8-K: Bread Financial Reports Solid Q2 Results, Announces Dividend

Bread Financial reported a net income of $133 million for the second quarter of 2024, alongside a 25% year-over-year increase in tangible book value per share and the declaration of a $0.21 per share quarterly dividend.

Summary

• Bread Financial announced its second quarter 2024 results, showing a net income of $133 million.
• The company's tangible book value per share increased by 25% year-over-year to $48.89.
• Average credit card and other loans increased by 1% compared to the second quarter of 2023.
• Revenue decreased slightly by 1%, or $13 million, while expenses decreased by 12%, or $61 million.
• Direct-to-consumer deposits grew by 20% year-over-year, reaching $7.2 billion and now represent 40% of total funding.
• The common equity tier 1 (CET1) capital ratio increased by 170 basis points year-over-year to 13.8%.
• The company signed a long-term agreement with Saks Fifth Avenue.
• The second quarter delinquency rate was 6.0%, and the net loss rate was 8.6%.
• The company expects the net loss rate to have peaked in the second quarter of 2024.
• The company's 2024 outlook assumes no impact from the CFPB late fee rule due to ongoing litigation.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to strong growth in tangible book value and deposits, but tempered by revenue decline, increased credit losses, and uncertainty around the CFPB rule. The company is showing resilience but faces headwinds.

Positives

• The company's net income increased by $85 million compared to the second quarter of 2023.
• Tangible book value per share saw a significant increase of 25% year-over-year.
• Direct-to-consumer deposits grew substantially, indicating strong customer confidence.
• The CET1 capital ratio improved significantly, demonstrating a stronger capital position.
• Expenses were reduced by 12%, showing effective cost management.
• The company successfully reduced its double leverage ratio to 110%, achieving its target.
• The new partnership with Saks Fifth Avenue is expected to drive future growth.
• The company anticipates the net loss rate has peaked, suggesting improved credit performance ahead.
• The declaration of a $0.21 per share quarterly dividend is positive for shareholders.

Negatives

• Revenue decreased by 1% year-over-year, or $13 million.
• Credit sales decreased by 7% year-over-year, reflecting moderating consumer spending and strategic credit tightening.
• The delinquency rate increased to 6.0% from 5.5% in the second quarter of 2023.
• The net loss rate increased to 8.6% from 8.0% in the second quarter of 2023.
• The company expects average loan growth to be down low single digits for 2024.
• Total revenue growth is anticipated to be down lowto mid-single digits for 2024.
• The company anticipates a lower net interest margin for 2024.

Risks

• The company faces risks from macroeconomic conditions, including inflation and higher interest rates, which could impact consumer spending.
• There is uncertainty surrounding the outcome of the litigation related to the CFPB's final rule on credit card late fees.
• The company's credit performance is subject to risks, including potential increases in delinquency and write-off rates.
• The company's business is concentrated in U.S. consumer credit, which exposes it to regional economic risks.
• The company's models and estimates may be inaccurate, affecting the allowance for credit losses and credit risk management.
• The company's ability to access financial or capital markets could be impacted by its level of indebtedness.
• The company is subject to pending and future legislation and regulation, which could impact its operations.
• The company faces risks from failures or breaches in its operational or security systems, including cyberattacks.

Future Outlook

The company's 2024 outlook assumes no impact from the CFPB late fee rule due to ongoing litigation, and anticipates slower sales growth, lower net interest margin, and a net loss rate in the low 8% range.

Management Comments

• Actions we have taken over the past few years have enabled us to consistently generate solid results.
• We remain focused on disciplined capital allocation and proactive credit risk management, while maintaining the financial flexibility and resilience to successfully navigate through regulatory changes and economic volatility.
• We are confident in our ability to generate strong results and achieve our long-term strategic objectives and financial targets regardless of the litigation outcome.
• Our second quarter financial results reflect our commitment to delivering strong returns through a disciplined approach.
• We are confident in our ability to deliver strong financial results while remaining responsible and disciplined in our credit management and capital allocation.

Industry Context

The results reflect a challenging macroeconomic environment with moderating consumer spending and higher interest rates, which is impacting the broader financial services industry. The company's focus on digital capabilities and new partnerships aligns with industry trends towards technology-driven solutions and strategic collaborations.

Comparison to Industry Standards

• Bread Financial's CET1 ratio of 13.8% is above the regulatory minimum and compares favorably to many regional banks, but is lower than some larger national banks.
• The 25% increase in tangible book value per share is a strong performance compared to many financial institutions, which are facing headwinds from the current economic environment.
• The 20% growth in direct-to-consumer deposits is a positive sign, indicating a successful strategy in attracting retail funding, which is a key focus for many financial companies.
• The net loss rate of 8.6% is higher than some industry averages, but the company expects it to have peaked, which is a positive sign.
• The company's efficiency ratio of 49.9% is competitive, indicating effective cost management compared to peers.

Legal Proceedings

• The company is involved in ongoing litigation related to the CFPB's final rule on credit card late fees.

Stakeholder Impact

• Shareholders will benefit from the declared dividend and the increase in tangible book value per share.
• Customers will have access to new payment solutions through the partnership with Saks Fifth Avenue.
• Employees will be impacted by the company's ongoing efforts to improve efficiency and manage expenses.
• Creditors will be impacted by the company's capital management and debt levels.

Next Steps

• The company will continue to implement its mitigation strategy in response to the CFPB's final rule on credit card late fees.
• The company will proceed with the acquisition of the existing portfolio and the new program launch with Saks Fifth Avenue in the third quarter.
• The company will continue to monitor consumer spending and adjust its credit risk management strategies.
• The company will continue to focus on disciplined capital allocation and expense management.

Key Dates

Keywords

financial results, credit cards, consumer lending, net income, tangible book value, capital ratio, deposits, delinquency rate, net loss rate, CFPB, dividend