Executive Summary / Key Takeaways

• Bread Financial has undergone a significant transformation, diversifying its product suite beyond private label cards into co-brand, proprietary, and Bread Pay offerings, while strengthening its balance sheet through aggressive debt reduction and capital build.
• The company's "tech-forward" approach, including its digital platform and API capabilities, provides tangible operational efficiencies and competitive advantages in areas like transaction processing speed and merchant integration, supporting its growth strategy and partner wins like Crypto.com.
• Recent financial performance reflects strategic actions and macroeconomic pressures, with Q1 2025 showing stable credit metrics despite a challenging environment, supported by pricing actions and operational expense discipline, though revenue and NIM were impacted by lower late fees and mix shift.
• Management's 2025 outlook anticipates flat to slightly lower average loans and flat to slightly higher total revenue (excluding portfolio sales), driven by cautious consumer spending, strategic tightening, and mix shift, while targeting nominal positive operating leverage and a full-year net loss rate of 8.0%-8.2%.
• Key factors for investors to monitor include the pace of macroeconomic recovery, the impact of tariffs/inflation on consumer health, the realization of benefits from pricing actions and operational efficiencies, and the company's continued ability to execute on its diversified growth strategy and capital allocation priorities amidst competitive pressures.

A Transformed Landscape and a Tech-Forward Approach

Bread Financial Holdings, Inc. (NYSE:BFH) has evolved significantly from its origins in specialty retail finance. Following strategic divestitures, including the Epsilon segment in 2019 and the LoyaltyOne segment in 2021, the company has sharpened its focus on being a tech-forward provider of payment, lending, and saving solutions to millions of U.S. consumers. This transformation is central to its current investment thesis, emphasizing a diversified product suite, strategic partnerships, and a robust operational backbone.

At its core, Bread Financial operates through a single reportable segment, generating revenue primarily from interest and fees on its credit card and other loan products, supplemented by contractual relationships with its brand partners. The company's strategic pivot has seen it actively grow its co-brand and proprietary credit card programs, moving beyond its historical reliance on private label cards. This diversification extends to its Bread Pay offerings, which include installment loans and split-pay options, catering to evolving consumer preferences for flexible payment solutions.

This strategic shift is underpinned by a deliberate investment in technology. Bread Financial positions itself as "tech-forward," leveraging digital advancements, data, and analytics across its operations. While specific, detailed quantitative metrics on its technology's performance advantages are not extensively disclosed, the company highlights its digital suite and API platform as enabling capabilities like seamless integration and enhanced customer service across mobile and web channels. Management commentary suggests these technological capabilities contribute to winning new partnerships, such as the recently announced Crypto.com credit card program, by demonstrating the ability to support innovative product features and provide efficient service. The strategic intent behind these investments is clear: to drive operational excellence, improve customer satisfaction, enhance enterprise-wide efficiency, reduce risk, and ultimately create value for stakeholders. Industry comparisons suggest that such digital platforms can offer faster transaction processing and more efficient loan origination compared to more traditional systems, although they may require higher upfront investment.

In the competitive landscape, Bread Financial operates alongside major players like Synchrony Financial (SYF), Capital One (COF), Discover Financial Services (DFS), and Ally Financial (ALLY). While larger peers like COF and DFS boast greater scale and broader market share, particularly in general-purpose credit cards, BFH has carved out a strong position in the private label and co-brand partnership space, holding an estimated 10-15% market share in private label. Its diversified product offering, including the growing Bread Pay platform, allows it to compete across various consumer segments and retail verticals, from travel and entertainment (now its largest vertical by sales) to electronics and specialty apparel.

BFH's competitive advantages stem from its deep integration with brand partners and its specialized expertise in building and managing tailored credit programs. Its tech platform is designed to facilitate these partnerships, offering capabilities that support customized rewards programs and seamless point-of-sale financing. However, the company faces challenges from the scale and financial strength of larger competitors, which often benefit from lower operating costs per unit and more extensive data analytics capabilities. BFH's higher debt ratios compared to some peers also represent a potential vulnerability, particularly in uncertain economic conditions. Despite these challenges, BFH's proactive approach to credit risk management and its focus on operational efficiencies are key strategic responses aimed at enhancing its competitive standing and driving profitable growth.

Performance Amidst Macro Headwinds and Strategic Shifts

Bread Financial's recent financial performance reflects the interplay of its strategic initiatives and the prevailing macroeconomic environment. For the first quarter of 2025, the company reported total net interest and non-interest income of $970 million, a 2% decrease compared to the prior year period. This was primarily driven by a decline in net interest income, with the net interest margin narrowing to 18.1% from 18.7% in Q1 2024. The decrease in NIM was largely attributed to lower late fees, influenced by both lower early-stage delinquency volumes and the ongoing strategic shift towards a lower proportion of private label accounts, which typically generate higher late fees. Lower average prime rates also contributed to pressure on loan yield.

Offsetting some of this pressure, non-interest income saw a notable increase of $25 million year-over-year in Q1 2025. This improvement was primarily a result of implemented pricing actions, including paper statement fees, and a reduction in costs associated with brand partner retailer share arrangements. However, lower big ticket credit sales led to a decrease in merchant discount fees, partially counteracting these gains.

Total non-interest expenses in Q1 2025 decreased by 1% year-over-year to $477 million. This reduction was primarily due to the absence of debt extinguishment costs incurred in Q1 2024 and lower Card and processing expenses stemming from reduced volume-related costs. These savings were partially offset by increases in information processing and communication expenses (due to software license renewal costs) and marketing expenses (related to brand partner joint marketing campaigns). This expense discipline contributed to a PPNR of $493 million, down 3% from Q1 2024, primarily reflecting the lower net interest income.

Looking back at 2024, the full year saw total revenue of $3.8 billion, an 11% decrease from 2023. This significant drop was primarily due to a large gain on portfolio sale in 2023 that did not recur, as well as lower finance charges and late fees driven by the product mix shift and a lower average prime rate. Adjusted total noninterest expenses for the full year 2024 decreased by 7% (excluding the impact of convertible note repurchases), reflecting efficiencies gained from operational excellence initiatives and reduced fraud losses. This allowed the company to achieve its goal of generating positive operating leverage in 2024.

Credit performance remains a critical determinant of financial results. In Q1 2025, the delinquency rate stood at 5.9%, flat sequentially and down 30 basis points from Q1 2024. The net principal loss rate for Q1 2025 was 8.2%, down from 8.5% in Q1 2024. While these metrics show signs of stabilization and modest improvement, management notes that gross losses remain elevated compared to historical through-the-cycle levels, reflecting the lingering impact of prolonged inflation and higher interest rates on consumer payment capacity. The allowance for credit losses decreased slightly to $2.172 billion as of March 31, 2025, from $2.241 billion at year-end 2024, primarily due to the seasonal paydown of loan balances. The reserve rate was 12.2% at quarter-end, reflecting management's continued use of appropriately prudent weightings on adverse economic scenarios in their modeling.

The company has made significant strides in strengthening its balance sheet and enhancing its capital position. Over the three years leading up to the end of 2024, parent-level debt was reduced by over $1 billion, achieving the target double leverage ratio of below 115%. This focus continued into Q1 2025 with the successful issuance of $400 million in 8.38% Subordinated Notes due 2035, which significantly boosted the Total risk-based capital ratio to 15.5% as of March 31, 2025. The company also completed its $150 million share repurchase program in March and April 2025, repurchasing 3.2 million shares, and further reduced its outstanding Convertible Notes to just $3 million. Direct-to-consumer deposits continue to be a growing and stable funding source, reaching $7.9 billion in Q1 2025, a 13% increase year-over-year, and representing 43% of total funding.

These actions demonstrate a disciplined approach to capital allocation and provide increased financial flexibility.

Outlook and Key Considerations for Investors

Bread Financial's outlook for 2025 reflects a cautious stance amidst ongoing economic uncertainty, balanced by the anticipated benefits of its strategic initiatives. Management expects 2025 Average credit card and other loans to be flat to slightly lower compared to 2024. This projection is based on an updated range of economic scenarios, expected impacts on consumer spending, the continuation of strategic credit tightening actions, and anticipated elevated gross credit losses. While new business growth is expected, it is not projected to fully offset these factors on an average balance basis, though year-end 2025 loans are anticipated to be slightly higher than year-end 2024.

Total net interest and non-interest income for 2025 (excluding portfolio sale gains) is anticipated to be flat to slightly higher year-over-year. This outlook incorporates the expected benefits from implemented pricing actions, including those related to CFPB mitigation strategies. However, these gains are expected to be partially offset by the impact of anticipated Federal Reserve interest rate decreases (given the company's slight asset sensitivity), lower billed late fees resulting from improving credit quality, and the continued shift in product mix towards co-brand and proprietary cards, which tend to have lower finance charges and late fees.

Management is targeting nominal full-year positive operating leverage in 2025 (excluding specific items like portfolio sales and convertible note impacts). This is expected to be achieved through efficiencies gained from ongoing operational excellence initiatives, disciplined expense management, and prudent investments in technology and digital capabilities. The degree of positive operating leverage will be influenced by macroeconomic conditions, including the pace of credit improvement and loan growth.

The full-year Net principal loss rate for 2025 is projected to be in the range of 8.0% to 8.2%. This forecast assumes a slow, gradual improvement in the macroeconomic environment, acknowledging that it will take time for the cumulative effects of prolonged inflation and higher interest rates to fully dissipate and for consumer payment capacity to strengthen. Quarterly loss rates may exhibit some variability, including an estimated $13 million negative impact in Q2 2025 due to hurricane-related customer accommodations from late 2024. The normalized effective tax rate for the full year is expected to be in the range of 25% to 26%.

For investors, the key implications of this outlook are multifaceted. The flat to slightly lower average loan growth suggests that portfolio expansion will not be a primary driver of top-line growth in 2025. Revenue growth will rely more heavily on yield management through pricing actions and the benefits of the ongoing product mix shift, although the latter also presents a headwind to yield due to lower late fees. The focus on operational excellence and expense discipline is critical for driving profitability and achieving positive operating leverage in this environment.

Several risks could impact this outlook. The macroeconomic environment remains uncertain, with potential adverse impacts from tariffs, trade policies, and persistent inflation on consumer spending and credit quality. While the CFPB late fee rule has been vacated, future regulatory actions remain a possibility. Litigation related to the LVI spinoff also presents potential financial liabilities, although the company believes the claims are without merit and intends to defend itself. Operational risks, as highlighted by the FDIC consent order related to the servicing transition, require continued focus and investment.

Despite these challenges, Bread Financial's strengthened balance sheet, diversified funding base (particularly the growth in DTC deposits), and disciplined capital allocation strategy provide a degree of resilience. The completion of the share repurchase program and the reduction of convertible notes demonstrate a commitment to optimizing the capital structure and returning value to shareholders when appropriate, while maintaining flexibility for future growth and potential market volatility.

Conclusion

Bread Financial has successfully navigated a period of significant transformation, emerging as a more focused, tech-forward financial services company with a diversified product portfolio and a strengthened balance sheet. The company's strategic emphasis on responsible growth, disciplined capital allocation, and operational excellence is evident in its recent performance and forms the bedrock of its investment thesis.

While the macroeconomic environment continues to present challenges, impacting consumer spending and credit quality, Bread Financial's proactive credit management and ongoing operational efficiency initiatives are helping to mitigate these pressures. The outlook for 2025 reflects a realistic assessment of these dynamics, projecting stable to slightly lower average loan balances and modest revenue growth, supported by pricing actions and expense discipline. The company's technological capabilities, while not always quantifiable in publicly available data, are a key differentiator, enabling strategic partnerships and driving operational improvements. As the company continues to execute on its strategy, including further diversifying its partner base and product offerings, and as macroeconomic conditions hopefully improve, the benefits of its transformation and disciplined approach are expected to become more fully realized. Investors should monitor the trajectory of credit quality, the effectiveness of pricing and operational initiatives, and the broader economic landscape as key indicators of the company's progress towards its medium-term financial targets.