Executive Summary / Key Takeaways

• Bread Financial Holdings, Inc. (BFH) is demonstrating robust financial performance, with Q3 2025 net income of $188 million and adjusted diluted EPS of $4.02, driven by strong credit sales growth and improving credit metrics.
• The company's tech-forward strategy, including its unified SDK, API suite, and extensive use of AI/ML models, provides a significant competitive edge in digital payment integration and operational efficiency, enhancing customer experience and decision-making.
• Strategic diversification into co-brand and proprietary credit cards, alongside Bread Pay (BNPL) offerings, is improving the credit risk mix, leading to lower delinquencies and losses, and securing long-term partnerships.
• BFH has significantly strengthened its balance sheet, achieving a 14% Common Equity Tier 1 (CET1) ratio and reducing parent-level debt by 50% since Q4 2021, enabling increased shareholder returns through a 10% dividend hike and substantial share repurchase authorizations.
• Despite persistent macroeconomic uncertainties, BFH's disciplined credit management and operational excellence initiatives position it for positive operating leverage and a net loss rate at the lower end of its 7.8%-7.9% full-year 2025 outlook.

A Transformed Lender: Setting the Scene for Bread Financial

Bread Financial Holdings, Inc. (BFH) has fundamentally reshaped its identity and operational focus over the past few years, evolving into a tech-forward financial services company. Originally incorporated in 1995, the company underwent significant strategic divestitures, including the sale of its Epsilon segment in 2019 and the spinoff of LoyaltyOne in 2021, culminating in its rebranding from Alliance Data Systems Corporation to Bread Financial in March 2022. This transformation has sharpened its focus on providing simple, personalized payment, lending, and saving solutions to millions of U.S. consumers, primarily through credit card and other loan products, and strategic brand partnerships.

The company's core business revolves around issuing private label and co-brand credit cards, proprietary credit cards, and offering Bread Pay products, which include installment loans and split-pay options. This diversified product suite is delivered through its insured depository institution subsidiaries, Comenity Bank and Comenity Capital Bank. BFH's partner base is extensive and well-diversified across industries such as travel and entertainment, health and beauty, jewelry, sporting goods, technology, home, and specialty apparel, featuring prominent brands like AAA, Academy Sports Outdoors (ASO), Caesars , Dell Technologies (DELL), Hard Rock International, the NFL, Saks Fifth Avenue, Signet (SIG), Ulta (ULTA), and Victoria's Secret (VSCO). This broad reach and product flexibility are foundational to its strategy, allowing BFH to cater to a wide spectrum of consumer segments, from Gen Z to Baby Boomers.

The Digital Edge: Technology as a Core Differentiator

Bread Financial's strategic pivot is deeply rooted in its commitment to technological differentiation and innovation. The company positions itself as a "tech-forward" financial services provider, leveraging advanced digital capabilities to enhance its offerings and operational efficiency. Its core technology includes a unified software development kit (SDK) and a robust suite of application programming interfaces (APIs), which enable merchants and partners to seamlessly integrate BFH's payment and lending solutions directly into their online shopping experiences. This integration promotes credit payment options earlier in the customer journey, fostering a frictionless user experience.

The tangible benefits of this technology are multifaceted and contribute directly to BFH's competitive moat. The seamless integration capabilities drive enhanced customer loyalty and engagement, potentially leading to recurring revenue streams and superior margins in lending services. For instance, the Crypto.com co-brand credit card program, launched in Q2 2025, exemplifies this, offering up to 5% in crypto rewards delivered through a frictionless user experience natively integrated into the Crypto.com app. This showcases BFH's leadership in loyalty innovation and flexible, tech-forward payment solutions.

Beyond external-facing applications, BFH is heavily invested in internal technology modernization, digital advancement, and artificial intelligence (AI) solutions. The company's approach to AI is described as a "fast follower," learning from early adopters to identify high-impact use cases. BFH currently employs over 200 machine learning models across various functions, including credit, collections, marketing, and fraud, and has enhanced over 100 processes using robotic process automation (RPA). These initiatives aim to simplify, streamline, and automate business processes, driving increased efficiency, reducing risk, improving controls, and enhancing both customer and employee experiences. The strategic intent is to accelerate innovation, move projects through the technology pipeline faster, and ultimately drive growth and positive operating leverage. This focus on technology is not merely about cost reduction but also about enabling better decision-making and revenue generation, forming a critical pillar of its long-term growth strategy.

Strategic Evolution and Competitive Positioning

Bread Financial's strategic evolution is marked by a deliberate shift in its product mix and an aggressive pursuit of new partnerships, all while strengthening existing relationships. The company has actively diversified its portfolio away from a heavy reliance on private label credit cards towards a higher proportion of co-brand and proprietary cards. This shift is strategic, as co-brand programs generally yield higher credit sales per account, an improved credit risk mix, higher transactor balances, lower delinquencies, and reduced losses compared to private label counterparts. This product diversification also extends to its Bread Pay offerings, which include installment loans and split-pay options, a growing segment that is regulatory compliant and scalable.

In the competitive landscape, BFH operates alongside major players like Synchrony Financial (SYF), Capital One Financial Corporation (COF), Discover Financial Services (DFS), and American Express Company (AXP). BFH differentiates itself through its tech-forward approach and specialized focus on brand partnerships, particularly in enabling seamless digital payment and lending solutions. While larger competitors like SYF and COF benefit from greater scale and broader banking ecosystems, BFH's agility in digital integration and its ability to tailor solutions for specific merchant needs provide a distinct advantage. For example, BFH's API-driven platform can offer notably faster integration for merchants, enhancing the shopping experience and potentially leading to more efficient account origination.

BFH's strong renewal rate with existing partners, including the multiyear extension with Caesars Entertainment (CZR) that secures its top 10 programs into at least 2028, underscores its competitive strength. The company also continues to win new business, expanding its home vertical in Q3 2025 with partners like Bed Bath & Beyond, Furniture First, and Raymour & Flanigan. This expansion into diverse verticals, coupled with innovative product launches like the Crypto.com co-brand card, demonstrates BFH's ability to compete effectively by offering tailored, tech-enabled solutions. While competitors may boast broader market reach or established network effects (like DFS), BFH's focus on deep, technology-driven partnerships and a diversified product suite allows it to capture and grow market share in targeted segments. The company's management emphasizes that its underwriting philosophy remains profit-focused, aiming for industry-leading returns on equity while driving losses down to a long-term target of 6%.

Financial Resilience and Performance Drivers

Bread Financial reported strong third-quarter 2025 results, reflecting its strategic initiatives and operational discipline. Net income for Q3 2025 stood at $188 million, with adjusted net income and earnings per diluted share reaching $191 million and $4.02, respectively, excluding the post-tax impact from repurchased debt expenses. This performance was underpinned by a 5% year-over-year increase in credit sales to $6.80 billion, driven by new partner growth and increased general-purpose spending, notably during the back-to-school season.

Despite the growth in credit sales, average and end-of-period credit card and other loans saw a slight decrease of 1% and 2% respectively, primarily due to an increasing payment rate and the ongoing effect of elevated gross credit losses. Total net interest and non-interest income for the quarter was $971 million, a 1% decrease from Q3 2024. This was influenced by a 3% decrease in total interest income, mainly from lower billed late fees and average loan balances, partially offset by reduced reversals of finance charges and late fees due to improving gross credit losses and pricing actions. Net interest margin remained flat year-over-year at 18.80% but improved sequentially from 17.70% in Q2 2025, reflecting seasonal loan yield trends. Non-interest income decreased by $7 million, impacted by higher retailer share arrangements and lower merchant discount fees from reduced big-ticket credit sales, though partially offset by new paper statement fees.

Operational efficiency remains a key focus, with total non-interest expenses decreasing by 17% year-over-year to $476 million. Adjusted for the prior year's $96 million impact from repurchased debt, adjusted total non-interest expenses decreased by 1%. This reduction highlights the effectiveness of the company's operational excellence initiatives and disciplined expense management. The provision for credit losses decreased, driven by a $28 million reserve release and net principal losses of $327 million, compared to a reserve build and higher losses in the prior year. The reserve rate stood at 11.70% as of September 30, 2025, reflecting improving credit metrics and higher-quality new account acquisitions. The company's credit quality continues to benefit from multiyear credit tightening actions and product mix shifts, with the percentage of cardholders having a 660-plus prime score increasing to 58% in Q3 2025.

Capital Strength and Shareholder Value Creation

Bread Financial has made significant strides in strengthening its balance sheet and optimizing its capital structure. The Common Equity Tier 1 (CET1) capital ratio increased to 14% in Q3 2025, up from 13.30% in Q3 2024, driven by net earnings and partially offset by share and debt repurchases. A critical component of its funding strategy is the growth in direct-to-consumer (DTC) deposits, which increased 9% year-over-year to $8.20 billion as of September 30, 2025, now representing 47% of total funding, up from 41% a year ago. This shift towards a more stable and lower-cost funding base enhances liquidity and financial resilience.

The company has been proactive in managing its debt, reducing parent-level debt by 50% (over $1 billion) since Q4 2021 and achieving its double leverage ratio target of below 115%. Key actions include the redemption of $100 million in Senior Notes due 2026 in January 2025, a $400 million Subordinated Notes offering in March 2025, and multiple tender offers and repurchases of Senior Notes and Convertible Notes throughout 2025. As of September 30, 2025, only $0.10 million of Convertible Notes remained outstanding. These actions demonstrate a disciplined approach to capital allocation and debt optimization.

External recognition of BFH's financial strength is evident in the credit rating upgrades received in October 2025 from Moody's (MCO) and Fitch, with S&P (SPGI) also changing its outlook from Stable to Positive. This improved credit profile supports access to cost-effective unsecured funding. Furthermore, BFH is committed to returning value to shareholders. In August 2025, a $200 million board-authorized share repurchase program was announced, with an additional $200 million increase approved in October 2025, bringing the total available for future repurchases to $340 million. Concurrently, the Board declared a 10% increase in the quarterly cash dividend to $0.23 per share, signaling confidence in the company's sustained profitability and commitment to annual dividend growth tied to book value expansion.

Outlook and Managing Macroeconomic Headwinds

Bread Financial's 2025 financial outlook reflects a nuanced view of the economic environment, anticipating continued consumer resiliency, inflation remaining above the Federal Reserve Board's target rate, and a slowing yet stable labor market. The company expects Federal Reserve Board interest rate decreases, which are projected to result in slight net interest margin compression due to BFH's slight asset sensitivity and lagged cost of funds impacts.

For the full year 2025, average credit card and other loans are expected to be flat to slightly lower compared to 2024. Total net interest and non-interest income, excluding any gain on portfolio sale, is anticipated to be relatively flat. This is attributed to implemented pricing actions being offset by interest rate decreases, a continued shift in risk mix leading to lower delinquencies and billed late fees, and a product mix shift towards co-brand, proprietary, and installment lending products, which typically have lower finance charges and billed late fees.

Despite these pressures, BFH expects to generate positive operating leverage in 2025, excluding portfolio sale gains and the pretax impacts from repurchased debt, a testament to efficiencies gained from ongoing operational excellence initiatives and disciplined expense management. The full-year net principal loss rate is projected to range from 7.8% to 7.9%, with management expecting to be at the lower end of this range given current credit trends. The effective tax rate for 2025 is now expected to be in the range of 19% to 20% due to larger discrete items, with future years anticipated to normalize to 25% to 26%.

Key risks to this outlook include persistent macroeconomic uncertainty, potential changes in monetary and fiscal policies (including tariffs and trade policies), and their impact on consumer spending and employment. The company remains vigilant with its credit strategies, acknowledging that while entry rates into delinquency are better than pre-pandemic levels, mid- to late-stage roll rates are still elevated. Furthermore, BFH's wholly-owned subsidiary, Comenity Servicing LLC, is operating under an FDIC consent order from November 2023, addressing IT systems and risk management shortcomings, though without monetary penalties. Litigation related to the LoyaltyOne spinoff also presents a contingent liability, with claims seeking damages of approximately $750 million.

Conclusion

Bread Financial Holdings, Inc. has undergone a profound transformation, emerging as a digitally adept and financially resilient player in the credit services industry. The company's strategic focus on tech-forward payment and lending solutions, coupled with a disciplined approach to capital management and operational excellence, forms a compelling investment thesis. Its ability to diversify its product mix towards higher-quality co-brand and proprietary offerings, secure long-term partnerships, and leverage advanced technology for efficiency and customer engagement positions it for sustainable growth.

While macroeconomic uncertainties persist and present ongoing challenges, BFH's strong balance sheet, improving credit metrics, and commitment to shareholder returns underscore its capacity to deliver long-term value. The company's proactive management of risks, coupled with its strategic investments in technology and operational efficiencies, provides a solid foundation to navigate evolving market dynamics and achieve its financial targets, making it a noteworthy consideration for discerning investors.