Q1 2024 Bread Financial Holdings Inc Earnings Call
Yeah.
Good morning, and walk Us bread Financial's first quarter earnings Conference call. My name is Shannon and I'll be coordinating your call today at this time all parties have been placed on a listen only mode.
Following today's presentation. The floor will be opened for your questions to Register a question. Please press star followed by one one and it's now my pleasure to introduce Mr. Brian therapy head of Investor Relations at bread financial the floor is yours.
Yeah.
Thank you [noise] copies of the slides, we'll be reviewing in the earnings release can be found on the Investor Relations section of our website at Brent financial Dot Com on the call today, we have Ralph and dry dock, President and Chief Executive Officer, and Perry Bieber Executive Vice President and Chief Financial Officer before we begin I would like.
To remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements.
These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.
Also on today's call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors.
Conciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website with that I would like to turn the call over to Ralph in dry dock.
Thank you, Brian and good morning to everyone joining the call starting with the key highlights from the first quarter on slide three I am pleased with our solid start to the year during the quarter, we generated net income of $134 million and earnings per diluted share of $2.70 driven by a strong risk risk adjusted.
Loan yield despite higher credit losses as expected importantly, we continue to strengthen our balance sheet, we increased our tangible book value by 20% year over year to nearly $46 per share increased our direct to consumer deposits to $7 billion and continue to improve our ROIC.
Tori capital ratios.
Our solid financial position was acknowledged by the investment community as evidenced by strong investor demand for our 2023 senior unsecured notes offerings, which we opportunistically upsides in January of this year.
This extended the majority of our debt maturities to 2029 at the same time, we reduced our parent level debt by $100 million. Additionally, we completed $11 million about $30 million share repurchase authorization in the quarter.
On the economic front consumer spending in the first quarter continued to moderate game of persistent inflation and higher interest rates. We observed a continued reduction in discretionary and big ticket spending in the quarter with many consumers focusing on non discretionary purchases.
Consumers increase the frequency of shopping in store and online average transaction value decreased on a non discretionary repurchases pressuring sales and loan growth.
First quarter loan growth was further impacted by elevated gross losses as well as our proactive credit tightening initiatives, what do you mean.
And disciplined with our credit risk management actions, given economic pressures affecting consumer spending and payment capacity evidenced about credit action impacts can be observed through our improved late quarter delinquency rate, which we are observing improvements, particularly in early stage buckets.
In response to the Cfpb's final rule regarding credit card late fees, we have continued taking necessary steps to improve our financial resilience and adapt our pricing to the rule change I am pleased that we have made meaningful progress in the core to working closely with our brand partners to jointly identify necessary actions.
And determined timing to implement our plans.
This resulted in improved financial projections and better visibility of the expected net financial impact of the rule first is what we previously disclosed regardless of the effective date payroll share more details when he discusses our outlook.
Some of the early mitigating actions underway include various consumer pricing actions such as increased Apr's statement fees among others. The combination of our mitigation strategies and the diversification of our products and industry verticals and there are approved credit profile over the past five years position us well to adapt to the world change overtime.
We are closely monitoring the ongoing litigation related to the final CFPB late fee rules, but we'll continue to implement our mitigation strategy given the uncertainty surrounding the timing and outcome I would like to reiterate what I have said in the past, we along with prominent industry and business associations continues to believe.
Basic late fee will negatively impacts consumers not only with a lower late fees serve far less as a deterrent or penalty for consumers paying late meaning more customers will pay late and therefore impacting their credit scores. The CFPB late fee rule change will also ultimately result in consumers paying more for credit through high.
Your apr's and additional fees and in some cases consumers, losing access to credit regardless of the litigation against the CFPB, we remain focused on ensuring we deliver long term value for our shareholders.
Turning to slide four.
Our disciplined capital allocation strategy focuses on funding responsible profitable growth improving our capital metrics, reducing parent debt and driving long term shareholder value looking at the chart on the left you can see that since the first quarter of 2020, we have more than tripled our TCE to ta.
<unk> to 10, 6% and we see room for further improvement we will host an investor event on June 18th we will further discuss our capital targets and allocation strategies and how we will balance achieving these targets with continued investments in our business, while driving long term growth.
We're also making progress on debt reduction.
As shown in the second chart and just over four years, we have reduce parent level debt by 58% paying down more than $1 $8 billion, including the most recent $100 million pay down in January we improved our double leverage ratio from over 400% to 118% during this time period.
As previously mentioned, we have $100 million remaining in our 2026 bonds, which we intend to pay off later this year, reducing our leverage ratio.
Finally, our tangible book value of $46 per share has grown at a 31% compounded annual rate since the first quarter of 2020 supported by our strong cash flow generation, we expect to continue to grow our tangible book value further over time, we believe this growth combined with our financial resilience, which we displayed this.
<unk> and strengthened balance sheet should yield evaluation, that's multiple of our tangible book value.
Our experienced leadership team has a decades long track record of successfully managing through economic cycles and regulatory changes, we remain focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable profitable growth and build long term value for our shareholder.
To a challenging economic and regulatory environments.
Turning to slide five our key focus areas for 2024 have not changed to reiterate they are growing responsibly.
Managing the macroeconomic and regulatory environment.
Celebrating digital and technology offerings and driving operational excellence, we are laser focused on generating responsible growth, while further scaling and diversifying our product offerings to align with the challenging economic landscape, although our sales in loan growth may moderate in 2024, reflecting ongoing challenging.
Macroeconomic conditions, we are focused on creating long term value for our shareholders.
Managing the macroeconomic and regulatory environment effectively is fundamental to our success with the CFPB credit card late fee rule effective date looming, we continued to execute numerous mitigation strategies intended to help offset the anticipated financial impact as I discussed accelerating our.
Digital and technology capabilities remains a top priority throughout 2024, we will focus on further building out.
Our capabilities to enhance customer experience and satisfaction, including the continued rollout of our mobile app to brand partners customers.
Finally, our heightened focus on operational excellence to drive improved customer experience enterprise wide efficiency and reduced risk and value creation is embedded in all our decision, making we have seen early success in our customer care area, where we are utilizing our investments in digital technology machine learning and <unk>.
To better serve our customers. For example are enhanced interactive voice response system provides cardholders with self service options and enhanced issues classification, leading to faster call resolution highest satisfaction and lower cost to serve our goal is to consistently.
General operation and expense efficiencies that enabling reinvestment in our business support responsible growth and achieve our targeted returns as I mentioned earlier, we will host an investor day on June 18th where our leadership team will provide a more comprehensive update on our business strategy and refresh our long term financial targets.
Now I'll turn it over to Perry to review the quarters financials and discuss our outlook.
Perry: Thanks, Ralph and good morning, everyone.
Perry: Turning to slide six which provides our first quarter financial highlights.
Perry: During the first quarter credit sales and average loans were down year over year at the first quarter of 2023 included approximately two months of Bj's activities.
Perry: The quarter was additionally impacted by moderating consumer spend in our credit tightening actions.
Perry: Revenue was $1.01 billion in the quarter down 23% year over year due to the gain generated from the Bj's sale in the prior year, coupled with lower net fee revenue and higher interest expense this year.
Perry: Income from continuing operations decreased by $320 million as the prior year benefited from the Bj's gain on sale and related reserve release.
Perry: Looking at the financials in more detail on slide seven total net interest income for the quarter decreased 6% year over year, driven by a combination of lower average loans and lower net interest margin, resulting from the higher reversal of interest and fees due to elevated gross credit losses.
Perry: Total noninterest income in the quarter was pressured by lower merchant discount fees as a result of moderating sales on big ticket items. We would expect this pressure to continue in the coming quarters as consumers continue to make smaller non discretionary purchases versus larger big ticket purchases.
Perry: Total noninterest expense increased 12% year over year, primarily driven by a decrease in card and processing cost, including fraud, and a reduction in marketing expenses and depreciation and amortization costs.
Perry: Additional details on expense drivers can be found in the appendix of the slide deck posted on our website.
Perry: Pre tax pre provision earnings or <unk> decreased $236 million or 32% driven by the gain on portfolio sale in the prior year PNR less the gain on portfolio sale was down $6 million nearly flat to a year ago.
Perry: Turning to slide eight.
Perry: <unk> yield increased 40 basis points year over year benefiting from the upward trend in the prime rate, causing our variable price loans to move higher in tandem.
Perry: Both loan yield of 27.0% and net interest margin of 18, 7% were pressured sequentially from an increase in the reversal of interest and fees related to higher sequential gross credit losses. This continued pressure together with normal seasonal trends and higher funding costs is expected to result in a sequential reduction in net.
Perry: On the funding side, we are seeing total funding costs moderate as deposit costs are beginning to stabilize.
Perry: Additionally, as you can see on the bottom right chart. Our funding mix continues to improve fueled by growth in direct to consumer deposits, which increased 7.0 billion to end the first quarter as well as meaningful reductions of our unsecured debt as previously disclosed.
Perry: Direct to consumer deposits accounted for 36% of our average funding.
Perry: From 28% a year ago, 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 opportunistically and efficiently fund our long term growth objectives.
Perry: Moving to credit on slide nine.
Perry: Our delinquency rate for the first quarter was six 2% down from the fourth quarter and showed a linked quarter decrease beyond seasonal trend expectations.
Perry: Signs of stabilization and improvement are a result of our ongoing credit tightening actions.
Perry: The net loss rate was eight 5% for the quarter compared to 7.0% in the first quarter of 2023 and 8.0% in the fourth quarter of 2023, the first quarter net loss rate was elevated compared to last year's level due to more challenging macroeconomic conditions pressure in consumer payment rates as well as ongoing credit tightening.
Perry: And slower responsible loan growth impacting the denominator.
Perry: We expect the net loss rate to peak in the second quarter of 2024 at around 9% with may marking the high point for the year.
Perry: Given the inflection in delinquency, we have optimism and confidence that the net loss rate will improve in the second half of the year. The degree of improvement will remain macro dependent.
Perry: As expected the reserve rate increased sequentially to 12, 4% as transact or balances decreased seasonally in the first quarter with the rate returning to levels seen in the first three quarters of 2023, we intend to maintain a conservative weighting of economic scenarios in our credit reserve model until we see sustained improvement in delinquency.
Perry: An improved macroeconomic outlooks.
Perry: Looking at our credit risk distribution mix the percentage of cardholders with 660, plus credit score remained above pre pandemic levels. Despite continued inflationary pressures. This improvement is a result of our prudent credit tightening actions as well as our more diversified product mix we continue.
Perry: To proactively manage our credit risk to protect our balance sheet and ensure we are compensated for the risk we take.
Perry: Moving to slide 10, we have significantly enhanced our financial resilience by strengthening our balance sheet and balancing credit risk with returns.
Perry: Our financial resilience was evident this quarter as despite elevated losses, we generated high quality earnings growing our tangible book value.
Perry: Our commitment to strengthening our balance sheet is highlighted by our reduced parent debt level.
Perry: Growing regulatory capital ratios and conservative loan loss reserves.
Perry: Our loan loss reserve rate is more than 300 basis points higher than our seasonal they want it right in 2020.
Perry: Our quarter end loss absorption capacity, which we define as our allowance for credit losses, plus tangible common equity divided by total end of period loans was 25% provided.
Perry: Providing a strong margin of protection should more adverse economic conditions arise.
Perry: We continue to proactively manage our credit risk strategy across the account lifecycle from time of acquisition to ongoing credit line management to account closures as necessary on a risk adjusted basis, our new account approval rates are more than 100 basis points lower than last year, and nearly 500 basis points lower than prepaying.
Perry: <unk>.
Perry: The average vantage score of new accounts is now up five points year over year to 715.
Perry: Driven by continued credit tightening and improvements in our product risk mix. The product mix shift has also resulted in more than 50% of our credit sales coming from co brand and proprietary products.
Perry: Additionally, we have also prudently pause line increases and expanded line decreases for vulnerable segments, all of which have reduced our risk exposure.
Perry: We remain confident in our disciplined credit risk management and ability to drive sustainable value through the full economic cycle delivering responsible profitable growth remains a top priority even if doing so requires a disciplined slower rate of growth during periods of economic uncertainty.
Perry: Finally, slide 11 provides our 2024 financial outlook, we have updated our 2024 financial outlook to include the potential impacts from the final CFPB lengthy rule, while uncertainty remains regarding the final outcomes of the legal proceedings regarding the rules implementation timing.
Perry: We felt it would be helpful to provide a full year outlook with a may 14th assumed implementation date.
Perry: Our outlook contemplates continued slower credit sales growth as a result of further moderate moderate moderation in consumer spending and ongoing credit tightening both of which pressure alone in revenue growth and net loss rate in the near term. In addition, our 2024 outlook still conservatively assumes three interest rate decreases by.
Perry: The federal reserve in the second half of the year, which is expected to slightly pressured total net interest income.
Perry: We acknowledge and increasing likelihood that rates will remain higher for longer which would be a slight tailwind to our net interest margin, but would also indicate more persistent inflation, which would continue to pressure consumer spend ability to pay resulting loan growth and potential credit losses.
Perry: On our current economic outlook proactive credit tightening actions higher gross credit losses and visibility into our new business pipeline. We expect 2024 average loans to be down low single digits on a percentage basis relative to 2023.
Perry: Moving to revenue.
Perry: I will share three possible outcomes.
Perry: First.
Perry: A scenario, where the CFPB fee does not take effect in 2024, implying a legal stay decision before may 14th.
Perry: Our current updated guidance, which assumes the CFPB.
Perry: Rule goes into effect on May 14th and third a hypothetical October 1st rule effective date for a consistent comparison to what we shared on our last earnings call in January.
Perry: So first assuming the CFPB late few rule does not go into effect. This year, we expect full year revenue growth excluding gain on portfolio sales to be down around mid single digits for the year in line with our previous guidance.
Perry: The year over year revenue reduction is driven by lower average loans higher reversal of interest and fees due to expected higher gross losses, lower merchant discount fee from lower big ticket originations and is inclusive of three projected interest rate reductions by the federal reserve.
Perry: And the next scenario, which is our current updated guidance outlook. We are assuming a may 14 effective date for the late fee rule.
Perry: Full year total revenue growth for 2024, excluding gains on portfolio sales is anticipated to be down in the mid to high teen range. Additionally.
Perry: Additionally, when looking specifically at the fourth quarter of this year and still assuming a may 14th effective date.
Perry: CFPB late fee rule is expected to reduce fourth quarter total revenue in the mid teen range on an isolated basis relative to the fourth quarter of 2023.
Perry: Our estimates are net of mitigation actions that we believe will positively impact this year as a result.
Perry: Lastly, assuming a temporary stay is granted and using a hypothetical effective date of October one 2024, our updated estimate is that the rule would be expected to reduce fourth quarter 2020 for total revenue by approximately 20% on an isolated basis.
Perry: Relative to the fourth quarter of 2023 net of mitigation actions.
Perry: The improvement from the 25% impact we announced on our fourth quarter earnings call to the 20% now incorporates the final rule details and highlights. The continued progress we've made since the final rule was released as a result of discussions with our brand partners regarding customer pricing actions and clarity on the timing of implementation.
Perry: We have higher levels of confidence in the success of our actions.
Perry: We continue to expect the financial impact of the late fee rule will lessen over time as our full spectrum of mitigation actions are phased in and mature as we adapt and evolve our products. Our mitigating actions are focused on preserving program profitability and returns over the long term and ensuring safety and soundness of our banks throughout.
Perry: All periods.
Perry: Going back to our guidance scenario of a may 14th effective date for the CFPB late fee rule, we expect total noninterest expenses to be down low to mid single digits for the year as we remain focused on expense discipline and operational excellence as Ralph highlighted we continue to strategically invest in technology modernization did.
Perry: Little advancement and product innovation that will drive future growth and efficiencies.
Perry: In the year, we expect certain CFPB late fee mitigation strategies to include additional expense.
Perry: Estimates for these expenses are included in our updated guidance.
Perry: We expect a net loss rate in the low 8% range for 2024, peaking in the second quarter at around 9% as inflation continues to pressure consumers' ability to pay.
Perry: Moderates their spend.
Perry: Our outlook is inclusive of our ongoing credit tightening actions and expected slower growth.
Perry: Impacting the net loss rate.
Perry: We're projecting a lower loss rate in the second half of 2024 versus the first half as a result of the credit actions, we have taken at an assumed gradual modest improvement.
Perry: Economic conditions throughout the year.
Perry: Finally, our full year normalized effective tax rate is now expected to be in the range of 27% to 30% higher than previously guided 25% to 26% range due to the CFPB late fee rule change lowering earnings before tax.
Perry: Quarter over quarter variability will continue due to timing of certain discrete items in.
Perry: In closing we are confident in our ability to successfully manage risk return trade offs through this challenging macroeconomic and regulatory environment, while continuing to make strategic investments to drive long term value for our stakeholders.
Speaker Change: Operator, we're now ready to open up the lines for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, if you ask a question. Please press star followed by one one on your telephone keypad now.
Speaker Change: Change your mind. Please press star followed by one when again when preparing to ask your question. Please ensure your line has been muted locally.
Speaker Change: Our first question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.
Mihir Bhatia: Hi, Good morning, and thank you for taking my question just.
Mihir Bhatia: Just wanted to start with.
Mihir Bhatia: The late Bureau.
Mihir Bhatia: And some of the mitigation actions, you've taken and maybe just talk about a couple of things right. The first is what actions have you taken already and what's worked well what are you seeing where are you seeing pushback. What are you hearing from customers retail partners.
Mihir Bhatia: Like I guess, just trying to understand what all of this happened already versus what's still planned to be happened and what kind of response you're seeing.
Mihir Bhatia: Yeah, It's Ralph I'll start and I'll ask <unk> to chime in so actions. We've taken to date are ready to mitigate product and portfolio diversification, we've made certain pricing actions inclusive of sea and some policy changes and then we have our ongoing discussions with partners. So far from a customer behavior perspective, we.
Mihir Bhatia: Haven't seen anything dramatic.
Mihir Bhatia: Early days, so we havent seen anything that would be alarming to us it's kind of what we what we thought we would see but.
Ralph: I'll caution that we need to take a longer term view about that our partners.
Mihir Bhatia: Realize that this is a reality now and they're working with us collaboratively to commute.
Mihir Bhatia: It can be the changes, we want to make and making sure that quite frankly that to changes are accepted by the partner and us and and our well executed as as we move forward with that that's what we're seeing Perry you anything to add yeah, and just in terms of a little more color I mean, I would tell you that at the end of last year, you started to see us take all I'll say.
Perry: Half step into some pricing actions around higher Apr's as an example, there was a.
Perry: Like we call it a soft cap on APR has not grown above 29 99, while we remove that we increase the spread over.
Perry: The prime rate index, and again, not taking it up to where I think the end state on APR there'll be but a half step because you don't want to get dislocated from what was in the market.
Perry: So that was happening and now youre seeing that the final rule with the date came along.
Perry: You're seeing it in the marketplace and you'll see with us in the coming months more pricing actions inclusive of additional fees and policy changes as Ralph mentioned.
Perry: Yes.
Speaker Change: Well. Thank you and then maybe just switching to a little bit on the credit side.
Speaker Change: You're obviously expecting credit to peak here, but wanted to dig in a little bit more on the credit actions, you've been taking taking to tighten underwriting.
Speaker Change: And I guess when I look at slide nine.
Speaker Change: Greater than 60.
Speaker Change: So if the credit distribution.
Speaker Change: Not getting higher so like I'm trying to understand some of the credit actions I'm basically trying to square that circle like you're taking credit actions you think you've taken actions to tighten credit, which is gonna help delinquency than you would see that improvement in the delinquency rate, but we're not seeing the risk distribution improve like.
Speaker Change: Can you help me with that a little bit thank you.
Speaker Change: So.
Speaker Change: We've been proactively managing our credit risk strategy across our entire lifecycle from acquisitions to line management to account closures and if you think about it on a risk adjusted basis, our approval rates today are.
Speaker Change: 110 basis points lower than the nearly 500 basis low basis points lower than pre pandemic.
Speaker Change: Our new accounts.
Speaker Change: Average vantage score is higher than it's ever been so that.
Speaker Change: <unk> is higher.
Speaker Change: Sometimes we're pausing some line increases to.
Speaker Change: To prime and sometimes prime plus and we are.
Speaker Change: Expanding line decreases where we think appropriate so but this broad based inflationary pressure it's difficult to isolate.
Speaker Change: Our remedy, but however, we've continued to proactively.
Speaker Change: Assign the right lines and proactively manage why so we make sure people don't get overextended as they move forward.
Speaker Change: And I'd add one more thing to what Ralph just said right when youre looking at the risk distribution that we've put on the chart everything Ralph spoke about is happening on the new accounts coming in at the best risk scores that we've seen coupled with lower line assignments all of those things and that we're doing to protect the existing base, but then.
Speaker Change: What's happening is you're a FICO or risk or migration right. So as you book accounts in the past few years that were higher risk higher credit quality in an environment. Like this there are risk scores migrate downwards. So that's what's causing you not to see the improvement that is fully reflective of the actions. We've taken so the fact that it's actually.
Speaker Change: Stabilized is reflective of all the actions that we have put in place.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Sanjay <unk> with <unk>. Your line is now open.
Sanjay: Thank you good morning.
Sanjay: Just on the back of these mitigation actions, obviously, its very positive that <unk> been able to mitigate the impact in the fourth quarter.
Sanjay: Early as fourth quarter, maybe you could just talk about how much work there has to be done to even get that impact of lower like is it possible you could even get it lower and then maybe Terry you could help with the path of offsetting the entire impact into the future like what would be the timeline roughly as you sit here today. Thanks.
Speaker Change: Yeah, I would say that in terms of path to continue to reduce the impact of the team is feverishly working.
Speaker Change: Non stop with brand partners coming up with other policy changes and other things that can help close that gap, but I think in terms of I'll say that time to implement and what's in front of US. We're trying to give you our best view at this point and then as we move into 2025, we expect to continue to see improvements.
Speaker Change: That and the second part of your question was.
Sanjay: Yes, just like how much.
Sanjay: Is there potentially you could even cut that 20% down as early as the fourth quarter.
Sanjay: I'd like the 20% you've got 25 down to 20 can can even be lower with the work that you guys are doing or is that sort of the best.
Speaker Change: At this point.
Speaker Change: I think we have a line of sight into the the final rule. They are still ongoing partner negotiations. So we'll update that as we have more information.
Speaker Change: Got it.
Speaker Change: Just wanted to.
Speaker Change: Got it.
Speaker Change: And then the other part of that is with the APR changes. We've said this before it just takes time for those to burn in and have their full effect, while some fees that get implemented obviously have the near term impact, but we've reflected what we have the high confidence and right now its possible can improve a little bit, but I don't expect material movements from that.
Speaker Change: Okay got it.
Speaker Change: Just one question I know me here asked about the credit, but just on the reserve rate that went higher and I think your credit outlook was consistent if not slightly better just as we look ahead what drives this reserve rates going forward.
Speaker Change: Yeah and I appreciate that question. It did go higher by about eight basis points right and if you think about the reserve rate, it's been pretty steady from the first quarter of 2023, and it's moved around a few basis points up and down and that's all of this is we didn't change a lot of assumptions in the model and what was it.
Speaker Change: Testing.
Speaker Change: Would imagine there's a lot of complexities that go into the seasonal reserve rate and the modeling.
Speaker Change: We didn't change our risk weightings and to your point some of the early stage delinquency came in better but you're also in the model and the output is this peak second quarter losses that are expected to materialize, but that was already caring for so what really changed this model was the separation between the baseline economic.
Speaker Change: Outlook, and the adverse and severely adverse outlooks getting back weighted into the the risks overlay and surprisingly when that runs through a model that creates a little bit larger overlaid by a little it's a lot of time and it didn't seem like the right time to reduce weightings in the overlay is just to keep the number of <unk>.
Speaker Change: <unk>.
Speaker Change: Full transparency so what my expectations are as the peak losses are in the rearview mirror at the end of the second quarter and delinquencies improved we should start to see some improvement in the reserve rate and I would expect to exit the year with a lower reserve rate than what we exited 2023.
Speaker Change: Perfect. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.
Moshe Ari Orenbuch: Great. Thanks.
Moshe Ari Orenbuch: Hey.
Moshe Ari Orenbuch: Getting back on the late fee issue.
Moshe Ari Orenbuch: Could you just talk a little bit about the steps that you've actually already taken the steps that you expect to be taken by may 14th in what you know how long that takes.
Moshe Ari Orenbuch: To kind of flow into the earnings gets which I'm trying to parse through some of the things you've said about the three different scenarios that would be helpful. Thanks.
Speaker Change: Sure. So the actions that have been taken as mentioned earlier some of those early APR increases that were already in flight and as you and I have discussed before it takes some time for those to burn in and know what youre going to see come through is further increases in the base apr's for new transaction.
Moshe Ari Orenbuch: On existing accounts higher APR is on new accounts, you'll see an introduction of statement fees that will roll into the market.
Moshe Ari Orenbuch: Sequenced way with different partners, starting I would say in the next few months and so really it's a matter of the timing of when these hit market and the value that they will have and then on top of that you will start to have some additional underwriting changes.
Moshe Ari Orenbuch: <unk> product strategy changes that will happen later in the year and perhaps into early next year.
Moshe Ari Orenbuch: And then some other fees and you'll start to see things that can promote fees on big ticket purchases and alike.
Speaker Change: Okay. Thanks.
Speaker Change: The credit side, I mean, you've talked a lot really over the last a year and change you've got the impact of inflation on your customer base.
Speaker Change: What do you think it takes for for the for things to be closer to a normal situation like is it is it just continued wage growth like in how much time do you mean.
Speaker Change: Do you think about that as you.
Speaker Change: And then have a thought about how that could be reflected in Europe.
Speaker Change: Credit metrics.
Speaker Change: It's a great question, it's something that either is a chart that I love to look at which is the cumulative gap between inflation and wage growth and we had a couple of months this quarter, where it was actually closing which was encouraging but then it kind of reversed course, a little bit in March.
Speaker Change: I'd like to see that continue to improve so to your point wage growth outpacing inflation is good for the consumer, particularly those that we serve that's what will end up giving them relief I mean, the encouraging part is they are not over levering I mean, they're really trying to do the best they can and use discipline to repurpose their spend into things that are non <unk>.
Speaker Change: Aggression area and make sure they're able to manage their finances, I think that will help obviously lower interest rates help consumers more broadly.
Speaker Change: But unemployment has been good so I think I'm optimistic of the future and then for US the credit actions that we've taken put it on.
Speaker Change: Better book.
Speaker Change: We will also improve our delinquency and losses and then as you start to have the tailwind of the.
Speaker Change: Improved economy and that with the wage growth outpaced inflation, then youll start to see us be able to unwind some of the restrictive line increases more approvals come through what should be a tailwind to growth as well.
Speaker Change: Thanks very much.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Bill Katz with Wolfe Research Securities. Your line is now open.
Bill Carcache: Thanks, Scott Good morning, Ralph and Perry.
Bill Carcache: We go up on <unk> question about how long it will take to mitigate the effect can you discuss how you're thinking about the earnings power and return generating ability of the business how thats evolved as we look to the other side of implementation. Both in terms of ROA and ROE you mentioned Perry that there would be some underwriting and product changes just curious how that.
Perry: Yeah, I think what I would do.
Speaker Change: Correct. My response back to is what we've said before is that our goal is to deliver strong returns on the other side of this and with all of the pricing and APR changes that go into effect, particularly the Apr's. If you call that chart, we put out there and one of the Investor conferences. It takes a few years for the full value of APR changes to work it.
Perry: Way through but our goal is to get back to strong returns, obviously as fast as possible and we'll give more guidance on that at our Investor day.
Perry: Okay. Thank you and then separately on.
Speaker Change: On capital your largest peer targets and 11% CET one ratio how does the 12, 6% that you're at currently compare relative to what you would use sort of your longer term target I know this will probably come up during investor day, but maybe some initial thoughts now.
Perry: Since you're not aggressively growing loans currently are we approaching a level, where we could see you return capital more aggressively.
Perry: Yes.
Speaker Change: Now that we will give more direction on that at Investor day, but I would tell you that we have more room for improvement.
Perry: In CET, one and I know it's.
Perry: We all wanted to compare ourselves to different peers, everybody has a different capital stack and structure. So we all have different binding constraint. So we'll go through that more at our Investor day.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Minder to ask a question. Please press star followed by one one on your telephone keypad.
Speaker Change: Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.
Jeffrey Adelson: Hey, good morning.
Jeffrey Adelson: I was just wondering if we could.
Jeffrey Adelson: Just a little bit more head on why that 20% came in lower than the prior 25% I know youre expressing more confidence in that view, there, but Perry I think you mentioned before that some retailers were kind of holding out until the rule actually came through.
Jeffrey Adelson: Are you noticing maybe more retailers now coming onboard with your plans, giving that hey, it looks like we're sitting here less than three weeks away and this might potentially come through just maybe speak to what kind of progress youre seeing on retailers that are kind of held out on doing anything yet.
Jeffrey Adelson: Yeah.
Jeffrey Adelson: You really summarize.
Speaker Change: Summarized that pretty well 90 days ago, and it's a long time in this process.
Speaker Change: And the final rule came out when we gave our initial estimate.
Speaker Change: We tried to give an estimate based on our degree of confidence of what we believe we could execute and where we were with partner discussions.
Speaker Change: And over the past 90 days, we have more clarity into the final rule as well as it brought a lot more clarity to the discussions and actions that had happened with partners and more of those partners agreements in terms of what we were going to deliver with them. So it's really just continued progress.
Speaker Change: Got it.
Speaker Change: Have you kind of Dimensionalize, the EPS impact from the potential may 14 data in.
Speaker Change: I think one of your peers back from Covid.
Speaker Change: The dividend, but I'm just wondering have you thought about weather.
Speaker Change: The lack of earnings for this temporary period might impact the dividend or how to think about that.
Speaker Change: At this point I do not see.
Speaker Change: Any impact to our dividend.
Speaker Change: In a good place on that and what we provided was the revenue impact that you can assume will flow through.
Speaker Change: Earnings before tax.
Speaker Change: But no I'm not expecting there to be a.
Speaker Change: And in fact.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Reggie Smith with Jpmorgan. Your line is now open.
Reginald Lawrence Smith: Hey, good morning, Thanks for taking the question I appreciate all the disclosure.
Reginald Lawrence Smith: The different scenarios.
Speaker Change: <unk> two <unk>.
Reginald Lawrence Smith: Question is have you guys disclosed what the mitigated impact.
Reginald Lawrence Smith: B.
Reginald Lawrence Smith: In the fourth quarter, and then I have a follow up.
Speaker Change: No we haven't.
Speaker Change: Really the impact is a combination of obviously the reduction in late fee.
Speaker Change: Two what will be applied how it flows through the P&L and all new pricing actions that will flow through because they kind of they go hand in glove right.
Speaker Change: Act in tandem.
Speaker Change: Got it understood.
Speaker Change: And then I was hoping.
Speaker Change: I guess kind of switch subject I was hoping if you could maybe give a little texture.
Speaker Change: On the spending.
Speaker Change: Trends within semi year.
Speaker Change: Different pockets I don't know if you could talk about maybe what's your higher incomes and it looks like maybe different FICO scores.
Speaker Change: Co brand versus private label is are there any trends worth calling out.
Speaker Change: There.
Speaker Change: As you can.
Speaker Change: Any strength or weakness.
Speaker Change: It's what you would expect in this type of economy right. So your prime and Prime plus people are spending and they have some spending capacity and youll see that and.
Speaker Change: As you move down the vantage of FICO chain, you see people.
Speaker Change: Focusing on more.
Speaker Change: Non discretionary items and they're focused on budgeting.
Speaker Change: Budgeting and not overextending themselves. So that's what we're that's what we're seeing so if you look at our co brand spend you're seeing the co brand spend is probably.
Speaker Change: Our non discretionary items and we're seeing some lower big ticket spend as well.
Speaker Change: And then if I can sneak one last one and there's a slide on slide nine of the diagram that shows.
Speaker Change: Different FICO bucket.
Speaker Change: Is there a way and have you guys disclosed.
Speaker Change: <unk>.
Speaker Change: Higher losses.
Speaker Change: Fall between those different tiers, so that the relative weighting I would imagine obviously.
Speaker Change: The bulk of your losses or rather the.
Speaker Change: The lower FICO bands represented disproportionate one but any any color.
Speaker Change: You can provide around that would be would be helpful. If you kind of think about.
Speaker Change: Losses.
Speaker Change: In the back half of the year and how that kind of migrate. Thank you.
Speaker Change: I think the.
Speaker Change: One no we don't provide losses by risk band good question, though.
Speaker Change: And one that I think as you as you think about the the risk bands. It is indicative of what losses, you may have in the future, but as I said before because it's about loss the risk scores basically drive losses. So as we see improvement in the overall risk scores that should be indicative of future improvement as well.
Speaker Change: <unk>.
Speaker Change: And some of that will be how risk scores move throughout the cycle as there is improvement in the cycle risk scores will migrate back up right now we're in a period, where they're migrating down despite our our risk actions.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. Our next question comes from the line of John <unk> with Evercore ISI. Your line is now open.
John: Good morning.
John: So regarding the impact of the <unk> implementation I heard your answer to Jeff's question that should not impact the.
John: The dividend does that mean, you expect that you'll earn the dividend in 2024 on an after tax bottom line basis.
John: The math initially running.
John: Matthew gave your scenario implies that you could be either not earning any money. This year. We're in a net loss and so I just want to get your thoughts there.
Speaker Change: Yes, we have a capital plan with <unk>.
John: Proved.
John: Actions that we can take and flexibility on how we would use that capital. So again that is where we're at and we do not expect or anticipate the need to reduce the dividend.
John: At this point.
John: Okay, and then just back to that the.
Speaker Change: Mr. Matt is pulling through a possible net loss for the year is there something we could be underestimating and running that math that gives you some confidence on the on the earnings potentially being positive when you run that may 14th scenario.
Speaker Change: I will give more clarity around that in future discussions, but really when you think about one of the earlier things I said.
Speaker Change: We're going to have a tailwind from the improving losses in the back part of the area of improving the losses, you have less reversal of interest and fees.
Speaker Change: And you also will have a expected reserve rate reduction throughout the year consistent with our responsible growth. So I think all of those things will aid in.
Speaker Change: Hopefully not having to post a negative earnings for the year.
Speaker Change: Okay got it alright, thank you.
Speaker Change: Thank you.
Speaker Change: Now pass it back to Ralph <unk> for closing remarks.
Ralph: Thank you very much and thank you all for joining our call today and for your interest in <unk> financial and we of course look forward to speaking with you again next quarter.
Ralph: And everyone have a terrific day.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
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