Bread Financial Holdings, Inc. (BFH) has demonstrated its ability to navigate the challenging macroeconomic and regulatory environment, delivering solid financial results in the second quarter of 2024. The company reported net income of $133 million and earnings per diluted share of $2.66, or $2.67 on an adjusted basis, reflecting the anti-dilutive impact of its capped call transactions related to the 2023 issuance of convertible notes.
Bread Financial's balance sheet continued to strengthen, with tangible book value increasing by 25% year-over-year to nearly $49 per share. The company also improved its common equity Tier 1 capital ratio by 170 basis points year-over-year to 13.8% and reduced its double leverage ratio to 110%, achieving its target of less than 115%. These capital enhancements underscore Bread Financial's financial resilience and its commitment to responsible growth.
The company's direct-to-consumer deposits grew 20% year-over-year to $7.2 billion, representing 14 consecutive quarters of growth. This diversified funding base, coupled with the company's disciplined capital allocation strategy, positions Bread Financial well to navigate the current macroeconomic and regulatory landscape.
In the second quarter, Bread Financial made further progress in implementing its mitigation strategy in response to the CFPB's rule on credit card late fees. The company's ongoing discussions with brand partners have been productive, leading to the introduction of various pricing changes, including increased annual percentage rates (APRs) and statement fees. While the litigation related to the CFPB rule remains ongoing, Bread Financial is confident in its ability to generate strong results and achieve its long-term strategic objectives and financial targets, regardless of the litigation outcome.
Macroeconomic Trends and Credit Performance
Consumer spending continued to moderate in the second quarter, reflecting persistent inflation and higher interest rates. This trend was evident in lower transaction sizes accompanied by more frequent shopping trips, as well as reduced discretionary and big-ticket spending. Bread Financial's credit sales were also impacted by its proactive credit tightening measures, as the company remained disciplined in its underwriting given the economic pressures affecting consumer payment capacity.
Despite these headwinds, Bread Financial's credit performance remained stable, with the delinquency rate improving 20 basis points sequentially to 6.0% in the second quarter. The net loss rate, however, increased to 8.6% compared to 8.0% in the prior-year period, primarily due to more challenging macroeconomic conditions, pressure on consumer payment rates, and the impact of the company's slower, responsible loan growth on the denominator.
Bread Financial expects the second quarter net loss rate to represent the peak for 2024, with a reduction to 8% or slightly below in the third quarter, before increasing seasonally in the fourth quarter to the low 8% level. The company's outlook assumes a slow, gradual improvement in the macroeconomic environment, as it will take time for the lingering effects of the prolonged period of elevated inflation to dissipate.
Bread Financial's total loss absorption capacity, comprising tangible common equity plus the credit reserve rate, ended the second quarter at 26% of total loans, an increase of 100 basis points from the prior quarter and 270 basis points from a year ago. This strong margin of protection demonstrates the company's prudent risk management and its ability to withstand more adverse economic conditions.
Diversification and Responsible Growth
Bread Financial's focus on growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings, and driving operational excellence has been a key driver of its performance. The company's diversified product suite, including private label and co-brand credit cards, as well as buy now, pay later (BNPL) offerings, has enabled it to scale and diversify its business.
During the second quarter, Bread Financial announced a new partnership with Saks Fifth Avenue, which is expected to be completed in the third quarter of 2024. The company also announced a partnership with HP, further strengthening its presence in the electronics vertical. Bread Financial's experienced business development team continues to identify and secure attractive opportunities across a range of industries, from small- and medium-sized businesses to large consumer-based brands.
The company's disciplined capital allocation strategy has been instrumental in strengthening its balance sheet and enhancing shareholder value. Over the last three years, Bread Financial has improved its common equity Tier 1 capital ratio by 410 basis points and reduced its parent-level debt by 53%, achieving its long-term double leverage ratio target of less than 115%.
Bread Financial's tangible book value has grown at a 22% compound annual rate since the second quarter of 2021, supported by the company's strong cash flow. This growth in tangible book value, coupled with the company's focus on responsible growth and prudent risk management, positions Bread Financial well to continue generating sustainable value for its shareholders.
Regulatory Landscape and Mitigation Efforts
The CFPB's final rule on credit card late fees, which represents a significant departure from the current rules, has been a key focus for Bread Financial. Absent a successful legal challenge, the rule would decrease the safe harbor amount for credit card late fees to $8 and eliminate the annual inflation adjustments.
While the litigation related to the CFPB rule remains ongoing, Bread Financial has removed the potential impact from its 2024 financial outlook. The company believes the timing and outcome of the litigation, as well as the implementation period following a final legal ruling, make it unlikely that the rule will become effective in 2024.
Bread Financial has been proactive in implementing its mitigation strategy, working closely with its brand partners to introduce various pricing changes, including increased APRs and statement fees. The company is closely monitoring the impact of these actions on customer behavior, ensuring that the changes do not have unintended consequences.
The company's experienced leadership team has successfully navigated regulatory changes in the past, and it remains confident in its ability to generate strong returns through prudent capital and risk management, even in the face of the ongoing CFPB late fee rule uncertainty.
Financials
In the second quarter of 2024, Bread Financial reported revenue of $939 million, down 1.4% year-over-year, primarily due to reduced merchant discount fees resulting from lower big-ticket credit sales. Income from continuing operations increased $69 million, driven by a higher reserve release and lower non-interest expenses compared to the same period last year.
Total net interest income remained essentially flat year-over-year, while non-interest income decreased by $8 million. Total non-interest expenses decreased 12% year-over-year, primarily driven by a decrease in card and processing costs, including fraud, as well as reductions in depreciation and amortization and marketing expenses.
Bread Financial's pretax pre-provision earnings (PPNR) increased 11% year-over-year to $420 million. The company's loan yield increased 30 basis points year-over-year, benefiting from the upward trend in the prime rate and the impact of its CFPB mitigation-related APR increases, though these were partially offset by a mix shift towards co-brand products with lower late fee revenue.
Outlook
For the full year 2024, Bread Financial expects average loans to be down in the low single digits on a percentage basis relative to 2023, reflecting slower credit sales growth due to moderating consumer spending and the company's proactive credit tightening. Total revenue growth, excluding gains on portfolio sales, is anticipated to be down in the low to mid-single digits, with a full-year net interest margin lower than 2023 due to higher reversals of interest and fees, declining interest rates, and a continued shift in product mix.
The company expects total non-interest expenses to decline in the mid-single digits relative to 2023, driven by efficiencies gained from ongoing investments in technology modernization and digital advancement, as well as disciplined expense management and reduced fraud. Bread Financial's full-year normalized effective tax rate is expected to be in the range of 25% to 26%.
Bread Financial remains confident in its ability to successfully manage risk-return trade-offs through the challenging macroeconomic and regulatory environment, while continuing to make strategic investments that drive long-term value for its stakeholders. The company's focus on responsible growth, capital discipline, and operational excellence positions it well to navigate the current landscape and capitalize on future opportunities.
Conclusion
Bread Financial has demonstrated its resilience and adaptability in the face of macroeconomic and regulatory headwinds. The company's diversified product suite, disciplined capital allocation, and experienced leadership team have enabled it to navigate the current environment and position itself for long-term success.
Despite the ongoing uncertainty surrounding the CFPB late fee rule, Bread Financial has proactively implemented mitigation strategies and remains confident in its ability to generate strong returns and build sustainable value for its shareholders. The company's focus on responsible growth, digital transformation, and operational excellence will be key drivers of its future performance.
As Bread Financial continues to execute on its strategic priorities, investors can expect the company to maintain its financial discipline, enhance its capital position, and capitalize on emerging opportunities in the consumer finance landscape. With its proven track record of resilience and its commitment to shareholder value creation, Bread Financial remains well-positioned to navigate the challenges ahead and deliver long-term success.