economists were concerned about a potential recession back then before it was preempted by the pandemic and so during this period of time inflation has remained elevated while it's been improving if you think about shelter and food theres still significantly.

<unk> effect over that period of time is weighing on consumers. So thats forward, while the market's steady both in terms of the job market and the stock market that sounds good. So those factors led to improving consumer sentiment in the month of June that said, we are seeing pressure in sales in July and we here and listen to our partners. So.

Up year over year, and you think about the comment I made about that average consumer make 67000 and how much more they're paying in their monthly bills today.

I think that's kind of caused a little bit of a contraction in the third quarter and this is all about the K economy, we've talked about many times in the past, where you think about us as a full spectrum lender right modern middle income Americans are more affected by the economic conditions than upper.

We're seeing.

Middle Class Americans. So most of these folks have depleted their savings, it's a growing cohort of people out there who are struggling to make their costs every month due to the things on top of a shelter and food prices that are way up. So we're observing consumers are doing the best they can to work through this but they are feeling the pressure and they're adjusting their.

<unk> effect over that period of time is weighing on consumers. So that's part of it while the market steady both in terms of job market and the stock market that sounds good. So those factors led to improving consumer sentiment in the month of June that said, we're seeing pressure in sales in July and we here and listen to our partner so.

Spend and the slower spend that we're observing is happening across all the consumer groups, but really exaggerated for lower risk score customers. So that's what we're watching and then we're doing credit pullback along the way it's not like we're just started this quarter, but it's a compounding effect of those credit pullback and now we're getting more lineup.

Site into consumer demand pulling back coupled with our actions gives us better line of sight into what the back half of the year is looking like and honestly, we need a prolonged period, where household wage growth outpaces.

Middle Class Americans. So most of these folks have depleted their savings, it's a growing cohort of people out there who are struggling to make their costs every month due to the things I told the shelter and food prices that are way up. So we're observing consumers are doing the best they can to work through this but they are feeling the pressure and they're adjusting their.

This inflation with employment remains steady for these customers I think to resume the type of robust spending while they're still spending we're just saying that it's a little more tempered than what we thought it was going to be.

Spend and the slower spend that we're observing is happening across all the consumer groups, but really exaggerated for lower risk score customers. So that's what we're watching and then we're doing credit pullback along the way it's not like we're just started this quarter, but it has a compounding effect of those credit pullbacks and now we're getting more lineup.

And we're being.

We've stated Ralph and I said, many times, we're focused on responsible growth.

Right.

Thank you for that color that's quite helpful.

For Us I just wanted to follow up quickly on I think on <unk> question in the answer I think very well.

I think it was you even said something about like you are trying to.

Make sure those economics are not impacted by the late flu can you just expand on that some more I guess, maybe take the opportunity to expand on just the discussion with your partner is holiday thinking about the issue how much attention of it being too at how willing are they making.

Changes to the program to account for it.

Yes. Thank you.

And we're being.

Yeah.

We've stated Ralph and I said, many times, we're focused on responsible growth.

Yes, what I'd say is that we are having productive discussions with the partners I.

Great.

I think they appreciate the fact that.

And thank you for that color that's quite helpful.

We have to make some contractual changes pricing changes and the ones that Ralph mentioned.

For Us I just wanted to follow up quickly on I think on <unk> question in the answer I think Barry.

And without some of those adjustments.

There is going to or perhaps even with some of their own contracts.

I think it was you even said something about like Youre trying to.

We may have to reduce.

Make sure those economics are not impacted by the late for you can you just expand on that some more I guess, maybe take the opportunity to expand on just the discussion with your boss knows holiday thinking about the issue of how much attention that's being too at how willing are they making.

People were able to underwrite and that would mean restricting credit within that also impact their ability to.

I'll say enable the sale. So those are conversations they probably look different for each partner. Some partners are going to be more impacted by this proposed rule change than others and thats something that so again it looks different for each partner I mean, I don't think.

To make changes to the program to account for it.

Yes. Thank you.

None of US like the proposed rule change partners included but I think they are all starting to better understand it and working jointly to figure out how do we mitigate it. So we are able to continue to lend to the customers who they serve.

Yes, what I'll say is that we are having productive discussions with the partners.

Think they appreciate the fact that we.

We have to make some contractual changes pricing changes and the ones that Ralph mentioned.

Okay. Thank you for taking my question.

And without some of those adjustments.

There is going to or perhaps even with some of their own contracts.

The next question comes from the line of Adelson with Morgan Stanley . Please go ahead. Your line is open.

We may have to reduce.

People were able to underwrite and that would mean restricting credit was then it could also impact our ability to.

Hey, Good morning, guys appreciate taking my question here.

Just wanted to understand a little bit better than what you are seeing under the hood in your portfolio. I think there has been a bit of a narrative that don't know where its quality lowest income credits or maybe starting to stabilize a little bit.

Trust me none of US like the proposed rule change partners included but I think they are all starting to better understand it and working jointly to figure out how do we mitigate it. So we're able to continue to lend to the customers who they serve.

Are you guys seeing that I know you just alluded to some pressure on the though mid income consumer.

Maybe just an update on the internals there and then.

Okay. Thank you for taking my question.

Maybe more specifically can you give us an update on what percentage of your borrowers are maybe doing a maintain now versus last quarter a year ago.

The next question comes from the line of Adelson with Morgan Stanley . Please go ahead. Your line is open.

Hey, Good morning, guys appreciate taking my question here.

Yes, I think when you look at our the best.

The thing to look at for US is look at our delinquency rates, we're seeing stabilization, which is why I feel confident in being able to guide the second quarter loss rate should be about 100 basis points below I mean third.

Just wanted to understand a little bit better than what you're seeing under the hood in your portfolio.

I think there has been a bit of a narrative that don't know where its quality lowest income credits or maybe starting to stabilize a little bit.

<unk> third quarter loss ratio by 100 basis points below the second quarter loss rate because of our line of sight into delinquency formation.

Are you guys seeing that I know you just alluded to some pressure on NIM, though mid income consumer.

Payment rates still continue to come down when you look at where we are this quarter compared to the first quarter again I think these are things that we just continue to monitor and when we're looking at it we're seeing some stabilization in part because of the credit actions that we've taken.

Maybe just an update on the internals there.

Maybe more specifically can you give us an update on what percentage of your borrowers or maybe doing a min pay now versus last quarter a year ago.

But it is something that you just continue to watch and hopefully some of the inflation improvement or moderation is going to give a little bit of relief, but when you do look at certain categories. They do remain elevated so we're just very watchful of it.

Yes, I think when you look at our the best.

Thing to look at for US is look at our delinquency rates, we're seeing stabilization, which is why I feel confident in being able to guide the second quarter loss rate should be about 100 basis points below <unk>.

Okay, and then just in terms of spending I know Vijay is just kind of distorting the year over year noise about 30% decline.

Third quarter loss ratio by 100 basis points below the second quarter loss rate because of our line of sight into delinquency formation.

Any way to think about kind of the <unk> growth youre seeing and how.

July is trending so far and the consumer trends consumer spending front I know you are.

Commenting about some weakness in the retail sales for July .

I guess, just trying to get a better sense of how consumers are spending within your book.

Whether they are still continuing to kind of trade down like you said before.

Yeah. This is Ralph I think.

Let's put bj's in perspective, it was a high spec high transact of book and that's that's.

So that's what that dosing effects that you're seeing we have new partners coming on we're seeing growth with some new partners.

As they came on the books, so you will see accelerated growth.

Okay, and then just in terms of spending I know Vijay is just kind of distorting the year over year noise about 30% decline.

<unk> partners as they move forward so spending in July .

It was a little softer than June .

Any way to think about kind of the <unk> growth youre seeing in <unk>.

We've turned the corner in June spending was a little softer.

I see is that consumers are still spending, but they're self regulating so they're spending with thoughtfully instead of <unk>.

July is trending so far in the consumer trend in consumer spending front I know youre, commenting about some weakness in the retail sales for July .

Spending.

I guess, just trying to get a better sense of how consumers are spending within your book.

And in a different way, which I think is a good thing.

They are managing their managing their budget in a period of time when they have to within a high inflation and high interest rate. So.

Whether they are still continuing to kind of trade down like you said before.

Yeah. This is Ralph I think let's put Bj's perspective, it was a high spec high transact a book and Thats.

I expect that will continue for some period of time, but as we bring on new partners, we see growing spin.

So that's what that dosing effects that you're seeing we have new partners coming on we're seeing growth with some new partners.

Thank you.

As they came on the books, so you will see accelerated growth.

Our next question comes from the line of Bill <unk> with Wolfe Research. Please go ahead.

<unk> partners as they move forward so spending in July .

Was a little softer than June .

Thank you good morning, Ralph and Perry.

Turning the corner in June spending was a little softer.

When I see is that consumers are still spending, but they're self regulating so their spending with.

Portfolio.

Spending.

In a different way, which I think is a good thing.

They're comparable enterprise level CET, one metric that you think about internally. It seems like you guys are getting close but it would be great to hear from you. How close you think you are.

Managing their managing their budget in a period of time when they have to within a high inflation and high interest rate. So I.

I expect that will continue for some period of time, but as we bring on new partners, we see growing spin.

Yes, I mean look we're closing in on it right, but for US our total risk based capital is our binding constraint and so thats something that we are continuing to evaluate what's the right target for us and for what.

Thank you.

Our next question comes from the line of Bill <unk> with Wolfe Research. Please go ahead.

We say getting closer to peers remember every company has a slightly different target rate based on their internal stress models and the profile of their business. So it's something where youll look we've made tremendous progress as you've noted and we're getting close but we still have more room to go and as well as continuing to improve that double leverage ratio, which.

Thank you good morning, Ralph and Perry.

I wanted to follow up on your commentary around building capital closer to your peers the growth in your tangible common equity has been impressive but most of your peers tend to have CE tier one targets in the 11% range at the enterprise level is there a comparable enterprise level CET one metric that you think about internally. It seems like you guys are.

Paying down debt a little bit further.

And it seems like it just puts more.

We're getting close but it'd be great to hear from you. How close you think you are.

On the.

The kind of the restart of the buyback once once we have kind of greater clarity that youre at peer levels.

Yes, I mean look we're closing in on a rate, but for us our total risk based capital is our binding constraint and so thats something that we are continuing to evaluate what's the right target for us and for like.

So certainly.

Just some back of the envelope math suggest that you are close but it would be great. If there's any way that you guys might be able to try to provide something like that going forward.

That would be much appreciate it.

That was it for me thank you.

Thank you.

Yeah.

Our next question comes from the line of Dominick Gabriele with Oppenheimer. Please go ahead Domenic. Your line is open.

Paying down debt a little bit further.

Thanks, So much for taking my question and good morning, everybody.

No.

I guess, a peer of yours talked about.

And it seems like it just puts more.

On the.

Recouping some of the late fee revenue.

The kind of the restart of the buyback once once we have kind of greater clarity that youre at peer levels.

There were offsets would take quote unquote years.

Was wondering how you think about that timing.

So certainly.

Just some back of the envelope math suggest that you are close but it would be great. If there's any way that you guys might be able to try to provide something like that going forward.

Think that if you got a head start on this.

It's more of a one excuse me two to three quarter impact or is this really measured in a year and years to fully recoup the offset.

That would be much appreciate it.

That was it for me thank you.

Thank you.

Late fees coming down.

Our next question comes from the line of Dominick Gabriele with Oppenheimer. Please go ahead Domenic. Your line is open.

I have a follow up thank you.

Thanks Dominic.

Yes, I think it's really goes to the dynamic of the lever, which you pull right. So as we think about the levers.

Thanks, So much for taking my question and good morning, everybody.

So.

If we do across the board APR increases that you think would happen yes as soon as you say.

I guess a peer of yours.

About.

Recouping some of the late fee revenue.

There as soon as we hear the announcement you may start to increase Apr's for new accounts and existing customers and then say the effect goes in 12 months later, but the way card Act has the payment hierarchy rules. It pays off the highest APR first and then the low so it's going to take a bit of a burn in period for that to happen for us to realize the benefit.

There were offsets would take quote unquote years.

I was wondering how you think about that timing do you think that if you got a head start on this.

It's more of a one excuse me two to three quarter impact or is this really measured in a year and years to fully recoup the offset.

Of the higher APR on existing account balances new accounts, you get that benefit as soon as you book the new accounts. So for those they look a little different so really determined what determines the phase in of this is the amount of new volume that comes on through new accounts and the churn in your portfolio.

Late fees coming down.

Just have a follow up thank you.

Thanks Dominic.

Yes, I think it's really goes to the dynamic of the lever, which you pull right. So as we think about the levers.

If we do across the board APR increases that you think would happen yes as soon as you think there as soon as we hear the announcement you may start to increase apr's for new accounts and existing customers and then say the effect goes in 12 months later, but the way card Act has.

And that existing account base is really I think what they are speaking to is the.

How long it would take to fully mitigate now obviously transaction fees annual fees things like that partner agreements all of those things will have a much faster burn in but I think they are speaking to be 100% mitigated.

The payment hierarchy rules it pays off the highest APR first and then the low so it's going to take a bit of a burn in period for that to happen for us to realize the benefits of the higher APR.

The card act aspect could take a longer period of time on existing balances.

On existing account balances new accounts, you get that benefit as soon as you booked into account so for those they look a little different so really determined is what determines the phase in of this is the amount of new volume that comes on through new accounts and the churn in your portfolio.

So it's really the degree to which the last dollar is fully mitigated maybe it does take years. It just depends on I think the profile of the portfolio.

So it sounds like more of if we were to calculate the turnover of the total portfolio.

That's almost what im hearing right there does that sound right.

And that existing account base is really I think what they are speaking to is the.

That is an element that goes into the factor that the pace at which.

It gets offset.

Okay Cool alright, I really appreciate that and then if we just think about.

The processing expenses as a percentage of credit sales.

I believe that was about one 6% this quarter than it was last quarter, but it's up from 1% the previous year I'm just trying to think about some of the efficiencies that you're targeting I know that you've talked about modest efficiency gains and we've seen some real progress.

The card act aspect could take a longer period of time on existing balances.

So it's really the degree to which the last dollar is fully mitigated maybe it does take years. It just depends on I think the profile of the portfolio.

So it sounds like more of if we were to calculate the turnover of the total portfolio.

Over the last few years, but maybe you could just talk about what may have changed to elevate that percentage and where you think that percentage.

That's almost what im hearing right there does that sound right.

That is an element that goes into the factor that the pace at which Ah.

Should trend out and some of the factors. Thanks.

Yes, I think what I would say is over time I would expect us to continue to be able to see that rate come back down. It was elevated in the first half of this year in part because of the conversion related expense carryover.

It gets offset.

Okay Cool alright, I really appreciate that and then if we just think about.

The processing expenses as a percentage of credit sales.

Driven out those efficiencies yet coupled with elevated fraud thats been seen across the industry and so as.

Again, that's something the industry always has to grapple with it's been a little elevated across the entire industry in the first half of the year and expect that to get back in line over time.

Over the last few years, but maybe you could just talk about.

Thank you.

What may have changed to elevate that percentage and where you think that percentage.

Yes.

Our next question comes from Reggie Smith with Jpmorgan Ritchie. Please go ahead. Your line is open.

Should trend out and some of the factors. Thanks.

Hey, good morning, Thanks for taking the question most of mine have been hit but I wanted to kind of dig into I know you guys had talked about and everybody is talking about tightening credit bands.

Driven out those efficiencies yet coupled with elevated fraud thats been seen across the industry and so as.

Standards.

My question is are there any <unk>.

<unk> will limit to how high you can set apr's on new accounts.

That's something the industry always has to grapple with it's been a little elevated across the entire industry in the first half of the year and expect that to get back in line over time.

Just curious.

Obviously, you guys are in the business of pricing.

I was just wondering if there was a way too.

<unk>.

Except more people or open more accounts, maybe at a higher APR.

Thank you.

Yes.

Where are you at that limit.

Our next question comes from Reggie Smith with Jpmorgan Ritchie. Please go ahead. Your line is open.

There are no.

Limits, but we want to be responsible and competitive in the environment that.

Hey, good morning, Thanks for taking the question most of mine have been hit but I wanted to kind of dig into I know you guys had talked about and everybody is talking about tightening credit.

We working so while they are not limits. Our view is we've got to be reasonable and respectful.

It will be competitive.

And standards.

My question is are there any <unk>.

Got it thank you.

Contractual limits to how high you can set apr's on new accounts.

And so all of that.

Our next question comes from David <unk> with JMP, David. Please go ahead.

Just curious that.

Obviously, you guys are in the business of pricing risk.

I was just wondering if there was a way too.

Yes. Good morning, Thanks for taking my question as well.

No.

Except more people or open more accounts, maybe at a higher APR.

Just just to return to the spending outlook discussion and observations.

Where are you at that limit.

There are not limits, but we want to be responsible and competitive in the environment that we were working so while they are not limits. Our view is we've got to be reasonable and respectful and be competitive.

I'm wondering if it was helpful. You provided very early in your prepared remarks.

So talk of the verticals that you were seeing changes too.

And specifically specialty apparel it sounded like it was.

You were seeing.

Fair amount of the <unk>.

Moderation and I'm wondering I guess, it's a two part question.

Got it thank you.

So all of that.

One is.

Maybe just an update on some of the vertical exposure sort of thing.

Our next question comes from David <unk> with JMP, David. Please go ahead.

The mix.

And secondly, as you think about.

Yes. Good morning, Thanks for taking my question as well.

Your historical exposure to very discretionary verticals like jewelry.

Just just to return to the spending outlook discussion and observations.

Sure.

I think you highlighted.

Okay.

<unk> is holding in there.

I'm wondering if it was helpful. You provided very early in your prepared remarks.

That's something that you know.

Maybe next in line for moderation can you just talk about whether this slowdown is kind of <unk>.

So talk of the verticals that you were seeing changes too.

Likely to be more broad based and whether there are discretionary verticals.

Uh huh.

And specifically specialty apparel it sounded like it was where you were seeing a fair amount of the.

That are now representing a considerable mix of the portfolio.

Moderation I'm wondering I guess, it's a two part question.

Yes, I think since 2020.

One is.

Really diversified and Derisked our portfolio.

Maybe just an update on some of the vertical exposure sort of the mix.

Back in 2020.

The wrap was.

Soft goods retail mall base and if you look at the verticals now.

And secondly, as you think about.

Just take our announcement today with Dell works, we've got the technology vertical we've got AAA and Tech travel Entertainment automotive, we've got a number of verticals beauty as well all of those verticals.

Your historical exposure to very discretionary verticals like jewelry.

I think you highlighted travel is holding in there.

That's something that you know may be next in line for moderation can you just talk about whether this slowdown is kind of.

We no longer have that concentration risk. So as we think about travel and entertainment and beauty are really holding.

Likely to be more broad based and whether there are discretionary verticals.

Truly well and actually growing so while we see a little bit of.

That are now representing a considerable mix of the portfolio.

Decline in soft goods, we see an increase in those in those areas and remember our portfolio is very different than it was.

Yes, I think since 2020.

We've really diversified and Derisked our portfolio if you remember back in 2020.

Now have a lot of general spend and discretionary spend because we've moved.

The wrap was.

Migrated to co brand cards, and 50% of our really 50% of our spend and those sales in categories are up.

Soft goods retail mall base and if you look at the verticals now.

Just take our announcement today with Dell.

Yes.

We've got the technology vertical we've got AAA and Tech travel Entertainment automotive, we've got a number of vertical beauty.

Got it got it.

Maybe just kind of a related question as you think about.

Maybe just soft goods.

As well all of those verticals.

Moderation.

And I know the Bds portfolio is always always been kind of the largest in that has a.

We no longer have that concentration risk. So as we think about travel and entertainment and beauty are really holding extremely well and actually growing so while we see a little bit of.

Yeah.

Lower FICO profile lower age.

Demographic I believe historically is there any way of getting a sense whether any of that.

Decline in soft goods, we see an increase in those in those areas and remember our portfolio is very different than it was.

Moderation in spend is actually market share attrition at point of sale to maybe other point of sale offerings versus just.

Now have a lot of general spend and discretionary spend because we've moved.

More of a macro observation.

<unk> migrated to co brand cards, and 50% of our really 50% of our spend and those sales in categories are up.

Yes, I think Thats, a good question and I think to the point, you're making it's another aspect that influences.

Sure.

Got it got it.

Maybe just kind of a related question as you think about.

Our sales growth is the growth of each partner partners, who are growing and capturing more share and and.

Maybe just soft goods.

Moderation.

No.

I'll say in favor of the consumer are clearly going to do better than others, who maybe aren't and wont give any specifics on any one partner in particular, but partner performance is certainly something that factors in and we have some as Ralph mentioned, who are doing extraordinarily well and others. In this environment are feeling pressure at all differently. So.

Yes portfolio is always always been kind of the largest in that has a.

Lower FICO profile lower age demographic I believe historically.

Is there any way of getting a sense, whether any of the moderation in spend is actually market share attrition at point of sale to maybe other point of sale offerings versus just you know.

That's it.

The way you're thinking of it I am not saying about any particular partner, but youre right as you read their own headlines that will influence into.

What more of a macro observation.

Yes.

Okay.

Our tender share.

Yes, I think Thats, a good question and I think to the point, you're making it's another aspect that influences.

Got it great. Thanks, Thanks, so much for taking my questions.

Yeah.

Our sales growth is the growth of each partner partners, who are growing and capturing more share and and.

Our final question today comes from the line of Alexander <unk> with Jefferies.

Please go ahead your line is open.

I will say in favor of the consumer are clearly going to do better than others, who maybe aren't and wont give any specifics on any one partner in particular, but partner performance.

Hey, guys. Thank you for taking my question.

Did want to clarify a little bit on just net interest income maybe if you can give us like a little bit of.

On seasonality in the next few quarters.

Certainly something that factors in and we have some as Ralph mentioned, who are doing extraordinarily well and others. In this environment are feeling pressure at all differently. So I think that's it.

What should we assume on that and then also on the Dell portfolio wanted to ask if that was included already in the guide or not.

The way you are thinking of it I'm, not saying about any particular partner, but youre right as you read their own headlines that will influence into our.

Top of that thank you.

Okay.

So what I'd say first I'll start with the Dell portfolio, that's absolutely within the guide we were aware of that and when we talk about in our guidance, we're including things that are in the pipeline as well as our best view of the economy.

Our tender share.

Got it great. Thanks, Thanks, so much for taking my questions.

Yeah.

Our final question today comes from the line of Alexander <unk> with Jefferies.

Certainly in our guide.

Please go ahead your line is open.

As it relates to net interest margin.

Hey, guys. Thank you for taking my question.

We've talked to there's lots of moving parts pluses and minuses and we expect the full year to be close to the same rate we had last year.

Did want to clarify a little bit on just net interest income maybe if you could give us like a little bit of.

On seasonality in the next few quarters.

Second quarter, so we didn't get variability with each of the quarters. So in the second quarter was impacted a lot by purification as it related to the elevated losses, so that dragged down net interest margin than seasonally third quarter is normally a high point and in our case Youre going to also then see an improvement because of the low.

What should we assume on that and then also on the Dell portfolio wanted to ask if that was incurred.

Already in the guide or if this is on top of that thank you.

Okay.

So what I'd say first let's start with the Dell portfolio, that's absolutely within the guide we were aware of that and when.

Our loss expectation, which means less of a drag on net interest margin as it related to.

When we talk about in our guidance, we're including things that are in the pipeline as well as our best view of the economy. So Bell was certainly in our guide.

Those effective losses.

The second half of the year is obviously mathematically going to be higher than the first half to get to that average of 19 point too.

As it relates to net interest margin.

We've talked with lots of moving parts pluses and minuses and we expect the full year to be close to the same rate we had last year.

And then you look at the third to the fourth quarter.

I talked earlier about losses being sequentially higher than the third quarter by about 50 basis points that means purification will be a little bit higher in the reversal of interest and fee impact in net interest margin in the fourth quarter than what it was in the third quarter. So youll get a little bit of bouncing around of net interest margin, but again.

Quarter. So we can get variability with each of the quarters. So in the second quarter was impacted a lot by purification as it related to the elevated losses, so that dragged down net interest margin than seasonally third quarter is normally a high point and in our case Youre going to also then see an improvement because of the lower.

With our line of sight into it will be higher than what we saw in the first half of the year.

Loss expectation, which means less of a drag on net interest margin as it related to.

Perfect perfect. Thank you so much.

One quick last question.

RSA this quarter.

Those effective losses.

What drove the benefit and should we kind of expect kind of the same levels going forward. Thank you.

The second half of the year is obviously mathematically going to be higher than the first half to get to that average of 19 point too.

Yeah.

Yes, as it related to RSA this quarter, it's really based on lower sales originations.

When you look at the third to the fourth quarter.

Earlier about losses being sequentially higher than the third quarter by about 50 basis points that means purification will be a little bit higher in the reversal of interest and fee impact in net interest margin in the fourth quarter than what it was in the third quarter. So youll get a little bit of bouncing around of net interest margin, but again.

Yes.

Okay.

Perfect. Thank you for taking my questions and congrats on the good quarter.

Okay.

Thank you.

We do have one further question that comes from the line of John Sorry, with Evercore ISI. John . Please go ahead. Your line is now open.

With our line of sight into it will be higher than what we saw in the first half of the year.

Good morning.

Alright.

Yes.

Perfect perfect. Thank you so much.

The loss on discontinued operations of 16 million or 32 cents a share.

One quick last question.

<unk> this quarter.

What drove the benefit and should we kind of expect kind of the same levels going forward. Thank you.

What does that relate to was it.

Revenue driven loss or just traditional operating loss or is there a.

Okay.

Yes, as it related to RSA this quarter, it's really based on lower sales originations.

The reserve charge taken there related to loyalty loyalty one.

Yes within discontinued ops. This quarter is associated with some small charges that related to discontinued legacy businesses, including loyalty one and Epsilon.

Okay.

Perfect. Thank you for taking my questions and congrats on the good quarter.

Thank you.

We do have one further question that comes from the line of John <unk> with Evercore ISI. John . Please go ahead. Your line is now open.

Okay. So it has a reserve charge being taken for the any potential litigation and the loyalty business.

Good morning.

No.

Alright.

This has nothing to do with anything.

The loss on discontinued operations of 16 million or 32 cents a share.

Related to the spin.

And at this point, we've not been sued by that litigation trust that in everybody's been talking about.

What does that relate to was it.

Revenue driven loss or just traditional operating loss or is there a reserve charge taken there related to.

Right right got it okay. Thanks, and then separately can you just comment on your partnership pipeline in terms of potential.

<unk> will be one.

No maturities of any partnerships in the <unk>.

Yes.

In discontinued ops. This quarter is associated with some small charges that related to discontinued legacy businesses, including loyalty one and Epsilon.

Just given the competition.

It remains relatively brisk on that front I would love to get your updated.

Line of sight in terms of maturing partnerships.

Yes.

I think.

I mentioned, a little earlier before the pipeline is very robust and one of the things that we're very pleased with is we're being.

Okay. So it has a reserve charge being taken for the any potential litigation and the loyalty business.

No.

Quoted on certain uncertain.

This has nothing to do with anything.

Initiatives, and we are winning more than our share.

Related to the spin.

And at this point, we've not been sued by that litigation Trust that everybody's been talking about.

<unk>.

Even.

We are less reliant on any one partner because of our diversification as we think about it and that was all renewals go.

Right right got it okay. Thanks, and then separately could you just comment on your partnership pipeline in terms of potential.

We have nearly 85% of our loan to secure through 2025.

No maturities of any partnerships in the just.

Our top five brands have been renewed through 2028, so we have a good outlook pretty secure and we look at renewables now earlier and we look at our pipeline and determined.

Just given the competition.

Remains relatively brisk on that front love to get your updated line of sight in terms of maturing partnerships.

As a percentage of winning how would how would we go about it and we have a basket of products now that we can offer are our partners in there and their customers on how they want to on how they'd want to borrow so we feel very very good about the pipeline, we feel very good about our results and we feel very good about our renewables.

Yes, I think.

I mentioned, a little early before the pipeline is very robust and.

One of the things that we're very pleased with is we're being.

Reported on certain uncertain.

Initiatives in.

Winning more than our share.

And.

Okay, great. Thanks for taking my questions.

Given that.

We are less reliant on any one partner because of our diversification as we think about it and that was all renewals go.

Thank you.

We have no further questions I'll turn the call back to Ralph and Joseph for closing comments.

We have nearly 85% of our loan to secure through 2025.

And our top five brands have been renewed through 2028. So we have a good outlook pretty secure and we look at renewables now earlier and we look at our pipeline and determine what is our percentage of winning how would how would we go about it and we have a basket of products now that we can offer are our partners in there.

Thank you I want to thank you all for joining the call as you've seen we've made really nice progress on our on.

On our balance sheet and paying down our debt we're very.

Barry.

Very focused on that will continue to be focused on that and like everyone have a wonderful day and thank you again for your questions and your interest.

Our customers on how they want to on how they would one of Ara. So we feel very very good about the pipeline, we feel very good about our results and we feel very good about our renewables.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

Okay, great. Thanks for taking my questions.

Thank you.

We have no further questions I'll turn the call back to Ralph and Joseph for closing comments.

Thank you I want to thank you all for joining the call as you've seen we've made really nice progress on our on.

On our balance sheet and paying down our debt and were very.

Barry.

Very focused on that will continue to be focused on that and we like everyone have a wonderful day and thank you again for your questions and your interest.

Thank you everyone joining us today. This concludes our call and you may now disconnect your lines.

[music].

Q2 2023 Bread Financial Holdings Inc Earnings Call

Request a DemoDemo

BFH

Bread Financial

Earnings