Company Reports

After two years of rapid interest rate hikes, the rising rate cycle is likely over. While there is still considerable uncertainty surrounding the path that interest rates will take from here, the market is now anticipating falling interest rates in 2024, with interest rate futures projecting one to three rate cuts in 2024 and even more the following year. Like their traditional banking peers, many of the consumer finance-focused banks in our coverage did benefit from rising interest rates. However, this benefit was not uniform; there were clear winners and losers. We expect a similar phenomenon in a period of falling interest rates, with different firms holding significantly different exposure to interest rate movements.

No-moat Bread Financial reported decent first-quarter results that were largely in line with our expectations, though it does endure challenges from higher credit costs and the need to adapt to potential changes to late-fee regulations. Net revenue fell 23.1% from last year to $991 million, but the decline is exaggerated because the bank's results last year benefited from a $230 million gain from the divestiture of the BJ’s Wholesale portfolio. Without this comparison, the first-quarter decline would have been only 6.4%. EPS was $2.73, which translates to a return on tangible equity of 23.1%. We do not plan to materially alter our $44 fair value estimate. We see the shares as undervalued but caution investors that the firm faces significant uncertainty around its ability to mitigate the impact of new late-fee rules and the outcome of legal challenges to those rules.

We are reducing our fair value estimate for Bread Financial from $50 per share to $44, as we incorporate a higher chance that the Consumer Financial Protection Bureau’s new rules on credit card late fee limits are implemented as proposed. These new rules would limit late fees to $8 dollars per violation from the current $30 for first time offenses and $41 for additional missed payments. While these rules will impact all the card issuers in our coverage, Bread is particularly vulnerable to these changes due to its unusually weak credit quality and high reliance on late fee income.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

No-moat-rated Bread Financial reported weak fourth-quarter results as rising credit costs pressured the bottom line and average loans outstanding decreased. Net revenue decreased 1.5% from both last year and last quarter to $1.01 billion. Net income increased to $45 million from a loss of $134 million last year, inclusive of a $380 million credit reserve build in the prior year. These results translate to a return on equity of 6.2%, well below Bread’s historical average. As we incorporate these results, we do not expect to materially alter our $50 fair value estimate. We see the shares as undervalued at current prices, though we remind investors that Bread is facing considerable uncertainty in 2024 as credit risks rise and new rules on late fees are potentially implemented.

No-moat-rated Bread Financial reported solid third-quarter results that came in better than we had expected, as the company benefited from a surprisingly high net interest margin. The bank’s net interest income rose 5% from last year to $1.03 billion despite the sale of the BJ’s Wholesale portfolio earlier this year. Meanwhile, Bread’s net income rose 29% to $173 million, which translates to a return on average equity of 28.7%. As we incorporate these results, we do not plan to change our $50 fair value estimate for Bread, and we see the shares as materially undervalued.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

No-moat-rated Bread Financial reported solid second-quarter earnings as the bank made meaningful improvements to its balance sheet. While year-over-year revenue growth was modest, mostly due to the sale of the BJ's Wholesale Club portfolio, the improvements Bread has made to its capital structure and funding sources made up for it.

At first glance, Bread's first-quarter results were extremely strong, with a dramatic improvement in revenue and earnings. However, once the one-time gains associated with the sale of the BJ's Wholesale Club credit card portfolio are stripped away, the underlying results showed declining profitability. Even so, we appreciate the positive impact the sale has had on Bread's financial position.

Many of the credit card-focused firms under our coverage have developed deep discounts to our fair value estimates as concerns about rising credit costs have been aggravated by recent turmoil in the banking sector following the failure of Silicon Valley Bank. While the market has gone too far in discounting many of these names, the concern is not entirely unwarranted. Rising interest rates, debt levels, and shelter costs have increased financial pressure on consumers as a larger portion of their income becomes tied up in servicing financial obligations, and we expect this pressure to continue to build in the near term.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

No-moat-rated Bread Financial Holdings reported weak fourth-quarter results as the benefit of impressive loan growth during the quarter was overwhelmed by a significant jump in the bank's provisioning for loan losses. Bread's net revenue growth during the quarter was excellent, increasing 21% from last year and 5.5% from last quarter to $1.03 billion. On a less positive note, the bank reported a net loss of $2.68 per share compared with a gain of $2.69 just last quarter. The decline in earnings was primarily due to higher provisioning, as Bread built $380 million in reserves this quarter versus a $187 million build in the prior-year quarter. While reserve builds are partially a reflection of Bread's strong loan growth, higher net charge-offs also played a role as Bread's credit losses have normalized at a faster rate than its peers.

No-moat Bread Financial reported solid earnings that were roughly in line with our expectations, as strong net interest income was offset by rising credit costs and higher expenses. Net revenue grew 15% year over year and 9.6% sequentially to $979 million. On the other hand, earnings per share of $2.69 dropped 40% from last year. The decline in earnings was primarily due to higher provisioning for loan losses, as Bread built $86 million in reserves this quarter versus a $10 million build in the prior-year quarter.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private-label credit cards and buy now/pay later businesses its only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private label credit cards and buy now-pay later businesses being its only two product lines. However, Bread’s retail credit card business is under pressure. The company has historically targeted midsize retailers for its partnerships. This strategy has led to a partnership base that is weighted toward mall-based retailers, which are in decline due to increased online shopping. Many of Bread’s retail partners have already filed for bankruptcy, including the Ascena Retail Group in July 2020 and Forever 21 in 2019. Bread has also suffered defections, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

No-moat-rated Bread Financial reported mixed second-quarter results, with strong loan growth and new contract wins being offset by higher spending and reserves for credit losses. Bread reported net revenue growth of 16.9% from last year to $893 million while earnings per share were $0.25, down from $5.47 in the year-ago period. The decline in earnings was primarily due to higher provisioning for loan losses as Bread built $166 million in reserves this quarter versus a $206 release in the prior year's quarter. As we incorporate these results, we a reducing our fair value estimate for Bread Financial to $63 per share from $69. Around $2 of the decline is from the higher reserve assumptions, while the remainder comes from higher operating costs expectations offset somewhat by higher receivable growth projections.

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private label credit cards and buy now pay later businesses being its only two product lines. However, Bread’s retail credit card business is under pressure. The company has historically targeted midsize retailers for its partnerships. This strategy has led to a partnership base that is weighted toward mall-based retailers, which are in decline due to increased online shopping. Many of Bread’s retail partners have already filed for bankruptcy, including the Ascena Retail Group in July 2020 and Forever 21 in 2019. Bread has also suffered defections, losing Wayfair and Meijer to Citi in 2020 and BJ's Wholesale Club to Capital One at the start of 2022. We see retail partner loss as an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.