Q3 2023 Bread Financial Holdings Inc Earnings Call
Speaker 1: transcript
Speaker 1: Good morning and welcome to Brett Financial's third quarter earnings conference call. My name is Bruno and I'll be coordinating your call today.
Good morning, and welcome to Brett Financial's third quarter earnings Conference call.
My name is brutal and I'll be coordinating your call today.
Speaker 1: transcript
Speaker 1: At this time, all parties have been placed on a listen only mode. Following to this presentation, before we...
At this time all parties have been placed on a listen only mode.
Following today's presentation the floor will open for your questions.
Speaker 1: transcript
Speaker 1: to register a question, please press star followed by one on your telephone keypad. It is not my pleasure to introduce Mr. Brian Verib, Head of Investor Relations at Bright Financial. The floor is yours.
Just a question. Please press star followed by one on your telephone keypad.
My pleasure to introduce Mr. Brian <unk>.
Investor Relations at Brett financial the floor is yours.
Thank you Bruno 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 <unk>, President and Chief Executive Officer of bread financial and Perry Beaver men Executive Vice President and Chief Financial Officer, Brett financial.
Speaker 2: transcript
Speaker 2: Thank you, Bruno. Copies of the slides we will be reviewing and the earnings release can be found on the investor relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial, and Perry Biberman, Executive Vice President and Chief Financial Officer of Bread Financial.
Speaker 2: transcript
Speaker 2: Before we begin, I would like to remind you that some of the comments made on today's call, some of the responses to your questions may contain forward-looking states.
Before we begin I would like to remind you that some of the comments made on today's call. Some of the responses to your questions may contain forward looking statements.
Speaker 2: transcript
Speaker 2: 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 SES.
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.
Speaker 2: transcript
Speaker 2: 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 GAPP are included in our quarterly earnings materials posted on our investor relations website at breadsfinancial.com. With that, I would like to turn the call over to Ralph and Dreda.
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 Brent financial Dot com with that.
I would like to turn the call over to Ralph and dried up.
Speaker 3: transcript
Speaker 3: Thank you, Brian , and good morning to everyone joining the call. Starting with slide three, Bright Financial's Business Model, which features an industry-leaning risk-adjusted yield.
Thank you, Brian and good morning to everyone joining the call.
Joining with slide three great financials business model, which features an industry leading risk adjusted yield conservative reserves strong capital positioning is built to consistently perform well through the full cycle.
Speaker 3: transcript
Speaker 3: conservative reserves, strong capital positioning, is built to consistently perform well through the full site.
Speaker 3: transcript
Speaker 3: A third quarter results, which include net income of $171 million, and a 25% return on equity, demonstrate our continued financial resilience despite losses above or through the cycle average, and this current, more challenging, macroeconomic environment.
Our third quarter results, which include net income of $171 million and a 25% return on equity demonstrate our continued financial resilience despite losses above our through the cycle average in this current more challenging macroeconomic environment.
Speaker 3: transcript
Speaker 3: Funded by strong cash flows for operations we completed our authorized $35 million share repurchase in the quarter, which represented 935,000 shares.
Funded by strong cash flows for operations, we completed our authorized $35 million share repurchase in the quarter, which represented 935000 shares.
Speaker 3: transcript
Speaker 3: Additionally, we continue to deliver an our commitment to build long-term shareholder value as tangible book values share per share Exceeded $42 nearly triple the level compared to the first quarter of 2020 when I joined the company
Additionally, we continue to deliver on our commitment to build long term shareholder value as tangible book value share per share exceeded $42 nearly triple the level compared to the first quarter of 2020, when I joined the company.
Speaker 3: transcript
Speaker 3: During the quarter we launched Ross Dress for Less, the largest off-price apparel at Home furnishing chain in the US.
During the quarter, we launched Ross dress for less the largest off price apparel and home furnishing chain in the U S.
Speaker 3: transcript
Speaker 3: Also, at the beginning of October , we successfully closed on Dell Technologies' consumer credit portfolio purchase of approximately $400 million, and simultaneously launched the Dell Program, which includes a broad suite of payment solutions and expands our position and a consumer electronics market.
Also at the beginning of October we successfully closed on Dell technologies consumer credit portfolio purchase of approximately $400 million and simultaneously launched the Dell program, which includes a broad suite of payment solutions and expands our position in the consumer electronics market.
Speaker 3: transcript
Speaker 3: who are industry expertise, technology, and data, and analytic capabilities. We are a well-positioned to drive value for both our new and existing partners.
Through our industry expertise technology and data and analytic capabilities, we are well positioned to drive value for both our new and existing partners.
Sure.
Speaker 3: transcript
Speaker 3: The economic environment remains challenging, and consumers contend with numerous headwinds, including the compounding effect of persistent inflation relative to wage growth, high interest rates, the resumption of student loan payments, and gas volatility. Broadly speaking, these factors are weighing on consumers and, in part, led to the reduction in our credit sales in the third quarter, particularly within our retail and home industry verticals. For more information, please visit our website at www.FEMA.gov.
The economic environment environment remains challenging and consumers contend with numerous headwinds, including the compounding effect of persistent face inflation relative to wage growth.
Interest rates, the resumption of student loan payments and gas volatility.
<unk> speaking these factors are weighing all consumers at in part led to the reduction in our credit sales in the third quarter, particularly within our retail and home industry verticals for moderate to low income Americans.
Speaker 3: transcript
Speaker 3: who have depleted much of their excess pandemic air savings. We noted a reduction in travel and entertainment spending as these consumers focus more on non-discretionary purchase.
Who have depleted much of their excess pandemic era savings, we noted a reduction in travel and entertainment spending as these consumers focus more on non discretionary repurchases by contracts higher income consumers continue to spend on health beauty and experiences prime and Super Prime card holders remained resilient.
Speaker 3: transcript
Speaker 3: By contrast, higher income consumers have continued to spend on health, beauty and experience.
Speaker 3: transcript
Speaker 3: Prime and Super Prime cardholders remain resilient and are spending approximately the same amount as they did last year.
And our spending approximately the same amount as they did last year.
Speaker 3: However, as evidenced by many retailers, updated financial outlooks, economic pressures are expected to continue to manifest in terms of softer sales in the fourth quarter.
However, as evidenced by many retailers updated financial outlooks economic pressures are expected to continue to manifest in terms of softer sales in the fourth quarter.
Speaker 3: transcript
Speaker 3: Given the ongoing macroeconomic stresses faced by many consumers, we have continued to responsibly tighten our underwriting and credit line management.
Given the ongoing macroeconomic stresses faced by many consumers we have continue to responsibly tightened our underwriting and credit line management.
Speaker 3: transcript
Speaker 3: We proactively manage our exposure by tightening approval rates, pausing line increases and implementing line decreases we're approved.
We proactively manage our exposure by tightening approval rates pausing.
Line increases and implementing line decreases we are prudent.
Speaker 3: transcript
Speaker 3: While these adjustment limit cells and loan growth, we see these as a right action to support improve credit performance over time.
While these adjustment limit sales and loan growth, we see these as the right actions to support improved credit performance over time.
Speaker 3: transcript
Speaker 3: We remain focused on responsible growth and will continue to manage underwriting to meet our risk-return threshold.
We remain focused on responsible growth and we will continue to manage underwriting to meet our risk return thresholds.
Speaker 3: transcript
Speaker 3: From a regulatory perspective, we are developing mitigation strategies in anticipation of the CFPB's final rule on credit card latency.
From a regulatory perspective, we are developing mitigation strategies in anticipation of the Cfpb's final rule on credit card late fees, which would have significant impact on our business if unmitigated we.
Speaker 3: transcript
Speaker 3: which would have significant impact on our business if unmitigated.
Speaker 3: transcript
Speaker 3: We actively engage with our brand partners regarding possible outcomes and strategies.
We actively engage with our brand partners regarding possible outcomes and strategies, having effectively managed through significant regulatory changes and very credit cycles in the past our seasoned leadership team is focused on addressing potential impacts to our business and committed to generating strong returns through prudent capital risk management.
Speaker 3: transcript
Speaker 3: Having effectively managed through significant regulatory changes and varied credit cycles in the past, our seasoned leadership team is focused on addressing potential impacts to our business and committed to generating strong returns through prudent capital risk management.
Speaker 3: transcript
Speaker 3: Turning to slide four, our key focus areas for 2023 remain unchanged. They are growing responsibly, strengthening our balance sheet, optimizing data and technology, and strategically investing in our communities.
Turning to slide four.
Our key focus areas for 2023 remain unchanged they are growing responsibly strengthening our balance sheet.
Bruno: Good morning, and welcome to Bread Financial's third quarter earnings conference call. My name is Bruno and I'll be coordinating your call today. At this time, all parties have been placed on a listen only mode.
Optimizing data and technology and strategically investing in our business as.
Speaker 3: transcript
Speaker 3: As I mentioned on the last slide, our management team is committed to driving responsible growth that will deliver long-term shareholder value. We continue to expand and renew our partnerships with an emphasis on sustainable, profitable growth.
As I mentioned on the last slide our management team is committed to driving responsible growth that will deliver long term shareholder value, we continue to expand and renew our partnerships with an emphasis on sustainable profitable growth.
Bruno: Following today's presentation, the floor will open for your questions. To register a question, please press star followed by one on your telephone keypad.
Brian Vereb: It is not my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.
Speaker 3: transcript
Speaker 3: Strengthening our balance sheet remains a top priority and is integral to our long-term strategy.
Strengthening our balance sheet remains a top priority and is integral to our long term strategy.
Speaker 3: transcript
Speaker 3: Our ongoing disciplined balance sheet management actions enhance our financial resilience and provide additional flexibility for capital utilization, including supporting business growth and further reducing debt.
Our ongoing disciplined balance sheet management actions enhance our financial resilience and provide additional flexibility for capital utilization, including supporting business growth and further reducing debt.
Brian Vereb: Thank you, Bruno. Poppies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website.
Brian Vereb: On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial and Perry Beberman, 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, 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.
Speaker 3: transcript
Speaker 3: On the data and technology front, we are leveraging innovative capabilities gained from our platform conversion, system enhancements, and expanded product portfolio. In addition, machine learning remains one of the many tools we have utilized for many years to bring stronger credit risk models to continually enhance our underwriting, line management, and collection.
On the data and technology front, we are leveraging innovative capabilities gained from our platform conversion system enhancements and expanded product portfolio. In addition machine learning remains one of the many tools we have utilized for many years to bring stronger credit risk models to continually enhance our underwriting line management and <unk>.
Collections.
Speaker 3: transcript
Speaker 3: We continue to invest in a range of technology innovations from data and customer analytics to self-service and digital capabilities.
We continue to invest in a range of technology innovations from data and customer analytics to self service and digital capabilities, we strive to deliver exceptional value and experiences for our cardholders.
Brian Vereb: Also on today's call, our speakers will reference certain non-gap financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to gap are included in our quarterly earnings materials posted on our Investor Relations website at Bread Financial.com.
Speaker 3: transcript
Speaker 3: We strive to deliver exceptional value and experiences for our card.
Speaker 3: transcript
Speaker 3: Our goal is to continuously generate expense efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted return.
Our goal is to continuously generate expense efficiencies that enable reinvestment in our business support responsible growth and achieve our targeted returns.
Speaker 3: transcript
Speaker 3: Moving to slide five, we have significantly enhanced our financial resilience, strengthening our balance sheet and funding mix while effectively managing credit risk.
Moving to slide five.
Ralph Andretta: With that, I would like to turn the call over to Ralph Andretta. Thank you, Brian, and good morning to everyone joining the call. Starting with slide three, Bread Financial's Business Model, which features an industry-leaning risk-adjusted yield, conservative reserves, strong capital positioning, is built to consistently perform well through the full cycle. Our third quarter results, which include net income of $171 million and a 25% return on equity, demonstrate our continued financial resilience despite losses above or through the cycle average in this current, more challenging, macroeconomic environment.
We have significantly enhanced our financial resilience strengthening our balance sheet and funding mix, while effectively managing credit risk.
Speaker 3: transcript
Speaker 3: Over the past few years, we have diversified our product mix through partner co-brand growth, the introduction of two proprietary cards, and the launch and expansion of BreadPay.
Over the past few years, we have diversified our product mix through partner co brand growth. The introduction of two proprietary cards and the launch and expansion of bread pet.
Speaker 3: transcript
Speaker 3: Cobran spend now comprises approximately 50% of our credit sales, enabling us to capture incremental sales as consumer spending patterns shift in response to evolving economic conditions.
Co brand spend now comprises approximately 50% of.
Of our credit sales, enabling us to capture incremental sales as consumer spending pattern shift in response to the evolving economic conditions.
Speaker 3: transcript
Speaker 3: Additionally, our broader product suite increased our total addressable market opportunity and diversifies our spend.
Additionally, a broader product suite increased our total addressable market opportunity and Diversifies our spec.
Ralph Andretta: Funded by strong cash flows for operations, we completed our authorized $35 million share repurchase in the quarter, which represented 935,000 shares. Additionally, we continued to deliver in our commitment to build long-term shareholder value as tangible book value per share exceeded $42 nearly triple the level compared to the first quarter of 2020 when I joined the company.
Speaker 3: transcript
Speaker 3: We have generated significant growth in our direct consumer deposits, which reached $6.1 billion in the third quarter.
We have generated significant growth in our direct to consumer deposits, which reached $6 1 billion in the third quarter.
Speaker 3: transcript
Speaker 3: This additional source of funding has strengthened our balance sheet and enhanced our financial flexibility.
This additional source of funding has strengthened our balance sheet and enhanced our financial flexibility.
Speaker 3: transcript
Speaker 3: We have also strengthened our balance sheet by reducing debt and building capital while maintaining conservative loan loss reserve of 12.3% for the last three quarters. Our loan loss reserve rate is 300 basis points higher than our Cecil Day 1 rate in 2020.
We have also strengthened our balance sheet by reducing debt and building capital, while we while maintaining a conservative loan loss reserve of 12, 3% for the last three quarters. Our loan loss reserve rate is 300 basis points higher than our seasonal day, one right in 2020.
Ralph Andretta: During the quarter, we launched raw-stress for less, the largest off-price apparel at home furnishing chain in the U.S. Also, at the beginning of October, we successfully closed our Dell Technologies consumer credit portfolio purchase of approximately $400 million and simultaneously launched the Dell program, which includes a broad suite of payment solutions and expands opposition and a consumer electronics market. Through our industry expertise, technology and data and analytic capabilities, we are well positioned to drive value for both our new and existing partners.
Speaker 3: transcript
Speaker 3: Our quarter-end total absorption capacity, which we define as our allowance for credit losses plus Tier 1 capital, divided by the total end-of-period loans was 24%, providing a strong margin of protection should more adverse economic conditions arise.
Our quarter end total absorption capacity, which we define as our allowance for credit losses, plus tier one capital divided by the total end of period loans was 24%, providing a strong margin of protection should more adverse economic conditions arise.
Speaker 3: transcript
Speaker 3: 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.
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.
Speaker 3: transcript
Speaker 3: which may entail responsibly slowing growth during more uncertain economic periods.
Which may entail responsibly slowing growth during more uncertain economic periods.
Ralph Andretta: The economic environment remains challenging and consumers contend with numerous headwinds including the compounding effect of persistent faith inflation relative to wage growth, high interest rates, the resumption of student loan payments, and gas volatility. Broadly speaking, these factors are weighing on consumers and in part led to the reduction in our credit sales in a third quarter, particularly within our retail and home industry burden. For moderate-to-low-income Americans who have depleted much of their excess pandemic air savings, we noted a reduction in travel and entertainment spending as these consumers focus more on non-discretionary purchases. By contrast, higher-income consumers have continued to spend on health, beauty, and experiences. Prime and super-prime cardholders remain resilient and are spending approximately the same amount as they did last year.
Speaker 3: transcript
Speaker 3: Turning to slide six, our disciplined capital allocation strategy, which focuses on profitable growth, improving capital metrics, and reducing debt, has driven substantial growth and tangible book value over the past several years.
Turning to slide six our disciplined capital allocation strategy, which focuses on profitable growth improving capital metrics and reducing debt has driven substantial growth in tangible book value over the past several years.
Speaker 3: transcript
Speaker 3: Looking at the first chart you can see that since the first quarter of 2020, we have more than tripled our TCE to TA ratio.
Looking at the first chart you can see that since the first quarter of 2020, we have more than tripled our TCE to ta ratio.
Speaker 3: transcript
Speaker 3: Moving to the second chart, we are proud of the progress we have made with respect to debt reduction. In just over three years, we have reduced parent-level debt by 55 percent, paying down more than $1.7 billion.
Moving to the second chart. We are proud of the progress we have made with respect to debt reduction and just over three years, we have reduced parent level debt by 55% paying down more than $1 7 billion.
Speaker 3: transcript
Speaker 3: We aim to further enhance our total company capital metric.
We aim to further enhance our total company total company capital metrics from.
Speaker 3: transcript
Speaker 3: From where we are today, we will balance achieving these targets with continued investment in our business and growth aligned with our capital priorities.
From where we are today, we will balance achieving these targets will continued investment in our business and growth aligned with our capital priorities before I turn it over to Perry I will again highlight the improvement in our tangible book value per share shown on the last graph, which has grown at 37%.
Ralph Andretta: However, as evidenced by many retailers, updated financial outlooks, economic pressures are expected to continue to manifest in terms of softer sales in the fourth quarter. Given the ongoing macroeconomic stresses faced by many consumers, we have continued to responsibly tighten our underwriting and credit line management. We proactively manage our exposure by tightening approval rates, pausing line increases, and implementing line decreases. While these adjustment limits sales and loan growth, we see these as a right action to support improved credit performance over time. We remain focused on responsible growth and will continue to manage underwriting to meet our risk-return thresholds.
Speaker 3: transcript
Speaker 3: Before I turn it over to Perry, I will again highlight the improvement in our tangible book value per share shown on the last graph, which has grown at 37% compounded annual rate since the first quarter of 2020.
<unk> compounded annual rate since the first quarter of 2020.
Speaker 3: transcript
Speaker 3: Supported by our strong cash flow generation, we expect to continue to grow our tangible book value. We believe this growth combined with our meaningful improved financial resilience and a strengthened balance sheet should yield a company valuation that is multiple of tangible book value.
Supported by our strong cash flow generation, we expect to continue to grow our tangible book value. We believe this growth combined with our meaningful improved financial resilience and a strengthened balance sheet should yield a company valuation that has multiple of tangible book value.
Speaker 3: transcript
Speaker 3: Our significant accomplishments over the past three years demonstrate our focus and the success of managing our business responsibly to build long-term value for our stakeholders.
Our significant accomplishments over the past three years demonstrate our focus and the success of managing our business responsibly to build long term value for our stakeholders, we remain confident in our strategic direction and our commitment to drive long term value creation now I will turn it over to Perry to just discuss the <unk>.
Ralph Andretta: From a regulatory perspective, we are developing mitigation strategies and anticipation of the CFPV's final rule on credit card late fees, which would have significant impact on our business. We actively engage with our brand partners regarding possible outcomes and strategies, having effectively managed through significant regulatory changes and very credit cycles in the past. Our season leadership team is focused on addressing potential impacts to our business and committed to generating strong returns to recruiting capital risk management.
Speaker 3: transcript
Speaker 3: We remain confident in our strategic direction and our commitment to drive long-term value creation. Now I'll turn it over to Perry to discuss the financials for the court.
Financials for the quarter.
Speaker 4: transcript
Speaker 4: Thanks, Ralph. Slide seven provides our third quarter financial results.
Thanks, Ralph Slide seven provides our third quarter financial results bread financials credit sales were down 13% year over year to $6 7 billion.
Speaker 4: transcript
Speaker 4: Brett Financial's credit sales were down 13% year-over-year to $6.7 billion, reflecting the sale of the BJ's Wholesale Club portfolio in late February 2023, strategic credit tightening, and moderating consumer spending, partially offset by new partner growth.
Reflecting the sale of the Bj's wholesale club portfolio in late February of 2023 strategic credit the credit tightening and moderating consumer spending.
Partially offset by new partner growth as Ralph highlighted we have been proactive in tightening our credit underwriting and credit line assignments for both new and existing customers given the economic uncertainties and pressures affecting a portion of our customer base.
Ralph Andretta: Turning to slide four, our key focus areas for 2023 remain unchanged. They are growing responsibly, strengthening our balance sheet, optimizing data and technology, and strategically investing in our business. As I mentioned on the last slide, our management team is committed to driving responsible growth that will deliver long-term shareholder value. We continue to expand and renew our partnerships with the nephysis on sustainable profitable growth.
Speaker 4: transcript
Speaker 4: As Ralph highlighted, we have been proactive in tightening our credit underwriting and credit line assignments for both new and existing customers, given the economic uncertainties and pressures affecting a portion of our customer base.
Speaker 4: transcript
Speaker 4: Average loans were flat year over year driven by the addition of new partners and a lower consumer payment rate offset by the sale of the BJ's portfolio in February and softening credit sales.
Average loans were flat year over year, driven by the addition of new partners and a lower consumer payment rate offset by the sale of the Bj's portfolio in February and softening credit sales.
Speaker 4: transcript
Speaker 4: Revenue for the quarter was $1.0 billion, up 5%, while total non-interest expenses increased 3% year-over-year.
Revenue for the quarter was 1.01 billion up 5%, while total noninterest expenses increased 3% year over year.
Ralph Andretta: Strengthening our balance sheet remains a top priority and is integral to our long-term strategy. Our ongoing discipline, balance sheet management actions enhance our financial resilience and provide additional flexibility for capital utilization including supporting business growth and further reducing debt. On the data and technology front, we are leveraging innovative capabilities, gained from our platform conversion, system enhancements, and expanded product portfolio. In addition, machine learning remains one of the many tools we have utilized for many years to bring stronger credit risk models to continually enhance our underwriting line management and collections.
Speaker 4: transcript
Speaker 4: Income from continuing operations was $173 million, up 29%, and diluted EPS from continuing operations was $3.46.
Income from continuing operations was $173 million up 29% and diluted EPS from continuing operations was $3 46.
Speaker 4: transcript
Speaker 4: Looking at financials in more detail on slide A, total net interest income was flat year-over-year. Total non-interest income benefited from three factors, hire cardholder and brand partner engagement initiatives in the prior year post our conversion.
Looking at the financials in more detail on slide eight total net interest income was flat year over year.
Total noninterest income benefited from three factors higher cardholder and brand partner engagement initiatives in the prior year post our conversion.
Speaker 4: transcript
Speaker 4: higher merchant discount fees and interchange revenue earned in the current year, and lower payments under our retailer share agreements due to lower credit sales and higher losses.
Higher merchant discount fees and interchange revenue earned in the current year and lower payments under our retailers share agreements due to lower credit sales and higher losses.
Ralph Andretta: We continue to invest in a range of technology innovations from data and customer analytics to self-service and digital capabilities. We strive to deliver exceptional value and experiences for our car holders. Our goal is to continuously generate expense efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted return.
Speaker 4: transcript
Speaker 4: Total non-interest expenses increased 3% from the third quarter of 2022, yet declined $28 million or 5% sequentially.
Total noninterest expenses increased 3% from the third quarter of 2022, yet declined $28 million or 5% sequentially.
Speaker 4: transcript
Speaker 4: The year over year increase was primarily an increase in card and processing costs, including fraud, and higher employee compensation and benefit costs. This was partially offset by reduction in marketing expenses and depreciation amortization.
The year over year increase was primarily an increase in card and processing cost, including fraud and higher employee compensation and benefit costs. This was partially offset by a reduction in marketing expenses and depreciation and amortization costs. The sequential decline in expenses largely reflected lower fraud expenses.
Ralph Andretta: Moving to slide five, we have significantly enhanced our financial resilience, strengthening our balance sheet and funding mix while effectively managing credit risk. Over the past few years, we have diversified our product mix through partner, co-brand growth, the introduction of two proprietary cards, and the launch and expansion of bread pay. Co-brand spend now comprises approximately 50% of our credit sales enabling us to capture incremental sales as consumer spending payments shift in response to evolving economic conditions.
Speaker 4: transcript
Speaker 4: The sequential decline in expenses largely reflected lower fraud expenses, lower depreciation amortization costs, and our continued focus on driving efficiency through our prior and ongoing investment in technology. Additional details on expense drivers can be found in the appendix of the slide deck.
The lower depreciation and amortization costs and our continued focus on driving efficiency through our prior and ongoing investment in technology. Additional details on expense drivers can be found in the appendix of the slide deck.
Speaker 4: transcript
Speaker 4: Income from continuing operations was up $39 million for the quarter versus the third quarter of 2022 While pre-tax, pre-provisioned earnings or PPR grew for the 10th consecutive quarter Increasing by 7% year over year
Income from continuing operations was up $39 million for the quarter versus the third quarter of 2022, while pre tax pre provision earnings were <unk> grew for the 10th consecutive quarter, increasing by 7% year over year.
Speaker 4: transcript
Speaker 4: Turning to slide 9, loan yields continue to increase, up 140 basis points year over year. Loan yields benefit from an upward trend in the prime rate, causing our variable price loans to move higher in tandem. Net interest margin was seasonally elevated in the third quarter at 20.6%.
Turning to slide nine.
Ralph Andretta: Additionally, our broader products suite increased our total addressable market opportunity and diversifies our spend. We have generated significant growth in our direct consumer deposits which reached $6.1 billion in the third quarter. This additional source of funding has strengthened our balance sheet and enhanced our financial flexibility. We have also strengthened our balance sheet by reducing debt and building capital while maintaining conservative long-lost reserve of 12.3% for the last three quarters. On long-lost reserve rate is 300 basis points higher than our seasonal day one rate in 2020.
Loan yields continued to increase up 140 basis points year over year loan yields benefited from an upward trend in the prime rate, causing our variable priced loans to move higher in tandem.
Net interest margin was seasonally elevated in the third quarter at 26% looking.
Speaker 4: transcript
Speaker 4: Looking at the sequential change from the second quarter, both loan yield and net interest margin benefited from a decrease in the reversal of interest and fees related to reduced sequential credit loss.
Looking at the sequential change from the second quarter, both loan yields and net interest margin benefited from a decrease in the reversal of interest and fees related to reduced sequential credit losses.
Speaker 4: transcript
Speaker 4: Also, funding costs continue to rise and remain in line with our expectations. We would expect net interest margin to move lower sequentially in the fourth quarter following typical seasonality and due to an increase in the reversal of interest and fees related to expected in a sequential increase in gross losses.
Also funding costs continue to rise and remain in line with our expectations. We would expect net interest margin to move lower sequentially in the fourth quarter. Following typical seasonality and due to an increase in the reversal of interest and fees related to expected.
Ralph Andretta: Our quarter and total absorption capacity which redefine as our allowance for credit losses plus tier one capital divided by the total end of period loans was 24% providing a strong margin of protection should more adverse economic conditions arise. We remain confident in our discipline credit risk management and our ability to drive sustainable value through the full economic cycle.
Sequential increase in gross losses.
Speaker 4: transcript
Speaker 4: 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, which increased to $6.1 billion in the third quarter. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding to efficiently fund our long-term growth objectives.
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, which increased to $6 1 billion in the third quarter, while we anticipate that direct to consumer deposits, we will continue to grow steadily.
Ralph Andretta: We are committed to delivering responsible profitable growth which may entail responsibly slowing growth during more uncertain economic periods.
We will maintain the flexibility of our diversified funding sources, including secured and wholesale funding to efficiently fund our long term growth objectives.
Ralph Andretta: Turning to slide six, our discipline capital allocation strategy which focuses on profitable growth improving capital metrics and reducing debt has driven substantial growth and tangible book value over the past several years. Looking at the first chart you can see that since the first quarter of 2020 we have more than tripled our TCE to TA ratio. Moving to the second chart we are proud of the progress we have made with respect to debt reduction and just over three years we have reduced parent level debt by 55% paying down more than $1.7 billion. We aim to further enhance our total company capital metrics from where we are today. We will balance achieving these targets with continued investment in our business and growth aligned with our capital priorities.
Speaker 4: transcript
Speaker 4: Moving to credit on slide 10, our delinquency rate for the third quarter was 6.3%, up from second quarter as expected, driven by continued macroeconomic pressure.
Moving to credit on slide 10.
Delinquency rate for the third quarter was six 3% up from second quarter as expected driven by continued macroeconomic pressures.
Speaker 4: transcript
Speaker 4: The net loss rate was 6.9% for the quarter compared to 5.0% in the third quarter of 2022 and 8.0% in the second quarter of 2023. The third quarter net loss rate was elevated compared to last year's level due to more challenging macaroon economic conditions, pressuring the consumers payment rate as well as actions taken to the transition of our credit card processing services in June of 2022 that benefited the loss rate in that quarter.
The net loss rate was six 9% for the quarter compared to five 8% in the third quarter of 2020, 280% in the second quarter of 2023, the third quarter net loss rate was elevated compared to last year's level due to more challenging macroeconomic conditions pressuring the consumers' payment rate as well.
Actions taken to the transition of our credit card processing services in June of 2022 that benefited the loss rate in that quarter.
Speaker 4: transcript
Speaker 4: The net loss rate declined sequentially from the second quarter as the final impact from the transition of our credit card processing services was reflected in our July credit metric.
Net loss rate declined sequentially from the second quarter as the final impact from the transition of our credit card processing services was reflected in our July credit metrics.
Ralph Andretta: Before I turn it over to Perry I will again highlight the improvement in our tangible book value per share shown on the last graph which has grown at 37% compounded annual rate since the first quarter of 2020. Supported by our strong cash flow generation we expected continue to grow our tangible book value. We believe this growth combined with our meaningful improved financial resilience and a strengthened balance sheet should yield a company valuation that is multiple of tangible book value.
Speaker 4: transcript
Speaker 4: the reserve rate remained flat sequentially at 12.3%.
The reserve rate remained flat sequentially at 12, 3%.
Speaker 4: transcript
Speaker 4: 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 future credit losses.
We intend to maintain a conservative weighting of economic scenarios and our credit reserve model in anticipation of ongoing macroeconomic challenges and the consequential impact on our future credit losses.
Speaker 4: transcript
Speaker 4: As macroeconomic headwinds persisted during the quarter, our credit risk score distribution deteriorated slightly compared to the second quarter, driven by downward score migration from existing customers, despite new account risk scores by distribution being well above the portfolio blend. Even so, our percentage of cardholders with a 660 plus credit score remained above pre-pandemic levels, given our prudent credit tightening actions and our more diversified product mix.
As macroeconomic headwinds persisted during the quarter, our credit risk or distribution deteriorated slightly compared to the second quarter driven by downward score migration from existing customers. Despite new account risk scores by distribution being well above the portfolio blend even so our percentage of cardholders with a <unk>.
Ralph Andretta: Our significant accomplishments over the past three years demonstrate our focus and the success of managing our business responsibly to build long-term value for our stakeholders. We remain confident in our strategic direction and our commitment to drive long-term value creation.
660, plus credit score remained above pre pandemic levels, given our prudent credit tightening actions in our more diversified product mix.
Speaker 4: transcript
Speaker 4: As Ralph touched on, we continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take.
As Ralph touched on we continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk. We take we closely monitor our projected returns with the goal of generating risk adjusted margins above our peers.
Perry Beberman: Now we'll turn it over to Perry to discuss the financials for the quarter. Thanks, Ralph. Slide 7 provides our third quarter financial results. We're down to 13% year-over-year to $6.7 billion. Reflecting the sale of the BJ Social Club portfolio in late February 2023, strategic credit, credit tightening, and moderating consumer spending, partially offset by new partner growth. As Ralph highlighted, we have been proactive in tightening our credit underwriting and credit line assignments for both new and existing customers given the economic uncertainties and pressures affecting the portion of our customer base.
Speaker 4: transcript
Speaker 4: We closely monitor our projected returns with the goal of generating risk-adjusted margins above our peers.
Speaker 4: transcript
Speaker 4: Finally, slide 11 provides our financial outlook for the full year of 2023. Our financial outlook is updated to reflect slowing sales growth as a result of both our strategic and targeted credit tightening, as well as an expected continued moderation in consumer spending.
Finally, slide 11 provides our financial outlook for the full year of 2023, our financial outlook is updated to reflect slowing sales growth as a result of both our strategic and targeted credit tightening as well as an expected continued moderation in consumer spending for.
Speaker 4: transcript
Speaker 4: 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, we anticipate year end period loans to be around $19.3 billion inclusive of the recently acquired Dell portfolio of approximately $400 million.
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, we anticipate year end period loans to be around $19 3 billion inclusive of the recently acquired del portfolio of approximately $400 million.
Perry Beberman: Average loans were flat year-over-year driven by the addition of new partners and a lower consumer payment rate offset by the sale of the BJ's portfolio in February and softening credit sales. Revenue for the quarter was $1.0 billion of 5%, while total non-interest expenses increased 3% year-over-year. Income from continuing operations was $173 million, up 29%, and deluded EPS from continuing operations was $3.46. Looking at financials in more detail on slide 8, total net interest income was flat year-over-year, total non-interest income benefited from three factors.
Speaker 4: transcript
Speaker 4: We expect revenue growth to be slightly above our average loan growth in 2023, excluding the gain on sale from BJ's with a full year net interest margin similar to the 2022 full year rate.
We expect revenue growth to be slightly above our average loan growth in 2023, excluding the gain on sale from Bj's with a full year net interest margin similar to the 2022 full year rate.
Speaker 4: transcript
Speaker 4: Full-year total non-interest expenses are expected to be up 8% to 9% compared to 2022, with fourth quarter total expenses slightly higher than the third quarter, driven by increased seasonal marketing and employee benefits costs.
Full year non in total noninterest expenses.
Our expected to be up 8% to 9% compared to 2022 with fourth quarter total expenses slightly higher than the third quarter, driven by increased seasonal marketing and employee benefit costs.
Speaker 4: transcript
Speaker 4: We updated our net loss rate outlook as we now anticipate the full year 2023 rate will be in the mid 7% range, including impacts from the transition of our credit card processing services in June 2022. While our tighter underwriting and credit line management should benefit future loss performance, these actions raise the loss rate in the near term by lowering our projected loan balance, which forms the denominator in the net loss rate equation.
We updated our net loss rate outlook as we now anticipate the full year 2023 rate will be in the mid 7% range, including impacts from the transition of our credit card processing services in June 2022, while our tighter underwriting and credit line management should benefit future loss performance. These actions raise the loss.
Perry Beberman: Higher card holder and brand partner engagement initiatives in the prior year posed our conversion, higher merchant discount fees and interchange revenue earned in the current year, and lower payments under our retailer share agreements due to lower credit sales and higher losses. Total non-interest expenses increased 3% from the third quarter of 2022, yet declined $28 million or 5% sequentially. The year-over-year increase was primarily an increase in card and processing costs, including fraud and higher employee compensation and benefit costs.
In the near term by lowering our projected loan balance which forms the denominator in the net loss rate equation.
Speaker 4: transcript
Speaker 4: We now expect the fourth quarter net loss rate to be approximately 8% driven by normal seasonal trends, continued consumer payment pressure, and the denominator effect from lower loan growth.
We now expect the fourth quarter net loss rate to be approximately 8% driven by normal seasonal trends continued consumer payment pressure and the denominator effect from lower loan growth.
Perry Beberman: This was partially offset by reduction in marketing expenses and depreciation amortization costs. The sequential decline in expenses largely reflected lower fraud expenses, lower depreciation amortization costs, and our continued focus on driving efficiency through our prior and ongoing investment in technology. Additional details on expense drivers can be found in the appendix of the slide deck. Income from continuing operations was up $39 million for the quarter versus the third quarter of 2022, while pre-tax, pre-provisioned earnings or PPR grew for the 10th consecutive quarter increasing by 7% year-over-year.
Speaker 4: transcript
Speaker 4: In addition, we expect fourth quarter delinquency rate to be relatively consistent with the third quarter.
In addition.
We expect fourth quarter delinquency rate to be relatively consistent with the third quarter.
Speaker 4: transcript
Speaker 4: Sticking with credit, with the addition of the Dell portfolio in early October and the fourth quarter anticipated seasonal increase in transactor balances, it is likely the reserve dollars will increase, but the reserve rate could decline slightly year-end. The increase in transactor balances will also temporarily reduce our capital metrics in the fourth quarter, as is typical each year-end.
Sticking with credit with the addition of the Dell portfolio in early October and the fourth quarter anticipated seasonal increase in transact or balances. It is likely the reserve dollars will increase.
But the reserve rate could decline slightly at year end the increase in transaction balances will also temporarily reduce our capital metrics in the fourth quarter as is typical each year end.
Speaker 4: transcript
Speaker 4: Our full-year normalized effective tax rate is expected to remain in the range of 25 to 26 percent with quarter over quarter variability due to timing of certain discrete items.
Our full year normalized effective tax rate is expected to remain in the range of 25% to 26% with quarter over quarter variability due to timing of certain discrete items.
Perry Beberman: Turning to slide 9, loan yields continue to increase up 140 basis points year-over-year. Loan yields benefit from an upward trend in the prime rate causing our variable price loans move higher in tandem. Net interest margin was seasonally elevated in the third quarter at 20.6%. Looking at the sequential change from the second quarter, both loan yield and net interest margin benefited from a decrease in the reversal of interest and fees related to reduced sequential credit losses. Also, funding costs continue to rise and remain in line with our expectations.
Speaker 4: transcript
Speaker 4: One final item before wrapping up, as you can see in the financial tables provided in the appendix, we are now reporting total company regulatory capital ratios and our double leverage ratio.
One final item before wrapping up as you can see in the financial tables provided in the appendix. We are now reporting total company regulatory capital ratios and our double leverage ratio.
Speaker 4: transcript
Speaker 4: As Ralph highlighted, you can see the disciplined management decisions and successful execution of our plans over the past three years.
As Ralph highlighted you can see this disciplined manner.
Management decisions and successful execution of our plans over the past three years.
Speaker 4: transcript
Speaker 4: Briefly looking ahead to 2024, we will stay true to pursuing responsible, profitable growth. We expect consumer macroeconomic pressures to continue to drive softer consumer spending, which coupled with our continued tighter credit underwriting and line management actions will likely lead to loan growth remaining below our longer-term targets.
Briefly looking ahead to 2024.
We will stay true to pursuing responsible profitable growth, we expect consumer macroeconomic pressures to continue to drive software consumer spending, which coupled with our continued tighter credit underwriting and line management actions will likely lead to loan growth remaining below our longer term targets next year.
Perry Beberman: We would expect net interest margin to move lower sequentially in the fourth quarter, following typical seasonality and due to an increase in the reversal of interest and fees related to expected and sequential increase in gross losses. As you can see on the bottom right graph, we continue to improve our funding mix through our actions to grow or direct to consumer deposits, which increase to $6.1 billion in the third quarter. While we anticipate that direct to consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and host health funding to official payments, which will eventually fund our long-term growth objectives.
Speaker 4: transcript
Speaker 4: Also, we currently project that our net loss rate will peak in 2024, subject to economic conditions.
We currently project that our net loss rate will peak in 2024 subject to economic conditions.
Speaker 4: transcript
Speaker 4: We will provide specific guidance for 2024 during our fourth quarter earnings call in January , and more details around our intended mitigation strategies after a final CFPB rule is released.
We will provide specific guidance for 2020 forward during our fourth quarter earnings call in January and more details around our <unk> tenant mitigation strategies. After a final CFPB rule is released in.
Speaker 4: transcript
Speaker 4: In closing, we are effectively managing risk return tradeoffs through an ongoing, 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 line.
In closing, we are effectively managing risk return trade offs through an ongoing challenging macroeconomic environment, while continuing to strategically invest and drive long term value for our stakeholders.
Operator, we're now ready to open up the lines for questions.
Speaker 1: transcript
Speaker 1: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. That's star one on
Thank you.
Perry Beberman: Moving to credit on 510, our delinquency rate for the third quarter was 6.3% up from second quarter as expected, driven by continued macroeconomic pressures. The net loss rate was 6.9% for the quarter compared to 5.0% in the third quarter of 2022 and 8.0% in the second quarter of 2023. The third quarter net loss rate was elevated compared to last year's level due to more challenging macroeconomic conditions, pressuring the consumer's payment rate, as well as actions taken to the transition of our credit card processing services in June of 2022, that benefited the loss rate in that quarter.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Thats Star one on your telephone keypad.
Speaker 1: transcript
Speaker 1: To withdraw your question, press star followed by two. And please also remember to unmute your microphone if it's your turn to speak.
Do we draw your question. Please press star followed by two and please also remember too Unmeet your microphone if it's your turn to speak.
We do have our first question comes from Sanjay <unk> from K B W.
Speaker 1: transcript
Speaker 1: We do have our first question. It comes from Sanjay Sakrani from KBW. Sanjay, your line is now open. Please go ahead.
Jay Your line is now open. Please go ahead.
Thank you good morning, Ralph appreciate that these CFPB rules are fluid from a timing perspective, but it seems like we're going to get something by the end of the year and it's probably going to be closer to that $8. I am just curious if you've started to think about like an implement any mitigation efforts or tested to see what you.
Speaker 5: transcript
Speaker 5: Thank you. Good morning. Ralph appreciate that these CFPB rules are fluid from a timing perspective, but it seems like we're going to get something by the end of the year, and it's probably going to be close to that $8. I'm just curious if you've started to think about like and implement any mitigation efforts or tested to see what you might be able to do and how comfortable are you with mitigation.
Perry Beberman: The net loss rate declined sequentially from the second quarter as the final impact from the transition of our credit card processing services was reflected in our July credit metrics. The reserve rate remained flat sequentially at 12.3%. 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 future credit losses. As macroeconomic headwinds persisted during the quarter, our credit risk score distribution deteriorated slightly compared to the second quarter, driven by downward score migration from existing customers despite new account risk scores by distribution being well above the portfolio blend.
Might be able to do and how comfortable are you with mitigation.
Speaker 3: transcript
Speaker 3: Yeah, Sanjay, thanks for the question. You know, we're awaiting, like everybody else, for the final ruling from the CFPB. You know, we'd like it to come sooner than later so we can just get focused on it even more. But, you know, we're testing different APRs in the marketplace and a variety of other type of fees to close gaps. We're working with our partners diligently. They understand what the issue is and the impact it could have on their business as it could have on our business. And we continue to collaborate.
Yes, Sanjay thanks for the question.
We are waiting like everybody else for the final ruling from the CFPB.
Yes, we'd like it to come sooner than later, so we can just get focused on it even more.
Testing different APR in the marketplace in a variety of.
Other type of.
Our fees to close gaps, we're working with our partners diligently they understand what the issue is and the impact it can have on their business as it could have on our business and we continue to collaborate with them on.
Speaker 3: transcript
Speaker 3: mitigations. In terms of how long it will take, what the mitigations will be, closing the gaps, we'll know more when the final ruling comes out. But rest assured, we're focused on it. We're testing different strategies and working very collaboratively and diligently.
On mitigation.
In terms of how long it will take what the mitigation will be closing the gaps.
Perry Beberman: Even so, our percentage of cardholders with a 660 plus credit score remained above pre-pandemic levels given our prudent credit tightening actions and our more diversified product mix. As Ralph touched on, we continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. We closely monitor our projected returns with the goal of generating risk adjusted margins above our peers.
We'll know more when the final ruling comes out but rest assured we're focused on it we're testing different strategies and working very collaboratively and diligently with our partners.
Speaker 4: transcript
Speaker 4: I would just add to what Ralph said there, right?
Yes, Okay, and freight which as Ralph said there.
Speaker 4: transcript
Speaker 4: some of this it's hard to implement some of the changes that you have teed up before the final rule comes about. And so that's what we're waiting on, you know, and I would say that, you know, we all believe and know that this is going to get litigated in court and then the question is how long before we actually have to implement.
And some of US it's hard to implement some of the changes that you have teed up before the final rule comes about and so thats, what we are waiting on.
And I would say that.
Perry Beberman: Finally, slide 11 provides our financial outlook for the full year of 2023. Our financial outlook is updated to reflect slowing sales growth as a result of both our strategic and targeted credit tightening as well as an expected continued moderation in consumer spending. For the full year, average loans are expected to grow in a low-to-mid single-digit range relative to 2022 based on the latest economic outlook. We anticipate year-end period loans to be around $19.3 billion, inclusive of the recently acquired Dell portfolio of approximately $409.
I think we all believe and know that this is going to get litigated in court and then the question is how long before we actually have to implement.
Speaker 4: transcript
Speaker 4: And you know, one other thing I'd share is, and you know, we'll share more when and if the rule becomes final. But we expect the initial impact as a percent of total revenue.
And one other thing I would share is and we'll share more when and if the rule becomes final, but we expect the initial impact as a percent of total revenue.
Speaker 4: transcript
Speaker 4: will be more impactful to Brett Financial and will be higher than peers, given our higher proportion of private label credit card accounts and our deeper underwriting.
We will be more impactful to Brett financial and would be higher than peers, given a higher proportion of private label credit card accounts and our deeper underwriting.
Yes.
Absolutely.
Speaker 5: transcript
Speaker 5: Terry, maybe it's the question for you on credit. You talk a little bit towards the end about the reserve rate. And I know it's going to go down sort of in the third quarter because you get the trend, I'm sorry, in the fourth quarter because you get the trend actor build. But I'm just curious as we look out to next year, maybe you could just speak to how you're seeing the frequency migration, obviously, you should be backdrop.
Perry maybe just a question for you on like credit you talked a little bit towards the end about the reserve grade and I know, it's going to go down sort of in the third quarter, because you get the trend I'm sorry in the fourth quarter, because you had the transact or build but I'm just curious as we look out to next year, maybe you could just speak to how youre seeing delinquency migration obviously.
Perry Beberman: We expect revenue growth to be slightly above our average loan growth in 2023, excluding the gain on sale from BJs with a full year net interest margin similar to the 2022 full year rate. Full year total non interest expenses are expected to be up 8 to 9% compared to 2022 with fourth quarter total expenses slightly higher than the third quarter driven by increased seasonal marketing and employee benefits costs. We updated our net loss rate outlook as we now anticipate the full year 2023 rate will be in the mid-7% range including impacts from the transition of our credit card process of services in June 2022.
Choppy backdrop.
Speaker 5: transcript
Speaker 5: You know, who knows where things go, but seems stable ish, you know, at this point. Um, but just how, how the reserve rate would migrate, uh, if there's stability.
Who knows where things go but seems stable ish at this point.
But just how the reserve rate would migrate.
Stability. Thanks.
Speaker 4: transcript
Speaker 4: Thanks, Angie. Yeah, so as we think about the reserve rate, I think it is dependent on what you say.
Thanks Sanjay.
As we think about the reserve rate.
I think it is dependent on what you said.
Speaker 4: transcript
Speaker 4: What happens with the economy next year and as we signaled and I think it's playing out pretty much as we expected. I think we were
What happens with the economy next year and as we signaled in.
It's playing out pretty much as we expected I think we are.
Speaker 4: transcript
Speaker 4: Foreseeing things that perhaps a lot of the economic forecasts weren't seeing in terms of
Perry Beberman: While our tighter underwriting and credit line management should benefit future loss performance, these actions raise the loss rate in the near term by lowering our projected loan balance which forms the denominator in the net. We expect the fourth quarter net loss rate to be approximately 8% driven by normal seasonal trends continued consumer payment pressure and the denominator effect from lower loan growth. In addition, we expect fourth quarter delinquency rate to be relatively consistent with the third quarter sticking with credit with the addition of the Dell portfolio in early October and the fourth quarter anticipated seasonal increase in transactor bounces.
We're seeing things that perhaps a lot of the economic forecasts werent seeing in terms of what was happening with the consumers. We serve the pressure that this elevated environment of inflation puts into the consumer base and what that means for future delinquency and losses, we were caring for that when we increased our reserve rate to 12, 3%.
Speaker 4: transcript
Speaker 4: what was happening with the consumers we serve, the pressure that this elevated environment of inflation puts into the consumer base and what that means for future delinquency and losses. We were caring for that when we increased our reserve rate to 12.3 percent. Like I said previously, we did not expect unemployment to be the driver of this. It was more about the pressure from this compounding effect of inflation, so the degree to which
Like I said previously we did not expect unemployment to be the driver of this it was more about the pressure from this compounding effect of inflation, so the degree to which the fed.
Speaker 4: transcript
Speaker 4: the Fed is able to get, I'll say, inflation under control, whether it's the back half of next year, you start to see inflation coming down. You know, a lot of this is you can tell with what the Fed.
Ed is able to get I'll say inflation under control, whether it's the back half of next year, you start to see inflation coming down.
Lot of this is you can tell with what the Feds view on rates are now you're starting to see economists thinking that's going to maybe increase the rate one more time or so or keep rates higher longer that aligns to our view that rates were going to remain higher longer which implies inflation is going to remain.
Speaker 4: transcript
Speaker 4: view on rates are now you start to see economists think oh that's gonna maybe increase the rate one more time or so or Keep rates higher longer that aligns to our our view of that rates were going to remain higher longer Which implies inflation is going to remain a little higher longer before getting that 2%
Perry Beberman: It is likely the reserve dollars will increase but the reserve rate could decline slightly year end. The increase in transactor bounces will also temporarily reduce our capital metrics in the fourth quarter as is typical each year end. Our full year normalized effective tax rate is expected to remain in the range of 25 to 26% with quarter over quarter variability due to time and a certain discrete items. One final item before wrapping up as you can see in the financial tables provide in the appendix we are now reporting total company regulatory capital ratios and our double leverage ratios. As Ralph highlighted, you can see the discipline management decisions and successful execution of our plans over the past three years.
A little higher longer before hitting that 2% target rate. So we've said, we expect our losses to peak next year, whether it's midyear or remains elevated throughout the year is hard to know thats really going to be macro dependent but I would expect that as we think about the reserve rate the reserve rates are.
Speaker 4: transcript
Speaker 4: Target rate. So, you know, we said we expect our losses to peak next year You know, whether it's mid-year or you know remains a little elevated throughout the year It is hard to know that's really going to be macro dependent But I would expect that as we think about the reserve rate the reserve rate should remain pretty steady throughout next year
It remained pretty steady throughout next year.
Speaker 4: transcript
Speaker 4: And it's going to be macro dependent upon when that rate can come down. So we start to have a brighter outlook.
And it's going to be macro dependent upon when that rate can come down. So when we start to have a brighter outlook and that might be we see a brighter outlook into 2025 that means towards the end of next year. The reserve rate comes down if the outlook does not improve do you expect the reserve rate to hold kind of where it is.
Speaker 4: transcript
Speaker 4: And that might be, if we see a brighter outlook into 2025, that means towards the end of next year, the reserve rate comes down. If the outlook does not improve, you expect the reserve rate to hold it kind of where it is. Okay.
Perry Beberman: Briefly looking ahead to 2024, we will stay true to pursuing responsible profitable growth. We expect consumer macroeconomic pressures to continue to drive software consumer spending which coupled with our continued tighter credit underwriting and line management actions will likely lead to loan growth remaining below our longer term targets next year. Also, we currently project that our net loss rate will peak in 2024 subject to economic conditions. We will provide specific guidance for 2024 during our fourth quarter earnings call in January and more details around our intended mitigation strategies after final CFPB rule is released.
Okay. That's great. Thank you so much.
Speaker 1: transcript
Speaker 1: Our next question comes from Robert Napoli from William Blair. Robert, your line is now open, please go ahead.
Our next question comes from Robert Napoli from William Blair. Robert Your line is now open. Please go ahead.
Speaker 6: transcript
Speaker 6: Thank you, and good morning. Maybe just following up, I guess it's the biggest question, you know, as you looked at, I'm sure you have all types of models for mitigation and what effects
Thank you.
Good morning, maybe just following up I guess, it's the biggest question as you looked at I am sure you.
Both types of.
Models for mitigation and what effects, what do you have a confidence level and being able to generate.
Speaker 6: transcript
Speaker 6: Do you have a confidence level in being able to generate attractive returns?
Perry Beberman: In closing, we are effectively managing risk return tradeoffs through an ongoing challenging macroeconomic environment while continuing to strategically invest and drive long term value for our stakeholders.
Attractive returns post the.
Speaker 6: transcript
Speaker 6: the, you know, the adjustments, if they're filming it, you know, we go to the lowest level on late fees. What is your confidence level being able to drive?
The adjustments assuming we go to the lowest level in late fees, what is your confidence level being able to drive.
Bruno: Operator, we are now ready to open up the lines for questions. Thank you.
Speaker 6: transcript
Speaker 6: you know, reasonably attractive returns, I guess, at bread under any scenario on the
Reasonably attractive return I guess at Brad.
Are there any scenario.
Operator: Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Let's start one on your telephone keypad. Do we draw your question? Let us press start followed by two, and please also remember to unmute your microphone if you turn to speak.
Okay.
Speaker 4: transcript
Speaker 4: Thanks for the question. I mean, you know, that's, first of all, we don't know what the final rule is. And so, to your point, if we go to the current $8 fee, you should expect that, you know, we said in the past, and it's continued to be true, that APRs will have to go up across the board for all customers.
Thanks for the question.
That's first of all we don't know what the final rule is and so to your point. If we go to the current $8 fee you should expect that we said in the past and it's continued to be true that Apr's will have to go up across the board for all customers Youll start to see some fees for credit whether it means upfront.
Speaker 4: transcript
Speaker 4: You'll start to see some fees for credit, whether it means upfront origination fees, promotional fees, you know, fees on promotional amounts like for big ticket or annual or monthly fees.
Origination fees promotional fee fees on promotional spend.
Looks like for big ticket, our annual or monthly fees that would be true then youre going to have some restructuring of partner contracts. So as Rob talked about earlier, we're very engaged with our partners look we're in this together and trying to protect their economics as well as areas, but we've got to underwrite as you said to protect returns for our shareholders.
Speaker 4: transcript
Speaker 4: That would be true. Then you're going to have some restructuring of partner contracts. I mean, so as Ralph talked about earlier, we're very engaged with our partners. We're in this together. We're trying to protect their economics as well as ours, but we've got to underwrite.
Sanjay Sakhrani: I'm just curious if you've started to think about and implement any mitigation efforts or test it to see what you might be able to do, and how comfortable are you with mitigation? Yeah, Sanjay, thanks for the question. We're awaiting like everybody else for the final ruling from the CFPB. We'd like it to come sooner than later so we can just get focused on it even more. But we're testing different APRs in a marketplace and a variety of other type of fees to close gaps.
Speaker 4: transcript
Speaker 4: as you said, to protect returns for shareholders. And we're running through a bank, so we have a responsibility to make sure from a safety and soundness standpoint that we're doing that as well. So you're going to see some tightening of credit standards, which means we'll see a, which will result in fewer customers being extended credit.
We're running through a bank. So we have a responsibility to make sure from a safety and soundness standpoint that we're doing that as well so youre going to see some.
Some tightening of credit standards, with which means we will see a which will result in fewer customers being extended credit. So you might we might grow a little less than what we otherwise might have in I'll say private label, but then that will free up capital to deploy into other product adjacencies. So theres a lot to do.
Sanjay Sakhrani: We're working with our partners diligently. They understand what the issue is and the impact it could have on their business as it could have in our business, and we continue to collaborate with them on mitigations. You know, in terms of how long it will take, what the mitigations will be, closing the gaps. We'll know more when the final ruling comes out, but rest assured we're focused on it. We're testing different strategies and working very collaboratively and diligently with our partners.
To sort through but yes. It is our full expectation that we will be able to run our business delivering strong returns in the future there might be a little bit of a burn in period as the APR changes, but when you look to get the other side of it we have full expectation to be able to deliver strong returns.
Speaker 6: transcript
Speaker 6: Thank you. And then I guess given that your confidence there and given that your stock is so far below book value, tangible book value right now, what are your thoughts on capital, on capital return and balancing that with the new regulatory, potential regulatory changes coming up as well. But it seems like a good opportunity for public trouble is that high to increase tangible book value by reducing the share count even.
Thank you and then I guess given that your confidence there and given that your stock is so far below book value.
Speaker 6: transcript
Speaker 6: And then I guess given that your confidence there and given that your stock is so far below book value, tangible book value right now, what are your thoughts on, on capital on capital return and balancing that with the new regulatory, you know, potential regulatory changes coming up as well. But it seems like a good opportunity for confidence level is that high to, you know, to increase tangible book value by reducing the share count even.
Sanjay Sakhrani: Yeah, okay. So Ralph said there, right? Some of this is hard to implement. Some of the changes that you have teed up before the final rule comes about. And so that's what we're waiting on. I would say that we all believe and know that this is going to get litigated in court and then the question is how long before we actually have to implement. And you know, one other thing I'd share is and you will share more when and if the rule becomes final, but we expect the initial impact as a percent of total revenue will be more impactful to bread financial and be higher than peers, given a higher proportion of private label credit card accounts and are deeper underwriting. Yeah, absolutely.
Angela will book value right now what are your thoughts on.
On capital on capital return and balancing that.
With the new rate potential regulatory changes coming up as well, but it.
It seems like a good opportunity to tavis level was that high teen.
Two increased tangible book value by reducing the share count even.
Speaker 4: transcript
Speaker 4: Yeah, I think when we think about our capital structure, I'll first start by saying our priorities remain unchanged, right, supporting responsible, profitable growth, make sure we're investing in our technology and digital capabilities to serve our brand partners, and customers, we're still not where we want to be on that front. You know, Ralph talked about earlier, you know, we were paying down our debt, we need to pay down our debt to get below 115% double leverage ratio.
Yes, I think when we think about.
Our capital structure I'll first start by saying our priorities remain unchanged right supporting responsible profitable growth make sure we're investing in technology and digital capabilities to serve our brand partners and customers. We are still not where we want to be.
Perry Beberman: Perry, maybe it's the question for you on like credit. You talked a little bit towards the end about the reserve rate. And, you know, I know it's going to go down sort of in the third quarter because you get the transit. I'm sorry, in the fourth quarter because you get the transactor bill, but I'm just curious as we look out to next year. Maybe you could just speak to how you're seeing the link when see migration obviously should be backdrop, you know, who knows where things go, but seems stable ish, you know, at this point.
On that front.
Perry Beberman: But just how the reserve rate wouldn't migrate if there's stability. Thanks. Thanks, Angie. Yeah, so as we think about the reserve rate, you know, I think it is dependent on what you say. It's the what happens with the economy next year, and as we signaled, and I think it's playing out pretty much as we expect. And I think we were for seeing things that perhaps a lot of the economic forecast weren't seeing in terms of what was happening with the consumers we serve, the pressure that is elevated environment of inflation puts into the consumer base and what that means for future delinquency and losses.
Ralph talked about earlier, we are paying down our debt, we need to pay down our debt to get below 115% double leverage ratio.
Speaker 4: transcript
Speaker 4: We want to continue to build our capital ratios to fortify this balance sheet, and then we can think about things like, you know, you mentioned around further return to shareholders.
We want to continue to build our capital ratios to fortify the balance sheet and then we can think about things like you've mentioned around further returns to shareholders, but in this environment with the uncertainty around the macro side of things and as you noted on the regulatory front it would not be responsible to.
Speaker 4: transcript
Speaker 4: But in this environment, with the uncertainty around the macro side of things, and as you noted on the regulatory front, it would not be responsible to
Speaker 4: transcript
Speaker 4: take a, say a strong action like that. We did do our good hygiene share repurchases, or else noted, we've bought back $35 million shares. You know, if it weren't for those uncertain environments that we're right now, it certainly would be a lot more attractive, but I think that would not be the responsible thing for us to do at this time.
Take a strong action like that we did do our good hygiene share repurchases. Ralph noted, we bought back 35 million shares.
If it werent for those uncertain environment that we're right now certainly be a lot more attractive, but I think that would not be the responsible thing for us to do at this time.
Thank you I appreciate it.
Yes.
Our next question comes from Mihir Bhatia from Bank of America. Your line is now open. Please go ahead.
Speaker 1: transcript
Speaker 1: Our next question comes from Miyubatia from Bank of America. Miyu Yulans not open, please do a head.
Speaker 7: transcript
Speaker 7: Good morning. Thank you for taking my questions. I wanted to start with, you know, the delinquency trend and I think your comments about 2024 right at the end. You know, delinquency is right now at like, you know, 15-year highs. I think it's all in your appendix. And I understand some of the pressures on the consumer, but I was curious, like, I think it sounds like you expect this to obviously drive NCOs higher next year. And in hindsight,
Perry Beberman: We were caring for that when we increased our reserve rate to 12.3%. Like I said previously, we did not expect unemployment to be the driver as it was more about the pressure from this compounding effective inflation. So the degree to which the Fed is able to get inflation under control, whether it's the back half of next year, you start seeing the inflation coming down. You know, a lot of this is you could tell with what the Fed view on rates are.
Good morning, Thank you for taking my questions.
I wanted to start with.
Delinquency trends and I think your comments about 2020 full I think delinquencies right now about 15 year high as I think thats all in.
Bed bugs.
And I understand some of the ratios.
Consumer, but I was curious.
I think it sounds like you expect this to obviously drive in theater is higher.
And in hindsight do you think.
Perry Beberman: Now you start to see economists think, oh, the Fed's going to maybe increase the rate one more time or so or keep rates higher longer. That aligns to our view of that rates were going to remain higher longer, which implies inflation is going to remain a little higher longer before hitting that 2% target rate. So, you know, we said we expect our losses to peak next year, you know, whether it's mid-year or, you know, remains a little elevated throughout the year is hard to know.
Speaker 7: transcript
Speaker 7: bread or the industry got too aggressive with growth coming out of COVID? Like what's driving this? And just talk a little bit more about the tightening you're doing to get back to your expected or long term guidance of loss rates. Any more color you can give on that tightening?
Brad or the industry got too aggressive growth coming out of.
Covid like whats driving that.
You talked a little bit more about the tightening youre doing to get back to your <unk>.
Expected.
Guidance of loss rates any more color you can give on that tightening.
Let me talk.
Speaker 4: transcript
Speaker 4: Got a number of things in there and I'll, you know, Ralph will talk about the credit strategy tightening, but in terms of did we grow too fast. Come as no I'd say we've remained very disciplined in the growth and compared to others who maybe you heard where they've had these large vintages and these ventures are seasoning. You can look at our lag loss rates and things of that nature, we have not. That is not our issue really what we're.
We've got a number of things in there.
Ralph will talk about the credit strategy tightening.
In terms of did we grow too fast.
Perry Beberman: That's really going to be macro-dependent, but I would expect that as we think about the reserve rate, the reserve rate should remain pretty steady throughout next year and it's going to be macro-dependent upon when that rate can come down. So we start to have a brighter outlook and that might be if we see a brighter outlook in the 2025, that means towards the end of next year, the reserve rate comes down. If the outlook does not improve, you expect the reserve rate to hold kind of where it is. Thank you so much.
No I would say we've remained very disciplined.
And the growth in compared to others, who maybe you heard where they've had these large vintages and these vintages are seasoning you can look at our lag loss rates and things of that nature. We have not that is not our issue really what works.
Speaker 4: transcript
Speaker 4: What you're seeing is the economy and the effect it has on Moderate and lower-income households and where their wage growth is not keeping up with the compounding effect of inflation So it's an unfortunate element of this type of environment and our customers are doing the best they can to make ends meet They're rotating, you know spend categories to try to make it happen. They're picking up second jobs
What youre seeing is the economy and the effect it has on moderate and lower income households, and where their wage growth is not keeping up with the compounding effect of inflation. So it's an unfortunate element of this type of environment and their customers are doing the best they can to make ends meet the rotating.
Robert Napoli: Our next question comes from Robert Napoli from William Blair. Robert Caroline's not open, please go ahead. Thank you and good morning. Maybe just following up, I guess it's the biggest question. As you look at it, I'm sure you have all types of models for mitigation and what effects. What do you have a confidence level and being able to generate, you know, attractive returns post the, you know, the adjustments, if assuming it, you know, we go to the lowest level on late fees, what is your confidence level being able to drive, you know, reasonably attractive returns, I guess, at bread under any scenario on late fees.
Spend categories to try to make it happen theyre picking up second jobs.
Speaker 4: transcript
Speaker 4: job full environment. So your question, though, around the, you know, hitting delinquency and a 15 year peak, and I'm sure if you link that to the great financial crisis when these are.
Job full environment. So your question, though around the hitting delinquency and a 15 year peak and I am sure. If you link that to the great financial crisis when these.
Speaker 4: transcript
Speaker 4: Lawson's really peaked up much higher. There was a very different environment, right? The great financial crisis was driven by.
Losses really peaked up much higher it was a very different environment right. The great financial crisis was driven by rapid and high unemployment.
Speaker 4: transcript
Speaker 4: rapid and high unemployment, people were upside down in their mortgages, meaning they had negative equity, and that drove a lot of consumers to file bankruptcy.
People were upside down in their mortgages meeting.
Negative equity and that drove a lot of consumers to file bankruptcy and so that was a very different macro environment versus the one we're in right now where consumers are employed.
Speaker 4: transcript
Speaker 4: And so that was a very different macro environment versus the one we're in right now where consumers are employed. If that's not the issue, it's more so inflation, and inflation should come under control. It's just, it's not a matter of if, it's just a matter of when.
Robert Napoli: Thanks for the question. I mean, you know, that's for personal, we don't know what the final rule is, and so to your point, if we go to the current $8 fee, you should expect that, you know, we said in the past, and it's continued to be true, that APRs will have to go up across the board for all customers. You'll start to see some fees for credit, what it means upfront original fees, promotional fees, you know, fees on promotional, and it's like for big ticket or annual or monthly fees, that would be true.
Not the issue, it's more so inflation and inflation should come under control.
Not a matter of if it's just a matter of when.
Speaker 3: transcript
Speaker 3: So I think you're gonna see continued pressure on delinquency for a bit. It's gonna result in some higher losses, but I don't think you're gonna see the breakthrough type of losses like you had last time. And so, Rob, can we talk about the credit management? Yeah, you know, we have a very robust and proactive risk management process.
I think youre going to see continued pressure on delinquency forget it's going to result in some higher losses, but I don't think youre going to see the breakthrough type of loss of like you had last time and so Robin will talk about the credit management, yes, we have a very robust and proactive risk management process and it's across the lifecycle.
Speaker 3: transcript
Speaker 3: And it's across a life cycle of a borrower, so if you think from acquisition to line management to collections and account closures, we manage that very carefully.
Robert Napoli: Then you're going to have some restructuring of partner contracts. I mean, so as Ralph talked about earlier, we're very engaged with our partners. Look, we're in this together, we're trying to protect their economics as well as ours, but we've got to underwrite, as you said, to protect returns for shareholders and, you know, we're running through a bank, so we have a responsibility to make sure from a safety and sound standpoint that we're doing that as well.
The borrowers so everything from acquisition to align management to AR collections and account closures, we manage that very carefully.
Speaker 3: transcript
Speaker 3: You know, our view is to make sure that we are not putting anybody in harm's way.
<unk> is to make sure that we're not putting anybody.
In Harm's way and we're managing their debt appropriately. So for example, now that student loans just come back on track, we monitor those those customers that have student loans.
Speaker 3: transcript
Speaker 3: So for example, now that student loans has come back on track, we monitor those customers that have student loans. We've included those student loans in their obligation and ability to pay, even when they weren't paying them. So as we step through this uncertain time, we continue to focus on this, you know, across
Robert Napoli: So you're going to see some tightening of credit standards, which means we'll see which resulting fewer customers being extended credit. So you might, we might grow a little less than what we otherwise might have in, I'll say, private label, but then that will free up capital to deploy into other product adjacencies. So there's a lot to sort of work through, but yes, there's a full expectation that we will be able to run a business delivery strong returns in the future.
We've included those student loans in their obligation and ability to pay.
Even when they werent paying them so.
We step through this uncertain time.
We continue to focus on this.
Cross across the lifecycle of individual in terms of their credit underwriting in there.
Speaker 3: transcript
Speaker 3: across the life cycle of individual in terms of their credit underwriting and their ability to manage credit. So I feel very good about that. We were focused on this premire arrival in 2019. We were very diligent and thoughtful through...
<unk> two to manage credit so we feel very good about that we would focus on this pre my arrival in 2019, we were very diligent and thoughtful through through.
Robert Napoli: It might go a little bit of a burn-in period as, you know, with the APR changes, but, you know, when you look to get to the other side of it, we have full expectation to be able to deliver strong returns.
Speaker 3: transcript
Speaker 3: through the pandemic when everybody was kind of opening their buy box a little bit. We were very conservative and made sure that we were very diligent in terms of underwriting and line management. And we'll continue to do that as we move forward. Now, as we said, some of that impacts our growth in the near term, but from a lost perspective long term, we believe it's the right thing to do and we'll continue to manage very thoughtfully through the process. Then I'll have one left.
Through the pandemic when everybody was kind of opening the buy box a little bit we were very conservative and make sure that we were very diligent in terms of underwriting and line management and we will continue to do that as we move forward now.
Robert Napoli: Thank you. And then I guess given that your confidence there, and given that your stock is so far below book value, tangible book value right now, what are your thoughts on capital, on capital return, and you know, balancing that with the new regulatory, you know, potential regulatory changes coming up as well. But it seems like a good opportunity for public level is that high to, you know, to increase tangible book value by reducing the share count, even.
Some of that impacts are.
Our growth in the near term, but from a loss perspective long term. We believe it's the right thing to do and we'll continue to manage very thoughtfully through the process.
I have one last comment to what Ralph just said, we are seeing the benefits of those credit strategies and that we are seeing a little bit lower early stage delinquency, which demonstrates that the credit actions are taking hold the challenge is that once consumers get into delinquency, even though they are employed there are struggling to get back to current.
Speaker 4: transcript
Speaker 4: You know, we are seeing the benefits of those credit strategies in that we're seeing a little bit lower early stage delinquency, which demonstrates that the credit actions are taking hold. The challenge is, is that once consumers get into delinquency, even though they're employed.
Robert Napoli: Yeah, I think when we think about our capital structure, I'll first start by saying our priorities remain unchanged, right, supporting responsible, profitable growth. Make sure we're investing in our technology and digital capabilities to serve our brand partners and customers. We're still not where we want to be on that front. You know, Ralph talked about earlier, you know, we're paying down our debt. We need to pay down our debt to get below 115 percent double leverage ratio.
Speaker 4: transcript
Speaker 4: They're struggling to get back to current. And so what that means is that your later stage role rates are higher than historically they've been, and that's what's driving the higher losses. So we're going to continue to do what we can to drive down the early stage. And again, working with customers as they enter those later.
And so what that means is that your later stage roll rates are higher than historically, they've been and thats whats driving the higher losses. So we're going to continue to do what we can to drive down the early stage and again working with customers as they enter those later stages.
Speaker 7: transcript
Speaker 7: Thank you for that. Um, maybe switching gives just the spending, but you know, related to some of the tightening. Can you just talk about some of the changes you saw in Tracotto in consumer spending? Do you see like slow down months over months or months and maybe give us a glimpse of what you've seen months today? Really, what we're trying to understand and how much more can spending slow down from here into the fourth quarter. And as we think about the first quarter next.
So thank you for that.
Maybe switching gears just to spending but related to some of the tightening can you just talk about some of the changes you saw intra quarter in consumer spending did you see like slow down month over month go above that maybe give us a glimpse of what youll see in months to be.
Robert Napoli: We want to continue to build our capital ratio, just to fortify this balance sheet. And then we could think about things like, you know, you mentioned around further returns to shareholders. But in this environment, with the uncertainty around the macro side of things, and as you noted on the regulatory front, it would not be responsible to take a, say, a strong action like that. We did do our good hygiene share repurchases.
Really wanted to try to undecided, how much bulk and spending slowdown from good to the fourth quarter and as we think about the first quarter of next year.
Yes, I think when we think about that Theres, a slowdown basically that we're seeing.
Speaker 4: transcript
Speaker 4: Yeah, I think when we think about that, there's a slowdown basically that we're seeing, you know, certainly in the moderate and lower income cohorts, but you're starting to see that creep up into even some of the prime cohorts as, you know, inflation has taken hold. And I think the way you can look at it is, you know, when you think about the fourth quarter.
Robert Napoli: Ralph noted, we've bought back 35 million dollars here. You know, if it weren't for those uncertain environments that we're right now, it would certainly be a lot more attractive. But I think that would not be the responsible to do it this time.
Certainly in the modern and.
Lower income cohorts, but you're starting to see that creep up into even some of the prime cohort as <unk>.
<unk> taken hold and I think the way you can look at it is when we think about the fourth quarter and what what retailers are saying, what our brand partners are saying that theyre projecting a softening of sales. This holiday season, which is kind of in line with some of the trends you've been seeing over the summer. So you should expect is that more retailers.
Speaker 4: transcript
Speaker 4: And what retails are saying, what our brand partners are saying, that they're projecting a softening of sales this holiday season.
Robert Napoli: Thank you, appreciate it.
Speaker 4: transcript
Speaker 4: which is kind of in line with some of the trends they've been seeing over the summer. So what you should expect is that more retailers will be planned off their discounts and incentives are worse up.
Mihir Bhatia: Our next question comes from Mihir Bhatia from Bank of America. Mihir, your line's not open, please do ahead. Good morning. Thank you for taking my questions. I wanted to start with the frequency, Crem, and I think your comments about 2020, for like the end, you know, the link will be right now, like, no, 15 year, high, I think it's all in your band legs. And I understand some of the pressures on the consumer, but I was curious, like, I think it sounds like you expect this to obviously drive and see it was higher next year.
We plan to offer discounts incentives rewards.
Speaker 4: transcript
Speaker 4: Now, you know, unlike last year and even the year before where there were supply chain issues, people couldn't get the electronics or whatever it was they were looking for.
Now unlike last year and even the year before where there were supply chain issues people couldn't get the electronics or whatever it was they were looking forward spend got accelerated it earlier in the season into really early October even and now I think youre going to see is as consumers are more cost conscious and looking for deals youre going to see.
Speaker 4: transcript
Speaker 4: Spend got accelerated earlier in the season into really early October even. And now what I think you're gonna see is as consumers are more cost conscious and looking for deals, you're gonna see the typical seasonal spend of what you saw a few years ago where it's really concentrated into November , December as they're looking for that deal. And with the merchants are gonna be obviously putting things on sale at that time. So it may look more like past cycles from past years.
The typical <unk>.
Mihir Bhatia: And in hindsight, do you think bread on the industry got too aggressive with growth coming out of COVID, like what's driving this? And just talk a little bit more about the tightening you're doing to get back to your expected or long-term guidance of loss rates. Any more color you can give on that tightening? Let me talk a little bit. You've got a number of things in there. And Ralph will talk about the credit strategy tightening, but in terms of did we grow too fast?
Seasonal spend of what you saw a few years ago, where it's really concentrate into November December as Theyre looking for that deal and with the merchants are going to be obviously, putting things on sale at that time. So it may look more like past cycles from passengers.
Got it thank you.
Speaker 1: transcript
Speaker 1: Our next question comes from Jeff Adelson from Morgan Stanley . Jeff, your line is now open. Please go ahead.
Our next question comes from Jeff Adelson from Morgan Stanley. Your line is now open. Please go ahead.
Hey, guys. Thanks for taking my questions and good morning.
Mihir Bhatia: No, I'd say we've remained very disciplined in the growth. And compared to others who maybe you heard where they've had these large ventages and these ventures are seasoning, you can look at our lack loss rates and things of that nature. We have not, that is not our issue. Really what you're seeing is the economy and the effect it has on moderate and lower income households, and where their wage growth is not keeping up with the compounding effect of inflation.
Speaker 5: transcript
Speaker 5: Just wanted to follow up on the credit commentary and at the risk of, you know, beating a dead horse here. I just want to make sure we got it right. So I think you're expecting your loss rate to peak out next year. I just want to be sure. Should we be thinking about a peak loss rate in the context of, I think you mentioned this 4th quarter looking more like an 8%.
Just wanted to follow up on the credit commentary.
And at the risk of beating a dead horse here I just want to make sure. We got it right. So I think you are.
Back in your loss rate to peak out next year.
Wanted to be sure should we be thinking about a peak loss rate in the context, but I think you mentioned this fourth quarter.
Looking more like an 8%.
Mihir Bhatia: So it's an unfortunate element of this type of environment. I mean our customers are doing the best they can to make ends meet. They're rotating spend categories to try to make it happen. They're picking up second jobs. It's a job full environment. So your question, though, around the hitting delinquency and a 15-year peak, and I'm sure you'll link that to the great financial crisis when these losses really peaked up much higher, those are very different environments, right?
Speaker 5: transcript
Speaker 5: Um, I, I think, you know, maybe we were all accepting a little bit more improvement next year. So I just wanted to square those, um, those figures. No, I appreciate.
I think maybe we were offsetting a little bit more improvement next year. So I just wanted to square those two.
Those figures.
So I appreciate the direct question.
Speaker 4: transcript
Speaker 4: You're right, we we are definitely expecting fourth quarter to be around 8% and reiterate that's 100 basis points up link or someone at the seasonal increase and then.
You are right, we are definitely expecting fourth quarter to be around 8% and reiterate that the 100 basis points up linked quarter and someone thats a seasonal increase in then.
Speaker 4: transcript
Speaker 4: Um, you know, the other half of that I'll say is a combination of the macro conditions.
The other half of that will take it as a combination of the macro conditions affecting their consumers' ability to pay and the denominator effect. So when you think about that yes, you can extrapolate that into next year, because while seasonality will move around I think that pressure on the consumers' ability to pay we will continue to play out throughout next year.
Speaker 4: transcript
Speaker 4: affecting the consumer's ability to pay and the denominator effect.
Mihir Bhatia: The great financial crisis was driven by rapid and high unemployment. People were upside down in their mortgage meeting, they had negative equity, and that drove a lot of consumers to file bankruptcy. And so that was a very different macro environment versus the one we're in right now where consumers are employed. If that's not the issue, it's more so inflation. And inflation should come under control. It's just, it's not a matter if it's just a matter of when.
Speaker 4: transcript
Speaker 4: So, when you think about that, yes, you can extrapolate that into next year, because while seasonality will move around, I think that pressure on the consumer's ability to pay will continue to play out throughout next year, as well as the denominator effect as we will have smaller vintages from this year carrying into next year, and next year's vintage will also be smaller as a result. So that will put pressure on the net loss rate, and I don't think any of us are thinking that inflation is abating that quickly.
<unk> as well as the denominator effect as we will have smaller advantages from this year carrying into next year and next year's vintage will also be smaller as a result, so that will put pressure on the net loss rate and I don't think any of us are thinking that inflation abating that quickly and the effects of higher interest rates Theres a lag there.
Speaker 4: transcript
Speaker 4: and the effects of higher interest rates, there's a lagged effect of what that means to the consumers in terms of
Mihir Bhatia: So I think you're going to see continued pressure on delinquency for a bit. It's going to result in some higher losses, but I don't think you're going to see the breakthrough type of loss of like I had last time. So we have a very robust and proactive risk management process. And it's across the life cycle of a borrower. So I think from acquisition to line management to collections and account closures, we've managed that very carefully.
<unk>, what that means to the consumers in terms of higher.
Speaker 4: transcript
Speaker 4: higher cost of auto loans, home loans, credit card debt, and their, you know, debt is rising for them. So they've got, you know, more debt to pay with higher interest costs and at the same time student debt repayment is occurring. So
Higher cost of auto loans home loans credit card debt and the.
That is rising for them, so they've got more debt to pay with higher interest costs and at the same time student debt repayment is occurring so I think theres going to be this play out next year, which is definitely going to put it in the higher end of that range.
Speaker 4: transcript
Speaker 4: I think there's going to be this playoff of next year, which is definitely going to put it in the higher end of that range.
Okay great.
Mihir Bhatia: Our view is to make sure that we are not putting anybody in harm's way and we're managing their debt. So for example, now that student loans has come back on track, we monitor those customers that have student loans, we've included those student loans in their obligation and ability to pay even when they were in paying them. So as we step through this uncertain time, we continue to focus on this across the life cycle of individual in terms of their credit underwriting and their ability to manage credit.
Speaker 5: transcript
Speaker 5: Just to circle back on the NIM, I know this was a.
Just to circle back on the NIM.
I know this was seasonality lower reversals.
Speaker 5: transcript
Speaker 5: seasonality, lower reversals, and it's gonna, you know, trend back down next quarter on seasonality as well.
And it's going to trend back down next quarter on seasonality as well.
Speaker 5: transcript
Speaker 5: I think we're all pretty surprised by the strength and the nim though you've discussed yourself being a little bit more neutral to raise. I know there's a lag effect with the Fed here.
I think we were all pretty surprised by the strength in the NIM.
Discussed yourself being a little bit more neutral to rates I know theres, a lag effect with the fed here.
Speaker 5: transcript
Speaker 5: Um, to the primary, but, but thinking forward, is there a case to be made that maybe you've got a structurally higher name or car deal going forward with?
To the prime rate.
Thinking forward is there a case to be made that maybe you've got a structurally higher NIM or card deal going forward with.
Speaker 5: transcript
Speaker 5: You know, people may be revolving more, or you still more on the camp of, you know, hanging around this low 19% level.
People may be revolving more or are you still more in the camp.
Hanging around this low 19% level.
Mihir Bhatia: So I feel very good about that. We were focused on this premire arrival in 2019. We were very diligent and thoughtful through the pandemic when everybody was kind of opening their buy box a little bit. We were very conservative and made sure that we were very diligent in terms of underwriting and line management. And we'll continue to do that as we move forward. Now as we said, some of that impacts our growth in the near term, but from a lost perspective long term, we believe it's the right thing to do and we'll continue to manage very thoughtfully through the process.
Speaker 4: transcript
Speaker 4: Yeah, I'm definitely more in the camp of hanging around the low 19% level. We'll give more guidance on that as we get into next year. But when you think about what's going to happen in the fourth quarter, you're going to get a seasonal drop and as losses remain elevated. Remember, this this quarter losses were 100 basis points below last quarter. And now next quarter, they're going to go back up. So you're going to have that the purification or reversal of interest and fees impacting fourth quarter.
Yes.
More in the camp of hanging around the low 19% level, we'll give more guidance on that.
We get into next year, but when you think about what's going to happen in the fourth quarter youre going to get the seasonal drop and as losses remain elevated remember. This this quarter losses were 100 basis points below last quarter and now next quarter, they're going to go back up so youre going to have that the purification of reversal of interest and fees impacting.
Speaker 4: transcript
Speaker 4: and the losses remain elevated through next year, that's gonna put pressure on there. So, and then as we bring in, you know, smaller vintages, that will also affect, you know, higher quality vintages that may have a little bit of less rollover, maybe a little low pricing. So I would not wanna, you know, speculate that we have a structurally higher net interest margin going forward.
Fourth quarter.
Losses remain elevated through next year, that's going to put pressure on there so.
Mihir Bhatia: Then I'll have one last comment to what Ralph just said. We are seeing the benefits of those credit strategies and that we're seeing a little bit lower early stage to length one seed, which demonstrates that the credit actions are taking hold. The challenge is that once consumers get into length once they even though they're employed, they're struggling to get back to current. And so what that means is that your later stage role rates are higher than historically they've been, and that's what's driving the higher losses.
And then as we bring in <unk>.
Mihir Bhatia: So we're going to continue to do what we can to drive down the early stage. And again, working with customers as they enter those later stages. So thank you for that. So she gives just the spending, but you know related to some of the tightening.
Waller vintages that will also affect higher quality vintages that may have a little bit of less roller rollover, maybe a little low pricing. So I would not want to speculate that we have a structurally higher net interest margin going forward.
Great. Thank you guys.
Speaker 1: transcript
Speaker 1: Our next question comes from David Charles from GMP Securities. David, your line is now open, please go ahead.
Our next question comes from David Scharf from JMP Securities. Your line is now open. Please go ahead.
Speaker 8: transcript
Speaker 8: Thanks for taking my questions. Hey, I wanted to circle back to just some of the plan mitigation efforts and
Thanks for taking my questions.
Hey wanted to.
Circle back to just some of the planned mitigation efforts and.
Mihir Bhatia: Can you just talk about some of the changes you saw intra quarter in consumer spending? Did you see like slow down months over months or months and maybe give us a glimpse of what you've seen months today?
As it relates.
Speaker 8: transcript
Speaker 8: you know, to sort of timing and ability to kind of rule things out.
Sort of timing and ability to kind of roll things out.
Ralph Andretta: Really want to try to understand how much more can spending slow down from here into the fourth quarter and as we think about the first quarter next year. Yeah, I think when we think about that there's a slow down basically that we're seeing, you know certainly in the modern and lower income cohorts, but you start and see that creep up into even some of the prime cohorts as you know relations taken hold.
Speaker 8: transcript
Speaker 8: you know, not looking for you to name names, but I'm wondering, you know, is
I'm not looking for you to name names, but I'm wondering as you.
Speaker 8: transcript
Speaker 8: reflect on maybe your top 20 retailer partners and the discussions you've had thus far, is there sort of a unanimity in their, you know, reactions or embracing of certain mitigation efforts or pushback on others? I'm just wondering.
Reflect on maybe your top 20 retailer partners and the discussions you've had thus far.
Is there sort of a unanimity in there.
Reactions are embracing of certain mitigation efforts or pushback and others I'm just wondering is.
Speaker 8: transcript
Speaker 8: you know, is there a wide spectrum of support and resistance to various strategies among your partners or do you think that
Is there a wide spectrum.
Ralph Andretta: And I think the way you can look at it is, you know, we think about the fourth quarter and what retails are saying what our brand partners are saying that they're projecting a softening of sales as holiday season, which is kind of in line with some of the trends they've been seeing over the summer. So what you should expect is that more retailers will be planned off their discounts and send us rewards of now, you know, unlike last year and even the year before where there were supply chain issues.
Of support and resistance to various strategies among your partners or do you think that you know.
Speaker 8: transcript
Speaker 8: there's a pretty uniform buy-in to what you're thinking and that, therefore, kind of.
There was a pretty uniform buy into what you're thinking and that therefore.
Kind of implementation should be pretty smooth.
Speaker 3: transcript
Speaker 3: So let me start, and I'll let Perry finish. Just a couple of things. So our partners and our interests are aligned.
So let me let me so I'll.
I'll, let Perry.
Just a couple of things so our partners and our interests are aligned.
Speaker 3: transcript
Speaker 3: remain profitable during any kind of regulatory change. So that's it there. They are.
To remain profitable during.
Ralph Andretta: People couldn't get the electronics or whatever was they're looking for spend got accelerated earlier in the season into really early October even. And now what I think you're going to see is as consumers are more cost conscious and looking for deals, you're going to see the typical seasonal spend at what you saw a few years ago where it's really concentrating to November, December as they're looking for that deal and you know with the merchants are going to be putting things on sale at that time. So it made look more like pass cycles.
Any kind of regular regulatory change so thats out there they are.
Speaker 3: transcript
Speaker 3: focused on making sure that we would do the right things for their cardholders, that we can still provide credit, that their baskets at the point of sale are, you know, are as robust as they can be given the challenges we would have underwriting a certain population with just an $8.
Focused on making sure that we would do the right things for their cardholders that we can still provide credit that their baskets at the point of sale or.
Ralph Andretta: Thank you.
Are as robust as it can be given the challenges we would have underwriting a certain population with just an $8 late fee. So they are aware of it they understand our challenges we understand their challenges and we're working through the impacts of the changes we will need to make to keep them profitable and us as well and that may be.
Speaker 2: transcript
Speaker 2: so they're aware of it, they understand our challenges, we understand their challenges, and we're working through the impacts of the changes we will need to make to keep them profitable in us as well. And that may vary from partner to partner, but the,
Jerry from partner to partner, but the the.
Jeff Adelson: Our next question comes from Jeff Adelson from Morgan Stanley. Jeff, your lines are not open, please go ahead. Hey, guys, I have a question in the morning. I just wanted to follow up on the credit comments and as a risk of beating a dead horse there, I just wanted to make sure we got it right. So I think you're expecting your loss rate to peak out next year. I just want to be sure, should we be thinking about a peak loss rate in the context of, I think you mentioned this fourth quarter, looking more like an eight percent.
Speaker 3: transcript
Speaker 3: collaboration and understanding of the challenge is consistent.
Collaboration and understanding of the challenge is consistent.
Yes.
Got it.
Speaker 8: transcript
Speaker 8: And so, you know, and really what I was getting at is I didn't know if, you know, there was maybe a uniform pushback on, you know, origination fees, whereas others were more leaning towards promotional and whatnot. But obviously, it sounds like everybody's rowing in the same boat.
So.
And really what I was getting at is I didn't know if there was maybe a uniform pushback on.
Origination fees, whereas others were more leaning towards promotional and whatnot, but.
Yeah.
Everybody is rolling in I think the other thing.
Speaker 3: transcript
Speaker 3: I think the other thing to remember too is, you know, most of our partnership.
I think the other thing to remember too is most of our.
Our partnership.
Jeff Adelson: I think maybe we were all accepting a little bit more improvement next year, so I just wanted to square those post figures. I appreciate the direct question. You're right, we are definitely expecting fourth quarter to be around eight percent and reiterate that to 100 basis points up in quarters, someone that's a seasonal increase, and then the other half that I'll say is a combination of the macro conditions, effectively a consumer's ability to pay and the denominator effect.
Speaker 3: transcript
Speaker 3: Partnership contracts have a material change in law and provides us to make to allows us to make adjustments So, you know, and that's what we're working through
Partnership contracts have a material change in law provides us to make to allows us to make adjustments. So.
That's what we're working through with them.
Yes.
Speaker 4: transcript
Speaker 4: And I'll add to what Ralph just said, if you think about your top 20 partners, they're all different.
Jeff Adelson: So when you think about that, yes, you can extrapolate that into next year because while seasonality will move around, I think that pressure on the consumers' ability to pay will continue to play out next year as well as the denominator effect as we will have smaller advantages from this year carrying into next year and next year's advantage will also be smaller as a result. So that will put pressure on the net loss rate and I don't think any of us are thinking that inflation is abating that quickly and the effects of higher interest rates.
So what Ralph just said if you think about top 20 partners.
They are all different.
Speaker 9: transcript
Speaker 9: you know, whether they're a big ticket partner.
Whether they're a big ticket partner, where there I'll say, a little less impacted by it.
Speaker 4: transcript
Speaker 4: where they're, I'll tell you, a little less impacted by the late fee, but still impacted in a way, and then so you can pull levers on things like promotional fees.
But still impacting away and say can pull levers on things like promotional fees or others that are more private label concentrated.
Speaker 4: transcript
Speaker 4: or others that are more private label concentrated and you know the soft goods who are more impacted.
The soft goods, who are more impacted.
Speaker 4: transcript
Speaker 4: You know, those require different things so each partner.
Those require different things so each partner because of each of them are different in terms of their their business model. The size of the average balance of the customer they are attracting they all require nuanced and different approaches and the team is doing a really good job of partnering with them and as Rob said, it's a partnership with trying to protect their economic.
Speaker 4: transcript
Speaker 4: you know, because each of them are different in terms of their business model.
Speaker 4: transcript
Speaker 4: The size of the average balance, the customer they're attracting, they all require nuanced and different approaches. And the team is doing a really good job of partnering with them, and as Ralph said, it's a partnership. We're trying to protect their economics, protect our economics, and really...
<unk> protect our economics and really try to figure out how to underwrite as many customers as we can and still provide the right return for our shareholders. Yes, I think one of the as you look at what's facing us in terms of the cost to collect it's really a cost to land.
Speaker 4: transcript
Speaker 4: trying to figure out how to underwrite as many customers as we can and still provide the right return for our shareholders. Yeah, I think one of the as you as you look at
Jeff Adelson: There's a lag effect of what that means to the consumers in terms of higher costs of auto loans, home loans, credit card debt and their debt is rising for them so they've got more debt to pay with higher interest costs and at the same time student debt repayment is occurring. So I think there's going to be this play out the next year, which is definitely going to put it in the higher end of that range.
Speaker 3: transcript
Speaker 3: facing us in terms of the cost to collect, it's really a cost to lend. And the unintended consequence here is...
And the unintended consequence here is we may not be able to lend to the population we lend to today.
Speaker 3: transcript
Speaker 3: we may not be able to lend to the population we lend to today. So that I believe is.
So that I believe is.
Speaker 2: transcript
Speaker 2: going to be a casualty of this late fee legislation, and that's unfortunate.
Going to be a casualty.
This linked fee.
Perry Beberman: Okay, great. Just to circle back on the NIM, I know this was seasonality, lower reversals and it's going to, you know, try and back down next quarter on seasonality as well. I think we're all pretty surprised by the strength in the NIM though, you've discussed yourself being a little bit more neutral to raise. I know there's a lag effect with the Fed here to the prime rate, but thinking forward, is there a case to be made that maybe you've got a structurally higher NIM or a card you're going forward with people maybe revolving more or are you still more in the camp of hanging around this low 19% level?
Legislation and that's unfortunate.
Speaker 3: transcript
Speaker 3: Because people will not be able to borrow as they do today, because the legislation has made it risky.
Because people will not be able to borrow as they do today because.
The legislation has made it riskier for people to Barbara.
Alright.
Speaker 8: transcript
Speaker 8: Hey, quick follow-up, I think you mentioned about 50% of credit sales are co-branded now.
Hey.
Quick follow up I think.
I think you mentioned about 50% of credit sales are co branded now.
Perry Beberman: Yeah, I'm definitely more in the camp of hanging around the low 19% level. We'll give more guidance on that as we get to next year but when you think about what's going to happen in the fourth quarter, you're going to get the seasonality drop and as losses remain elevator. Remember, this quarter losses were 100 basis points below last quarter and now next quarter they're going to go back up so you're going to have that, you know, the purification or reversal of interest in fees impacting the fourth quarter and the losses remain elevated through next year.
And.
Speaker 8: transcript
Speaker 8: Can you just remind us what the mix is in terms of balances at the end of the quarter?
Can you just remind us what the mix is in terms of balances.
At the end of the quarter private label versus co brand.
Yes.
We are about a third of our portfolio average balances our co brand.
Speaker 4: transcript
Speaker 4: We are about a third of our portfolio average balances are co-branded.
Got it great.
Great.
Thanks again.
Okay.
Okay.
Speaker 1: transcript
Speaker 1: Our next question comes from Bill Kersache from Wolf Research. Bill, your line's not open. Please go ahead. Thanks.
Our next question comes from Bill <unk> from Wolfe Research. Your line is now open. Please go ahead.
Thanks, Good morning, Ralph and Perry.
Speaker 10: transcript
Speaker 10: It's great to see the total company C21 ratio disclosure. By our math, that metric was actually negative when you took over, Ralph, which is a.
Great to see the total company CET, one ratio disclosure by our math that metric was actually negative when you took over <unk>, which is.
Perry Beberman: That's going to put pressure on there. So, and then as we bring in, you know, smaller ventages that will also affect, you know, higher quality ventages. That may have a little bit of less roller, rollover, maybe a little low pricing. So, I would not want to, you know, speculate that we have a structurally higher than interest margin goal.
Speaker 10: transcript
Speaker 10: real testament to the significant capital that you've all accreted since taking over from the prior management team. But what's the right level?
Real Testament to the significant capital that you've all accreted since since taking over from the prior management team, but what's the right level.
Speaker 10: transcript
Speaker 10: of CET1 to target as you look forward from here, and then if you could layer into your response how you're thinking about the RWA inflation associated with Basel III endgame, which, you know, many of your peers are working through, but it'd be great to hear, you know, whether that's impacting how you think about capital.
<unk> you want to target as you look forward from here and then if you could layer into your response, how youre thinking about the <unk> inflation associated with Basel, III endgame, which many of your peers are working through but it'd be great to hear.
Whether that's impacting how you think about capital.
Perry Beberman: Thank you, guys.
Speaker 4: transcript
Speaker 4: Yeah, thanks for the question. And thank you for acknowledging the great work that Ralph's done under his leadership. That's news I've heard today. Let's start with the Basel III endgame and the implications. That only impacts banks over $100 billion in assets, and we are well below that. So for us...
Yes, thanks for the question.
David Scharf: Our next question comes from David Scharf from GMP Securities.
And thank you for acknowledging the great work that Ralph done under his leadership et cetera. It is I've heard today.
David Scharf: David Durland, now open, please go ahead. Thanks for taking my questions. I wanted to circle back to some of the planned mitigation efforts. And, you know, it is a relate, you know, to sort of timing and ability to kind of roll things out. You know, not looking for you to name names, but I'm wondering, you know, is you reflect on maybe your top 20 retailer partners and the discussions you've had thus far?
When you think let's start with the Basel III end game and the implications.
That only impacts.
Banks over a $100 billion in assets and we are well below that so for us.
Speaker 9: transcript
Speaker 9: You know, it could be opportunistic as a number of the big players when they look at new opportunities, new deals to sign with partners will have a different degree of capital requirement. So that for us is
It could be opportunistic as.
A number of the big players when they look at new opportunities new deals to sign with partners will have a different degree of capital requirements. So that for us is.
Not an impact as it relates to our our ongoing targets that's something that we continue to develop where not all the way home yet you're thinking about the stress models that go into figuring out what the right targeted look at your risk IV factors that go into targets.
Speaker 4: transcript
Speaker 4: As it relates to our ongoing target.
David Scharf: Is there sort of a unanimity in their, you know, reactions or embracing of certain mitigation efforts or push back on others? I'm just wondering, is there a wide spectrum of support and resistance to various strategies among your partners? Or do you think that, you know, there's a pretty uniform buy-in to what you're thinking and that therefore kind of implementation should be pretty smooth?
Speaker 4: transcript
Speaker 4: That's something that we continue to develop. We're not all the way home yet. Think about the stress models that go into figuring out what the right target is. Look at your risk ID factors that go into targets. And you think about what traditional discipline banks do. That is how we're going to approach this. And in the environment we're in right now, we're certainly not.
What.
Traditional disciplined banks do that is how we're going to approach this and.
In the environment. We're in right now, we're certainly not all the way to where we want to go and then we will communicate more.
Speaker 4: transcript
Speaker 4: All the way to where we want to go and then we'll we will communicate more this in 2024 probably during our investor event to give longer term targets around where we will be and what our binding.
In 2024, probably during our investor event.
Ralph Andretta: So, let me, let me start, I'll let Perry finish up just a couple of things. So, our partners and our interests are aligned to remain profitable during, you know, any kind of regulatory change. So, that's it. They are focused on making sure that we would do the right things for their current holders, that we can still provide credit, that their baskets at the point of sale are, you know, are as robust as they can be, given the challenges we would have underwriting a certain population with just an $8.00 leaf fee.
To give longer term targets around where we will be and what our binding constraint.
Speaker 10: transcript
Speaker 10: Understood. Thank you. That's helpful. And separately, as you prepare for the potential late fee changes that that you've given some details on, are there any costs associated with that that you'd call out, whether they be one time or or, you know, recurring and, you know, I guess, how dependent are those costs on the rule getting litigated and, you know, whatever path that could take, you know, any, any thoughts around that would be helpful.
Understood. Thank you.
It's helpful and then separately.
As you prepare for the potential late fee changes that that you've given some details on are there any costs associated with that that you'd call out whether they'd be one time or recurring and I guess, how dependent are those costs on the rule getting litigated whatever path.
That could take.
Any thoughts around that would be helpful.
Speaker 4: transcript
Speaker 4: Yeah, I mean, that's that's some of the the issue is and some I think some of the comments that have been provided to the CFPB and we're encouraged that we understand that they've been, you know, looking at the comments and hopefully they contemplate the comments as well. So the cost to lend
Ralph Andretta: So, they are aware of it. They understand our challenges. We understand their challenges, and we're working through the impacts of the changes we will need to make to keep them profitable and us as well. And that may vary from partner to partner, but the collaboration and understanding of the challenge is consistent. So, you know, in really what I was getting at is I didn't know if it was maybe a uniform pushback on, you know, origination fees, whereas others were more leaning towards promotion with what not.
Yes, I mean, that's some of the issue is.
Some of them I think some of the comments that have been provided to the CFPB and we are encouraged that we understand that they have been.
Looking at the comments that hopefully they contemplate the comments as Ralph said the cost of land.
Speaker 4: transcript
Speaker 4: But there are going to be some costs, depending on what the rule comes out, to implement those costs. If they put in certain things that require percent, you know.
But there are going to be some cost a bit depending on what the rule comes out to implement those cost if they put in certain things that require percent.
Speaker 4: transcript
Speaker 4: Lathe has to be a maximum of balance or changing grace versus their system costs to making those changes. But then more so when you think about
Lately it has to be a can be a max of 8% of balance or changing grace system cost to making those changes, but then more so when you think about.
Speaker 4: transcript
Speaker 4: the investment to pivot into other product adjacencies if we start to pull back in certain products that maybe are no longer as viable in a post-CFBB rule change. There could be some cost to develop capabilities on that front.
The investment to pivot into other product Adjacencies, if we start to pull back in certain products that maybe are no longer as viable in a post CFPB rule change there could be some cost to develop capabilities on that front.
Ralph Andretta: But, obviously, everybody is rolling in the same boat. I think the other thing to remember too is, you know, most of our partnership contracts have a material change in law and provides us to make, to allow us to make adjustments. So, you know, and that's what we're working through with them.
Got it thank you for taking my questions.
Perry Beberman: Yeah, and I'll add to what Ralph just said, if you think about your top 20 partners, they're all different. You know, whether they're a big ticket partner, where they're, I think, a little less impacted by the late fee, but still impacting the way. And then if they can pull levers on things like promotional fees or others that are more private label concentrated and, you know, the soft goods who are more impacted, you know, those required different things.
Speaker 1: transcript
Speaker 1: Our next question comes from Dominic Gabriel from Oppenheimer. Dominic, your line is now open. Please proceed.
Our next question comes from Dominick Gabriele from Oppenheimer. Dominic Your line is now open. Please proceed.
Speaker 11: transcript
Speaker 11: Hey, good morning, everybody. Makes for taking my questions. Just following up on the last line of questioning, the CET-1 Total Company Target, I do appreciate that as well. Is it fair to say that your target would likely be slightly above the industry average for credit card issuers just given the profile of the credit profile of the company?
Hey, good morning, everybody. Thanks for taking my questions.
Just.
Following up on the last line of questioning the CET one totaled.
Total company target I do appreciate that as well is it fair to say that your target would likely be slightly above the industry average for credit card issuers, just given the profile of the credit profile of the company.
Perry Beberman: So, each partner, you know, because of each of them are different in terms of their business model, the size of the address balance, the customer they're attracting, they all require new ones and different approaches. And the team is doing a really good job of partnering with them in this process. It's a partnership, we're trying to protect their economics, protect our economics, and really you're trying to figure out how to underwrite as many customers as we can and still provide the right return for our shareholders.
As a follow up I'll answer that directly yes that is a fair.
Speaker 9: transcript
Speaker 9: as a follow-up question. I'll answer that directly. Yes, that is a fair expectation.
Expectation.
Okay, perfect I thought that was an easy one.
Speaker 11: transcript
Speaker 11: Okay, perfect. I thought that was an easy one. And you know, yeah. You know, when you think about, you know, Perry, you've had some really good spending comments on this call. I know this is a huge focus for many investors of the trajectory of spend.
And is that.
Yes.
When you think about Neil Perry you've had some really good spending comments on this call I know this is a huge focus for many investors that trajectory of spend.
Ralph Andretta: Yeah, you know, I think one of the, as you look at. What's facing us in terms of the cost that collect, it's really a cost to lend. And the unintended consequence here is we may not be able to lend to the population we lend to today. So that I believe is going to be a casualty of this lengthy legislation. And that's unfortunate because people will not be able to borrow as they do today, because they'll think the legislation has made it riskier for people to borrow.
Speaker 11: transcript
Speaker 11: Could you try to isolate for us the spending slowdown, specifically at partners only, not bread spending in the fourth quarter, but what the partners that you have, that you're talking to, what that year over year spend the expectation is. For instance, is it 1%, 2%, 3% slowdown versus last year? How were they thinking about the magnitude of that spending slowdown? Thanks so much.
Would you try to isolate for us the spending slowdown specifically at partners only not bred spending in the fourth quarter, but what the partners that you have that you are talking to what that year over year spend the expectation is for instance is it 1% 2% 3%.
Slowdown versus last year, how are they thinking about the magnitude of that spending slowdown. Thanks. So much.
Speaker 4: transcript
Speaker 4: Yeah, I think I don't want to, you know, speak to any one particular partner because I think it's going to be varied by partner by product category. So it's really mixed.
Yes, I think I don't want to speak to any one particular partner because I think it's going to be varied by partner by product category. So it's really mixed by vertical.
Dominic Gabriel: Quick follow-up, I think you mentioned about 50% of credit sales are co-branded now. And can you just remind us what the mix is in terms of balances at the end of the corner, private labor versus co-brand? We are about a third of our portfolio average balances are co-branded. Got it. Great.
Speaker 4: transcript
Speaker 4: You know, so I think, you know, we commented, you're seeing some slowdown in, you know, some retail categories, some home furnishings, you know, year over year. So it's really going to be interesting to watch consumers as they play into this fourth quarter and how they direct their, you know, their holiday spend. I wish I could give you more context on that, but it probably wouldn't be appropriate to comment on one particular partner.
So I think as.
Dominic Gabriel: Thanks again.
We commented Youre seeing some slowdown in.
Some retail categories, some home furnishings year over year, so it's really going to be interesting to watch consumers as they play into this fourth quarter and how they direct there.
Their holiday spend I wish I can give you more context on that but probably wouldn't be appropriate to comment any one particular partner.
Okay perfect. Thanks, so much.
Bill Carcache: Our next question comes from Bill Carcache from Wolf Research. Bill, your line's not open, please go ahead. Thanks. Good morning, Ralph and Perry. It's great to see the total company CT1 ratio disclosure. By our math, that metric was actually negative when you took over Ralph, which is a real testament to the significant capital that you've all created since taking over from the prior management team.
Speaker 1: transcript
Speaker 1: As a reminder, to ask a question, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad.
As a reminder to ask a question. Please press star one on your telephone keypad.
Thats Star one on your telephone keypad.
Speaker 1: transcript
Speaker 1: Our next question comes from Reggie Smith from JP Morgan. Reggie, your line to not open, please go ahead.
Our next question comes from Reggie Smith from Jpmorgan. Your line is now open. Please go ahead.
Speaker 11: transcript
Speaker 11: Good morning. Thanks for taking a question. I got a few here. You, I guess you suggested that loss rates would keep in 24 and it sounds like you expect inflation to kind of moderate the back half of the year. What's your, I guess, embedded unemployment assumption in that view that loss rates will kind of peak in 24? What's your total rate?
Hey, good morning, Thanks for taking the question.
Few here.
<unk>.
I guess, you suggested that loss rates.
Perry Beberman: But what's the right level of CT1 to target as you look forward from here? And then if you could layer into your response, how you're thinking about the RWA inflation associated with Basel 3N game, which many of your peers are working through, but it'd be great to hear whether that's impacting how you think about capital. Thanks for the question. And thank you for acknowledging the great work that Ralph's done under his leadership.
In 2004, it sounds like you.
You expect inflation to kind of moderate.
In the back half of the year.
What.
I guess embedded.
Unemployment assumption and that new debt.
That loss rates will peak in 2004.
And again that unemployment assumptions with $25.
Speaker 12: transcript
Speaker 12: to fully appreciate that, right?
To fully appreciate that right.
Well, so I've talked about this.
Speaker 4: transcript
Speaker 13: Well, so, you know, I've talked about this.
Perry Beberman: Did you have heard today? Let's start with the Basel 3N game and the implications. That only impacts the banks over $100 billion in assets, and we're well below that. So for us, it could be opportunistic as a number of the big players when they look at new opportunities, new deals to sound with partners will have a different degree of capital requirements. So that trust is not an impact. As it relates to our ongoing targets, that's something that we continue to develop.
Speaker 4: transcript
Speaker 13: Numerous times in the past right when we think about loss rates and you know where they're at this year unemployment is low It's really inflated
Numerous times in the past right. When we think about loss rates, where they are at this year unemployment is low it's really inflation driven and then as we talked about next year.
Speaker 4: transcript
Speaker 4: And then as we talk about next year and the commentary of losses peaking next year, I'm talking about a full year.
The commentary of losses, peaking next year I'm talking on a full year loss rate, but then even within some quarters I expect a quarterly peak to happen next year. So we're going to end up this quarter from quarter to 8% net.
Speaker 4: transcript
Speaker 4: loss rate but then even within some quarters I expect to quarterly peak to happen next year so we're gonna end up
Speaker 4: transcript
Speaker 4: you know, this quarter, coming quarter, 8% next year, there could be some quarters like that. When you think about, it's less about what the unemployment assumption is and more about inflation. Now, I expect there to be a rotation.
Next year, there could be some quarters like that.
When you think about it's less about what the unemployment assumption is and more about inflation now I expect it to be a rotation of inflation pressure getting replaced by some modest uptick in unemployment and I think that's the outlook that everybody.
Perry Beberman: We're not all the way home yet. Think about the stress models that go into figuring out what the right target is. Look at your risk ID factors that go into targets. And you think about what traditional discipline banks do. That is how we're going to approach this. And you know, in the environment, we're right now. We're certainly not all the way to where we want to go.
Speaker 4: transcript
Speaker 4: of inflation pressure getting replaced by some modest uptick in unemployment. And I think that's the outlook that...
Speaker 4: transcript
Speaker 4: Everybody is looking at now. When we think about our reserve levels, we have a, you know, we wait in scenarios which include or the unemployment peeking over the next 24 months at, you know, an adverse number of 7.7% severely adversity, 8.7%. That's not what's expected, right? It's more that baseline view which does have unemployment getting up into the low force next year. And I think
He is looking at now when we think about our reserve levels. We have a we weighed in scenarios which include.
Perry Beberman: And then we'll communicate more in 2024, probably during our investor event to give longer term targets around where we will be and what are buying the constraints. I understand. Thank you. That's helpful.
Unemployment, peaking over the next 24 months it.
And adverse number at seven 7% severely adverse at eight 7% that's not what's expected rate, it's more of that baseline view, which does have.
Unemployment.
Perry Beberman: And separately, as you prepare for the potential late fee changes that you've given some details on, are there any costs associated with that that you'd call out, whether they be one time or recurring? And I guess how dependent are those costs on the rule getting litigated and whatever path that could take any thoughts around that would be helpful. Yeah, I mean, that's that's some of the the issue is and some I think some of the comments have been provided to the CFPB and we're encouraged that we understand that they've been you know looking at the comments and hopefully they constantly played the comments as well so they cost the lend but there are going to be some costs that depending on what the rule comes out to implement those costs if they put in certain things that require percent you know the late BKFB can be maximally percent of balance or changing grace versus their system costs to making those changes but then more so when you think about the investment to pivot into other product adjacencies if we start to pull back in certain products that maybe are no longer as viable in a post CFBB rule change there could be some costs to develop capabilities on that front Got it.
<unk> up into the low <unk> next year.
So that's what I'll say informing our base loss rate view would be that low to mid 4% unemployment with a starting to have some moderation of inflation, but not expecting inflation to.
Speaker 4: transcript
Speaker 13: I'll say informing our base loss rate view would be that low to mid 4% unemployment with a starting to have some moderation of inflation but not expecting inflation to fall off a cliff and come back and line that quick. And I think that's the sentiment that started to emerge is that inflation is going to be a little bit longer but the good news is that means.
Does it fall off a cliff and come back in line that quick and I think that's the sentiment that's starting to emerge is that inflation is going to be hanging around a little bit longer but the good news is that means unemployment should stay.
Speaker 4: transcript
Speaker 4: unemployment should stay in a good place for longer. And that's the ideal idea of a soft landing. And I think from all the outlooks that now getting updated, it's just pushing out that view so that we expect that to be the case. So it's just a matter of how long this environment...
In a good place for longer and that's the ideal idea of a soft landing and I think from all the outlooks at now getting updated it's just pushing out that view so.
We expect that to be the case. So it's just a matter of how long this environment persists.
Speaker 11: transcript
Understood that makes sense.
You made a comment.
In regards to the impact of the late fees and you get.
<unk>.
Speaker 11: transcript
Speaker 12: I guess you talked about the impact relative to your peers, and I was curious, when you say peers, is that just kind of synchrony or is it the broader credit card issue of space? And I ask because I think you suggested that your proportion of late fees is not materially different than synchrony, and so I was just trying to square those comments.
I guess talk about the impact relative to your peers and I was curious.
<unk> is that just kind of synchrony as the broader credit card.
Issuers space can I ask because I think.
You suggested that your proportion of late fees is not materially different and synchrony is I was just.
Dominic Gabriel: Thank you for taking my questions.
Trying to square those comments.
Speaker 4: transcript
Speaker 4: We've always said that if, you know, somebody is asking about us relative to peers.
We've always said that.
Dominic Gabriel: Our next question comes from Dominic Gabriel from Openheimer. Dominic, your line's not open please proceed. Hey, good morning everybody.
Somebody is asking about us relative to peers.
Speaker 4: transcript
Speaker 4: That we have a higher mix of private label and we underwrite deeper and then.
We have a higher mix of private label and we underwrite deeper and then as that which means we have more exposure to that and then if youre asking specifically about synchrony have always said it whatever.
Reggie Smith: Next we're taking my questions. Just following up on the last line of questioning the CET-1 total company target I do appreciate that as well. Is it fair to say that your target would likely be slightly above the industry average for credit card issuers just given the profile of the credit profile of the company as a follow up. Oh, I see that directly. Yes, that is a fair expectation. Okay, perfect. I thought that was an easy one.
Speaker 4: transcript
Speaker 4: which means we have more exposure to that. And then, if you're asking specifically about synchro, we've always said it, you know, whatever, it is a synchro-y plus. And I say plus, that means more, not in line with them more, because of the fact that we have a higher mix of private label card and underage.
<unk> plus and <unk>.
Plus it means more not in line with them more because of the fact that we have a higher mix of private label card and underwrite deeper than they do.
Speaker 11: transcript
Speaker 12: That's it. And then last question, this is kind of a bigger picture question.
Okay. That's fair and then last question is kind of a bigger picture question.
Speaker 11: transcript
Speaker 12: your your cycle loss rate that is was curious how you arrived at six percent.
Your.
Your cycle loss rate guidance.
Was curious how you arrive at 6%.
Reggie Smith: And, you know, when you think about you know, Perry, you've had some really good spending comments on this call. I know this is a huge focus for many investors and the trajectory of spend. Could you try to isolate for us the spending slow down specifically at partners only not bread spending in the fourth quarter but what the partners that you have that you're talking to. So what that year over year spend expectation is for instance, there's a 1% 2% 3% slow down versus last year.
Yeah.
Speaker 11: transcript
Speaker 12: Given your rich NIMS, it doesn't appear to be a level that maximizes profit dollars, but maybe I'm wrong. How are you thinking about that? And I guess does it—
<unk> given you.
Nims doesn't appear to be a level that maximizes profit dollars, but maybe I'm wrong, but like how are you thinking about that and I guess does it.
Speaker 11: transcript
Speaker 12: that create a unnecessary constraint on the business.
Does that create.
Necessary constraint on the business.
That makes sense.
Yes, that's a really good question and one that we grapple with internally, but I think when you start to think about well, let's talk about the cycle. A cycle is typically 10 years can be 15 years in the through the cycle is to go peak to peak trough to trough average it out and it's been a good.
Speaker 4: transcript
Speaker 4: That's a really good question, and one that we grapple with internally, but I think when you start to think about, well, let's talk about the cycle, right? A cycle is typically 10 years, could be 15 years, and through the cycle is to go peak to peak, drop to drop, average it out, and it's been a good marker for us in terms of guiding, in terms of, you know, we're going to have some periods when we're above that, some where we're below it. And you can see right now, it's not like we're...
Reggie Smith: How were they thinking about the magnitude of that spending slow down. Thanks so much. Yeah, I think I don't want to speak to any one particular partner because I think it's going to be varied by partner by product category. So it's really mixed by vertical. You know, so I think it's, you know, we commented you're seeing some slow down in, you know, some retail categories, some home furnishings, you know, year over year.
Marker for us in terms of guiding in terms of youre going to have some periods. When we're above that some where we're below it and you can see right now it's not like we are.
Speaker 4: transcript
Speaker 4: Closing off the spigots, you know, we are still delivering very strong margins and I appreciate you commenting on that but there's also an element of
Closing off the spigot, we're still delivering very strong margins and I. Appreciate you commenting on that but there's also an element of.
Speaker 4: transcript
Speaker 4: you know, capital, right? So you're you need to stress your book. So you start to be more disciplined at the bank level and total company level and making sure that your capital ratios, capital targets are aligned. If we underwrote a lot deeper, let's go with it through the cycle of 9% as a new target. Well, that means the capital levels that would be have to help would be
Capital right. So you need to stress your book So you start to be more disciplined at the bank level and total company level and making sure that your capital ratios capital targets are aligned if we underwrote a lot deeper.
Reggie Smith: So it's really going to be interesting to watch consumers as they play into this fourth quarter and how they direct their, you know, their holiday spend. I wish I could give you more context on that, but I wouldn't be appropriate to comment on one particular partner. Okay, perfect. Thanks so much. As a reminder to ask a question, please press star one on your telephone keypad. That's star one on your telephone keypad.
I'll just go with a through the cycle of 9% as a new target well that means the capital levels that would be you have to help would be far in excess of that and I'm also not sure are regulars are appreciate it. So I think we find that sweet spot of profitability and we want to make sure. We're underwriting on the margin so to be profitable and provide that right.
Speaker 4: transcript
Speaker 4: far and excesses that and the most natural hour regulars would appreciate it. So I think we find that sweet spot of profitability and we want to make sure we're underwriting on the margin.
Speaker 4: transcript
Speaker 4: So to be profitable and provide that right return on equity.
Reggie Smith: Our next question comes from Reggie Smith from JP Morgan. Reggie, your line is not open.
Return on equity so thats, a real part of the disciplined practice that we have in our credit underwriting shop is every account is a decision around its profitability and making sure as a proper return on capital. So on the margin, we're underwriting deeper than a 6% rates of people coming in to be a 10% loss rate on the margin, but they are given the right return so.
Reggie Smith: Please go ahead. Good morning. Thanks for taking a question. I've got a few here. I guess you suggested that loss rates would keep in 24 and it sounds like you expect inflation to kind of my rate for the back half of the year. What's your, I guess, embedded unemployment assumption in that view that loss rates will kind of peak in 24? I guess I need unemployment assumptions for 25 to fully appreciate that, right?
Speaker 4: transcript
Speaker 4: So that's a real part of the discipline practice that we have in our credit underwriting shop. Is every account, there's a decision around its profitability and making sure as a proper return on capital so on the margin.
Speaker 2: transcript
Speaker 2: we're underwriting deeper than a 6%, right? So people coming in could be a 10% loss rate on the margin, but they're given the right return. So it's, I don't want to imply that, you know, there's a hard cut at 6%. So it's something that is managed very effectively and over time. Yeah, I think, you know, the principles we abide by are one, we get paid for the risk.
I don't want to imply that there is a hard cut at 6%. So it's something that is managed very effectively and overtime.
I think the principles, we abide by our one we get paid for the risk that we take.
Speaker 2: transcript
Speaker 2: two that were lending responsibly and that we're always aware of the safety and soundness of our
Two that were lending responsibly and that we're always aware of the safety and soundness of our banks those are the principles, we abide by it how we arrive at the risk we're willing to take a loss rate were willing to endure with the returns.
Reggie Smith: Well, so I've talked about this numerous times in the past, right? When we think about loss rates and where they're at this year, unemployment's low. It's really inflation driven. And then as we talked about next year and with the commentary of losses peaking next year, I'm somewhat a full year loss rate but then even within some quarters, I expect a quarterly peak to happen next year. So we're going to end up, you know, this quarter, come a quarter of 8% next year that could be some quarters like that.
Speaker 2: transcript
Speaker 2: Those are the principles we abide by. It's how we arrive at the risk we're willing to take and the loss rate we're willing to endure with the returns we.
<unk>.
We're expecting.
Perfect. Thank you.
Speaker 1: transcript
Speaker 1: We currently have no further questions, so I'll now pass it back to Rob Sandretta for closing remarks.
We currently have no further questions. So I'll now pass it back to Rob <unk> for closing remarks.
Speaker 2: transcript
Speaker 2: Well, thank you all. I appreciate your time and your continued interest in Bread Financial. Everybody have a terrific day.
Well. Thank you all I appreciate your time and your continued interest in bread financial everybody have a terrific day.
Reggie Smith: When you think about, it's less about what the unemployment assumption is and more about inflation. Now, I expect it to be a rotation of inflation pressure getting replaced by some modest uptick in unemployment. And I think that's the outlook that everybody is looking at now. When we think about our reserve levels, we have a, you know, we weighed in scenarios which include unemployment peaking over the next 24 months at, you know, an adverse number of 7.7% severely adverse at 8.7%.
Yes.
Speaker 1: transcript
Speaker 1: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
Okay.
[music].
Speaker 13: transcript
Speaker 14: So.
Reggie Smith: That's not what's expected, right? It's more that baseline view which does have unemployment getting up into the low force next year. And I think so that's what I'll say informing our base loss rate view would be that low to mid 4% unemployment with a starting to have some moderation of inflation, but not expecting inflation to, you know, fall off a cliff and come back and line that quick. And I think that's the sentiment that started to emerge is that inflation is going to be hanging around a little bit longer, but the good news is that means unemployment should say, you know, in a good place for longer.
Reggie Smith: And that's the ideal idea of a soft landing. And I think from all the outlooks that, you know, now getting updated, it's just pushing out that view so that we expect that to be the case. So it's a matter of how long this environment persists. And that's the, that makes sense.
Reggie Smith: You made a comment in regards to the impact of late fees on you guys. You, you, I just talked about the impact a lot of it to your peers and I was curious. If we say peers, is that just kind of synchrony or that the broader credit card issue with space and ask because I think you suggested that your proportion of late fees is not materially different from synchrony is just trying to square those comments.
Reggie Smith: We've always said that if somebody is asking about us, relative to peers, that we have a higher mix of private label and we underwrite deeper and then, which means we have more exposure to that. And then, if you're asking specifically about synch, we've always said it, whatever it is, it's synchrony plus. And I say plus, that means more, not in line with them, more because of the fact that we have a higher mix of private label card and underwrite deeper than they do.
Reggie Smith: That's it.
Reggie Smith: And then last question, this is kind of a bigger picture question. Your cycle loss rate data was curious how you arrived at 6%. You know, giving your rich nims, it doesn't appear to be a level that maximizes profit dollars, but maybe I'm wrong. You're like, how are you thinking about that? And I guess does it, um, that create a unnecessary constraint on the business that makes sense. That's a really good question.
Reggie Smith: One that we grapple with internally, but I think when you start to think about, let's talk about this cycle. Our cycle is typically 10 years, 15 years into through the cycle is to go peak to peak, drop to drop, average it out. And it's been a good marker for us in terms of guiding in terms of, you know, we're going to have some periods when we're above that somewhere we're below it.
Reggie Smith: And you can see right now, it's not like we're closing off the spickets. You know, we are still delivering very strong margins, and I appreciate you commenting on that. But there's also an element of capital, right? So you need to stress your books, so you start to be more disciplined at the bank level and total company level and making sure that your capital ratios, capital targets are aligned. And if we under wrote a lot deeper, let's, you know, let's go through the cycle of 9% as a new target.
Reggie Smith: Well, that means the capital levels that would be have to help would be far and excess of that. And I'm also not sure our regulars would appreciate it. So I think, you know, we find that sweet spot of profitability. And we want to make sure we're underwriting on the margin. So to be profitable and provide that right return on equity. So that's a real part of the discipline practice that we have in our credit underwriting shop is every account.
Reggie Smith: There's a decision around its profitability and making sure we have a proper return on capital. So on the margin, we're underwriting deeper than a 6% right. So people coming it could be a 10% loss rate on the margin, but they're given the right return. So it's, I don't want to imply that, you know, there's a hard cut of 6%. So it's something that is managed very effectively and over time. Yeah. I think, you know, the principles we abide by are one, we get paid for the risks that we take.
Reggie Smith: Two, that we're lending responsibly, and that we're always aware of the safety and soundness of our banks. Those are the principles we abide by and how we arrive at. You know, the risk we're willing to take and a loss rate we're willing to endure with the returns we, we, you know, we're expecting.
Reggie Smith: Perfect. Thank you.
Ralph Andretta: We currently have no further questions, so I will now pass it back to Ralph Andretta for closing remarks. Well, thank you all. I appreciate your time and your continued interest in Bread Financial. Everybody have a terrific day.
Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining.
Operator: You may now disconnect your lines.