Bread Financial Earnings: Credit Costs Remain a Headwind, but Prospects Are Improving

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.