BFH - NYSE

Good morning. And welcome to Bread Financial’s Fourth Quarter Earnings Conference Call. My name is Emily, and I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today’s presentation, the floor will be opened for your questions. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.

Thanks you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website. On the call today we have Ralph Andretta, President and Chief Executive Officer of Bread Financial; and Perry Beberman, Executive Vice President and Chief Financial Officer of Bread Financial. Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are based on management’s current expectations and assumptions, and are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC. Also on today’s call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website at breadfinancial.com. With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Starting with slide three. I will highlight our major accomplishments for 2023. We continue to execute on our strategic initiatives by growing responsibly and strengthening our balance sheet. Additionally, we continue to optimize data and technology while investing to capture future growth opportunities, inclusive of the sale of the BJs portfolio in February of 2023 and our strategic credit tightening, loans grew at a low-to-mid single digit rate compared to 2022 as forecasted. PPNR or profitless tax and loan loss provisions grew for the full year, as well as for each quarter in 2023, demonstrating our ability to deliver sustainable profitable growth. During 2023 we launched and renewed several key brand partner relationships. New partners included iconic brands such as Dell Technologies and the New York Yankees, and we were pleased to renew multiple partners including our longstanding business relationship with Signet. Importantly, our top five partners are currently secured through 2028 and more than 85% of our current loan portfolio has contracted through 2025. Our continued success reflects the dedication of our associates, our nimble customer first approach, our enhanced -- and our enhanced technology capabilities. We achieved significant progress in reducing our parent level debt during the year while refinancing both our term loan and revolving line of credit. We also obtained our inaugural holding company issuer credit rating in November. Following, we completed a $600 million senior unsecured note offering in December that was opportunistically upsize to $900 million earlier this month. With a portion of this new financing, we paid off our term loan early in December of 2023. Consistent with our parent level debt reduction plan, we paid down approximately $500 million of parent unsecured debt in 2023 and an additional $100 million in January of 2024. Additionally, we strengthened our balance sheet highlighted by 18% year-over-year growth to direct -- our direct-to-consumer deposits of $6.5 billion at year end. These actions coupled with our strong cash flow generation and disciplined capital allocation improve the company’s financial flexibility and capital ratios further fortifying our balance sheet. Investments in technology and driving innovation are paramount to our success. In 2023 we hired more than 100 new engineers, the cloud expertise and optimize our data and technology by adding new systems capabilities. These included API enhancements, enriched software development kits, unified salesforce integration, virtual card commercialization, as well as the launch of the Bread Financial mobile app. We also successfully converted a majority of our Comenity Mastercard portfolio to the new Bread Rewards American Express program for every day spend achieving strong activation and balanced build post conversion. Finally, we strengthened our relationship with our brand partners by delivering enhanced value propositions that helped drive sales, as well as meet the evolving needs of our customers. We are pleased with the progress we achieved in 2023 and remain focused on driving continued success throughout 2024 and beyond. Moving to the highlights for the fourth quarter on slide four. The fourth quarter marked our 11th consecutive quarter of year-over-year PPNR growth, further demonstrating our ability to deliver sustainable profitable growth. Net income was $43 million despite credit losses above -- or above our through the cycle average in the current challenging macroeconomic environment. Additionally, we continue to deliver on our commitment to build long-term shareholder value as our tangible book value per share approached $44, representing a 49 year-over -- 49% year-over-year increase. We are proud of the progress we have made in executing on our debt plan, strengthening our balance sheet and enhancing our financial resilience. The economy continued to be impacted by macroeconomic headwinds, including persistent inflation, high interest rates and the resumption of student loan repayments. These factors led to a moderation in consumer spending and pressured consumers’ ability to pay. As we enter 2024, we maintain disciplined credit risk management, given continued economic pressures that affect consumer spending and ability to pay. Our ongoing prudent credit tightening is driven by both the current environment and uncertainty around future economic conditions persistent inflation pressure and the impact of elevated interest rates. We have continued to responsibly manage our underwriting and credit line management, while proactively eliminating our exposure by tightening approval rates, pausing line increases and prudently implementing credit line decreases. Although these actions impacted our 2023 sales and loan growth, our credit distribution has stabilized above pre-pandemic levels. In anticipation of the CFPB’s final rule on credit card late fees, we are proactively implementing our plans intended to address the change in regulation, which if left unmitigated would have a significant impact on our business. We are engaged with our brand partners regarding necessary mitigating actions and expect to implement many of these actions prior to the final rule becoming effective. Additionally, we continue to strategically diverse business to be less relying on late fees with continued growth in our co-brand and proprietary products, and our improved credit profile. We expect the rule to be challenged in court and we will be monitoring the situation closely. Having successfully managed through significant regulatory changes and varied credit cycles in the past, our seasoned leadership team is focused on addressing the impact to our business while continuing to generate strong returns through prudent capital and risk management. Turning to slide five, as we have highlighted previously, our disciplined capital allocation strategy, which focuses on profitable growth, improving metrics and reducing parent level debt has driven substantial growth in tangible book value over the past several years. Looking at the first chart, you can see that since the first quarter of 2020, we have more than tripled our TCE to TA ratio. We aim to further enhance our total company capital metrics from where we are today. Additionally, we will balance achieving these targets with continued investment in our business and long-term growth, consistent with our capital priorities. Later this year we plan to host an Investor Day, where we will further discuss our capital targets and allocation strategies. Moving to the second chart, I will again highlight the progress we have made with respect to debt reduction. In just over three years, we have reduced parent level debt by 54% paying down more than $1.7 billion and we paid down an additional $100 million this week, which is not included in that figure. Finally, the improvement in our tangible book value per share has grown at a 38% compounded annual rate since the first quarter of 2020. Supported by our strong cash flow generation, we expect to continue to grow our tangible book value. We believe this growth combined with our meaningfully improved financial resilience and strengthened balance sheet should yield a company valuation that is a multiple of our tangible book value. We remain confident in our strategy and are focused on managing our business responsibly to build long-term value for our stakeholders. Turning to slide six, let’s review our key focus areas for 2024. Our initiatives build on the momentum we generated in 2023, while enabling us to proactively adapt to evolving macroeconomic conditions. Our key focus areas for 2024 include, growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings and driving operational excellence. We remain committed to generating responsible growth, while further scaling into first finding our product offerings to align with a challenging economic landscape. In doing so, we will optimize brand partner growth and revenue opportunities. Although our sales and loan growth may moderate in 2024, our responsible decisions are focus on creating long-term value for shareholders. Managing the macroeconomic and regulatory environment effectively is fundamental to our success, with the proposed CFPB credit card late fee rule coupled with persistent macroeconomic headwinds pressuring consumers, we are executing several mitigation strategies intended to help offset the anticipated financial impact. Perry will provide more details in his remarks. Accelerating our digital and technology capabilities remains a top priority and I am pleased to welcome Allegra Driscoll to our organization as new -- as our new Executive Vice President and Chief Technology Officer. Allegra’s proven track record as an innovative envision leader when combined with our deep understanding of financial services will be essential as we advance our tech innovation and modernization. Throughout 2024, we will focus on further building our capabilities to enhance customer experience and satisfaction. Finally, we will intensify our focus on operational excellence to accelerate continuous improvement gains that drive improved customer experience, enterprise-wise efficiency, reduced risk and value creation. Our goal is to consistently generate expense efficiencies that enables reinvestment in our business, support responsible growth and achieve our targeted returns. Before I turn it over to Perry, I want to thank our associates for their continued dedication and hard work. Our seasoned leadership team remains committed to generating strong returns through prudent capital and risk management as we move forward. I will now turn it over to Perry.

Thanks, Ralph. Slide seven provides our 2023 financial highlights. Bread Financial’s credit sales of $28.9 billion decreased 12% year-over-year reflecting the sale of the BJs portfolio in February 2023, moderating consumer spending and our ongoing strategic credit tightening, partially offset by new partner group. Average loans of $18.2 billion increased 3% year-over-year driven by the addition of new partners. As Ralph noted, we have proactively tightened our credit underwriting and credit line assignments for both new and existing customers given the economic uncertainties and pressures affecting a large portion of our customer base. Revenue increased $463 million or 12% year-over-year driven by higher finance charge yields and non-interest income including the gain on portfolio sale, partially offset by higher interest expense and reversals of interest and fees resulting from higher gross credit losses. Income from continuing operations increased $513 million to $737 million driven by a lower provision for credit losses and gain on portfolio sale, partially offset by higher income taxes. Moving to our fourth quarter financial highlights on slide eight. Similar to our full year drivers, fourth quarter credit sales and average loans were down year-over-year due to the sale of BJs portfolio, moderating consumer spending and credit tightening. Revenue reached $1.0 billion in the quarter, down 2% year-over-year due to lower late fee revenue, higher interest expense and higher reversal of interest and fees resulting from higher gross credit losses, partially offset by higher finance charge yield in non-interest income. Total non-interest expenses decreased 6% year-over-year, as we continue to gain operational efficiencies and better align our expenses with a more moderate growth outlook. Income from continuing operations increased by $179 million driven primarily by a lower reserve build. Looking at the financials in more detail on slide nine. Total interest income for the quarter decreased 5% year-over-year, but increased 2% for the full year compared to 2023. Fourth quarter and full year non-interest income benefited from three factors, higher cardholder and brand partner engagement initiatives in the prior year post our conversion, higher merchant discount fees and interchange revenue earned in the current year, and lower payments under our retailer share agreements due to lower credit sales and higher losses. Total non-interest expense decreased 6% from the fourth quarter of 2022, yet was up on an annual basis as anticipated. The year-over-year decrease in the fourth quarter was primarily driven by a decrease in card and processing costs, including fraud and a reduction in marketing expenses and depreciation amortization costs, partially offset by higher employee compensation and benefits costs. For the full year, investments in talent, technology and marketing primarily drove the increase. Additional details on expense drivers can be found in the appendix of the slide deck. As Ralph mentioned, pre-tax pre-provision earnings or PPNR grew for the 11th consecutive quarter, increasing 3% year-over-year in the fourth quarter. Turning to slide 10, loan yields increased 170 basis points year-over-year, benefiting from the upward trend in the prime rate causing our variable price loans to move higher in tandem. Both loan yield of 27.7% and net interest margin of 19.6% were pressured sequentially from a seasonal increase in the reversal of interest and fees related to higher sequential gross credit losses. We expect this pressure to continue and lead to a sequential reduction in the net interest margin in the first quarter of 2024. Also funding costs continue to rise but remained in line with our expectations. As you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $6.5 billion in the fourth quarter, as well as meaningful reductions in our unsecured debt over time. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain flexibility of our diversified funding sources including secured and wholesale funding to efficiently fund our long-term growth objectives. Moving to slide 11, our delinquency rate for the fourth quarter was 6.5% up from the third quarter as expected, driven by continued macroeconomic pressures. We expect to continue delinquency rate to move slightly higher this month, before stabilizing and moving lower in 2024. The net loss rate was 8.0% for the quarter, compared to 6.3% in the fourth quarter of 2022 and 6.9% in the third quarter of 2023. The fourth quarter net loss rate was elevated compared to last year’s level due to more challenging macroeconomic conditions, pressuring the consumer payment rate that I mentioned, as well as ongoing credit tightening and slower responsible growth impacting the denominator. The reserve rate decreased sequentially to 12.0% as transactor balances increased seasonally in the fourth quarter. We expect the first quarter 2024 reserve rate to return to approximately third quarter 2023 levels as transactor balances are paid down. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model in anticipation of continuing macroeconomic challenges and uncertainty and the consequential impact on our future credit losses. Despite these headwinds, our credit risk score distribution mix remained flat to the third quarter as our percentage of cardholders with a 660 PLUS credit score remained above pre-pandemic levels due to our prudent credit tightening actions and a more diversified product mix. These dynamics reinforce our confidence that our credit metrics will show improvement in the second half of 2024. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. We closely monitor our projected returns with the goal of generating risk-adjusted margins above our peers. Moving to slide 12, we have significantly enhanced our financial resilience, strengthening our balance sheet and funding mix while effectively managing credit risk. Over the past few years, we have diversified our product mix through partner co-brand growth, the introduction of two proprietary cards and the launch and expansion of Bread Pay for instalment lending. Our co-brand and proprietary products now comprise approximately 50% of our credit sales, enabling us to capture incremental general purpose sales as consumer spending pattern shift to more non-discretionary spend in response to evolving economic conditions. Additionally, our broader product suite has increased our total addressable market and diversified our spend. Direct-to-consumer deposits, which have continued to grow steadily provide an additional source of funding that has strengthened our balance sheet and enhanced our financial flexibility. We have strengthened our balance sheet further by reducing debt and building capital, while maintaining a conservative loan loss reserve. Our loan loss reserve rate is nearly 300 basis points higher than our CECL day one rate in 2020. Our quarter end total loss absorption capacity, which we define as our allowance for credit losses plus Tier 1 capital divided by total end of period loans was 23%, providing a strong margin of protection should more adverse economic conditions arise. We remain confident in our disciplined credit risk management and ability to drive sustainable value through the full economic cycle, delivering responsible profitable growth remains a top priority, even if doing so requires a disciplined slower rate of growth during extended economic uncertainty. Finally, slide 13 provides our 2024 financial outlook. Our 2024 outlook factors in an expected slower rate of credit sales growth as a result of continued moderation in consumer spending and ongoing strategic credit tightening. Both of which will pressure loan growth and the net loss rate. In addition, our 2024 outlook assumes multiple interest rate decreases by the federal reserve in the second half of the year, which will pressure total net interest income. At this time our outlook does not factor in the potential impacts of the proposed CFPB late fee rule. Based on our current economic outlook, executed and expected proactive credit tightening actions, higher gross credit losses and the visibility into new business pipeline, we expect 2024 average credit card and other loans to be down low-single digits relative to 2023. Excluding the BJs portfolio, which was sold in 2023, we expect 2024 average loans would be up low-single digits. Total revenue growth for 2024 excluding gains on portfolio sales is anticipated to be down low-to-mid single digits, driven by both lower average loans and net interest margin. Note, that the BJ portfolio exit in 2023 reduced our 2024 year-over-year revenue growth guidance by 1% to 2%. We expect our full year net interest margin to be below the full year of 2023 rate due to higher reversal of interest and fees given higher gross credit losses, declining interest rates and a continued shift in product mix to co-brand and proprietary products. Consistent with our prior commentary, the potential initial impact of the CFPB credit card late fee rule is significant to our business given our mix of private label accounts and deeper underwriting. For context, while not included in our 2024 outlook, assuming a hypothetical October 1, 2024 effective date, if the rule were to be implemented as proposed, our current estimate is that the rule would reduce fourth quarter 2024 total revenue by approximately 25% relative to the fourth quarter of 2023. This estimate is net of certain mitigation actions that we will proactively implement this year. It should be noted that the estimated revenue impact does not yet include any contractual changes to the retailer share arrangements with partners. Once the final rule is published, we will take further mitigating actions in coordination with our brand partners to preserve program profitability over the long-term. We expect the financial impact to be increasingly mitigated over time as our actions take effect with substantial progress expected within the first four quarters post-implementation. As I discussed in December at an Industry Conference, certain mitigation actions will require a longer timeframe to reach full mitigation value, such as APR changes. Therefore, we will proactively implement certain actions in advance of the final rule implementation, inclusive of fee and policy changes. Additionally, we expect there will be impacts of future loan growth due to the necessary underwriting changes to ensure we maintain profitability thresholds, which unfortunately will restrict access to credit for some consumers. All that said, given that a final rule has not yet been published and industry litigation is expected, the timing of the rule implementation and resulting financial impact will vary. In fact, it is possible there is no financial impact in 2024. Shifting to operating leverage, as a result of efficiencies, gained from ongoing investments in technology modernization and digital advancement, along with disciplined expense management, we aim to deliver nominal positive operating leverage for 2024, despite net interest margin headwinds. With our focus on expense discipline and operational excellence, we expect total expenses will be lower in 2024 than 2023 assuming our current economic outlook remains intact. We expect a net loss rate in the low 8% range for 2024, peaking in the first half of the year with each of the first two quarters of the year in the mid-to-high 8% range as inflation continues to pressure consumers’ ability to pay and moderate their spend. Our outlook is inclusive of our ongoing credit tightening actions and expected slower loan growth impacting the net loss rate. Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26% with quarter-over-quarter variability due to the timing of certain discrete items. In closing, the executive leadership team and I are confident in our ability to successfully manage risk return tradeoffs to this challenging economic environment, while continuing to make strategic investments that drive long-term value for our stakeholders. Operator, we are now ready to open up the lines for questions.

Thank you. [Operator Instructions] Our first question today comes from the line of Vincent Caintic with Stephens. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking my questions and I appreciate the CFPB late fee estimate and putting an impact number out there and so I wanted to unpack that a bit. On the 25%, I guess, I want to understand the confidence level on that, as well as how much further lower it can go. So thinking about the 25%, if you have -- I guess, how much of that -- how much mitigating impacts are influenced in 25%. So maybe, like, what would it be without the mitigating impacts and then how low do you think it could go and what impacts or what mitigations would need to happen to get to that lower rate? Thank you.

Thanks, Vincent, for the question. I am glad you appreciate us giving some guidance and increasing transparency there. What we have provided is, what I’d say is, a downside scenario, meaning it’s -- assuming the late fee rule comes out as proposed at $8, 25% cap with an effective October 1 with no partner adjustment considerations there, there were program considerations. And as we talked about in what I provided at one of the past conferences, some of the mitigating actions are just going to take time, right? APR changes take time to burn through. So there’s a lot more value that will come from mitigating action. So within, you can imagine, if you think about the six months of impact that might be in place if we start to do some pricing changes, if the rule comes out pretty soon, there’s not a, I’d say, a ton of mitigation within that number. The value is going to come over time.

Vincent it’s Ralph. I think the thing to remember is, we have a really seasoned team here that has been through Card Act and has managed through that and managed to return to profitability. So that’s what we are going to do. We are going to focus on what it takes to return to profitability. It’s going to take a little bit of time. We thought it was important today to kind of put it down, the worst case scenario out there, but we are really focused on closing the gap over time and we have been working on it since February of 2023.

Okay. I appreciate it. So it sounds like the 25%, you only really have six months of higher APRs in there. And then could you maybe discuss what actions you expect to take once the rule becomes finalized and what the impact of those mitigation strategies could be? And then also what the merchants are -- your discussions with the merchants on all of these? Thank you.

Yeah. And when you think about the actions, it will -- yeah, when you think about pricing actions, some of those require partner agreement. So Val Greer and her team have been very active in working with each partner, meeting with them all, trying to figure out what the right solution is for them, should this rule go into effect. And so part of it is you need to have the rule actually come out with the final parameters, and then each partner will work with our team to figure out what’s the right level for them to work through this. I mean, it could be promotional fees for some partners. They are not having to change pricing. Others are going to want to lean in harder on APRs and some may want to give up some royalties to make sure we still underwrite deeper. There’s going to be credit actions that are taken. So all the things that we have talked about, all the different levers are going to be in play and it’s really going to be partner dependent, product dependent in terms of what that will look like. So it’s hard to nail that down with a lot of specificity until the rule comes out, until the team gets to work with each partner in order to figure out what’s the right path for them.

Okay. I appreciate it. Very helpful. I will get back in the queue. Thank you.

Our next question comes from Mihir Bhatia with Bank of America Merrill Lynch. Please go ahead.

Hi. Thank you for taking my questions and good morning. Just off maybe just staying on the late fee topic, I think, you said the net of the mitigation actions, it will be 25% and we appreciate the specificity of the disclosure. But I was wondering if you could maybe taking step further, what will be the gross impact if you don’t implement the net, the mitigation actions. What I am trying to understand is how much are you mitigating proactively versus what it would be if you didn’t, because it also sounds like, hey, this will might not come in. There will be litigation. So just trying to understand what is the, I guess, I don’t know if the insurance is the right word, like proactively mitigating you are taking a bit of a revenue hit too, so or maybe getting revenue boost, I guess? Yeah.

Yeah. Mihir, I appreciate that question, right. I think some of it is, we are giving you the hypothetical downside risk for the fourth quarter of this year. Look, I don’t bet, and so, but some that do would say, there is a highly unlikely, it’s highly likely that rule would actually impact this year. But for us, we wanted to give you a sense of what it would look like or could look like if it came out as proposed impacted the particular quarter that we mentioned, because we just released the fourth quarter of 2023, so we are giving you a comparable quarter whereas if we roll that forward to first quarter of 2025 or second quarter of 2025, it becomes much harder to provide a degree of estimation. So the degree of mitigation is not significant relative to the impact of the fee change itself. I mean, there’s a number of things. And to your point, the longer litigation goes and to the extent that our partners and us say, hey, let’s go take some early actions and in anticipation this could happen to get further along that mitigation curve, the value curve. Yeah, that could provide some near-term benefit, but in that my expectation would be with partners, there’s -- there could be some partner sharing, investment program in different ways. So I don’t want to say there is a boost, because our goal is not to benefit from pending, what we call, detrimental flawed rulemaking.

Got it. Okay. Thank you. And then just switching gears, I want to talk about credit performance. Obviously, the two-part question. First is, are you still comfortable with your longer term guide through the cycle below 6% and how do you get there -- what gives you confidence you will get there, I mean, delinquency. Do you think it’s exiting 2024 thing, exiting 2025 thing, like, I am just trying to understand what the thoughts to get there looks like? Obviously, the credit tightening actions help, but just trying to understand the path? Thank you.

Yeah. I am confident that we will get back below 6% and some of its math. And so, the timing by which we get there, you would have to tell me your confidence in the economic outlook and that’s going to be part of a driver. So when you look at any past cycle, what happens is, you have a period of elevated losses and the losses, the higher loss rates and we are living through right now we have just provided guidance that we have a lower loan. So you are putting on the lower new account vintages. Now they are going to be better credit quality and but they are not large enough to replace what’s a trading through higher gross losses and normal attrition. But then as you come out the other side of the cycle, when you have an economic improvement. Now the losses have cleansed or the riskier customers are cleansed out of the book, you are putting on larger new vintages and that -- I will say that growth math a lower loss rate and now you are in a better economic cycle. Coupled with for us, you are also continued a product mix shift. So we have very good confidence that we will get there. Now I can’t pinpoint the quarter or the year, because a lot of it is the economic improvement that needs to occur in tandem with that.

Got it. Thank you. Thank you for taking my question.

Sure. Thank you.

Our next question comes from the line of Sanjay Sakhrani with KBW. Please go ahead, Sanjay.

Thanks. Good morning. I don’t know, Perry, Ralph, I guess, when I think about the late fee impact as it stands right now. Could you just talk about maybe like, what you can do to offset this on expenses, because I understand like the APRs probably take couple of years, right? So in the absence of some kind of delay or deferment, it seems like next year if everything sort of static, you could actually lose money or please correct me if I am wrong, unless there is some expense offsets and some of the offsets sort of flowed through quicker than what we think. Maybe you could just talk about that plus the fact or the question as to how -- can you get back to the profitability levels that you were at pre this regulation over time and sort of what the time horizon would be?

Yeah. Thanks, Sanjay, for the question. I think your question is one that is again we will go hypothetical, because the rule is not final and where it lands, we don’t know. In terms of the expense management, I think Ralph has been pretty clear and we have all been clear, we are to continue to invest in this business for long-term and not make short-term decisions that would adversely impact the business and really put us at a competitive disadvantage and not be able to serve our customers with digital capabilities, our brand partners with what they need as well. So, I think, in terms of expense efficiencies, that’s in our DNA, right? So that’s the thing where we talk about operational excellence. Our continued focus on improvement you are seeing that come through in the second half of 2023 results, you are going to see that in our commitment into 2024. But there’s nothing that would be appropriate to do to rip down expenses that would cause sacrifice of our future. There’s so many things you have to work through and you got to work with the revenue side of this while you are making tighter underwriting changes, we will clearly accelerate things with its digital capabilities and mobile deployment things that help improve expenses, but you would do that anyways at this company. But it’s just one of these things that you just have to, as Ralph said, you got to work through this, it’s -- and some it will result in tighter underwriting, sure you will have some maybe have fewer accounts. So that gives you a little bit of expense boost, but it is grinding your way back through the revenue side of the equation, and perhaps, there is less risk in the portfolio. So you have lower losses, you have less provision build or low reserve rate. All of this is going to play out. You need the final rule and we need to work with each partner to figure out what are those mechanics going to look like. So we understand the resulting, I say, front book coming out the other side. As a result, is your comment around getting back to returns, it is possible the returns to be a little lower than they would have been pre-CFPB, but expect strong returns, because you would have a less -- slightly less risky business in that process, too, because a number, Americas and consumers will no longer have access to credit that were on the riskier side of that spectrum.

Okay. Maybe just to follow up on credit. I think when we look at the peers. It seems like they are kind of turning the corner on credit. It seems like there’s gradual progress on your front. It just seems like when you qualitatively talk about your loan portfolio, it seems that there is a little bit more pressure on your end customer. Is it fair to say that, the inflation and the higher rates really hit them a little bit more disproportionately relative to other issuers in this space or when you parse out same customers inside those portfolios, they are behaving the same way. And what’s the light at the end of the tunnel, as inflation is receding, are you seeing better behavior. I am just curious just thinking through your credit performance? And then maybe just, sorry, follow-up on that, the reserve, right, progression over the course of this year, maybe you could just talk about how you are thinking about it? Thanks.

Yeah. So it’s interesting to hear you comment that others are turning the corner, because that actually can be thinking a little bit the opposite. I have been -- what we have been looking at, we have been seeing competitors have erosion of loss rates and delinquencies at a little faster pace than we have and we are still obviously seeing some pressure. But when you look at lag loss rates and other things, fourth quarter this year was fourth quarter last year. I don’t think that statement hold. So, but your point is right said, because the consumers that we serve. When you think about the consumers that are driving the -- driving engine within the economy as a top third of consumers. And yeah, they are seeing a little bit of higher rates on things and it’s an inconvenience for them. But the other two-thirds of Americans that are feeling the pressure. And as you noted, if that -- if inflation, it’s -- the products are costing more, we saw something the other day from an EY [ph] study where you said, the monthly cost for consumers are up $1,000 per month compared to what they were in 2019. That -- that’s $20,000 a year and their wages haven’t kept up. Now what’s happening is wage growth is starting to outpace inflation, inflation is coming down and that’s going to benefit the two-thirds that we serve. And I’d say, we probably serve the middle third in there. And the pressure they are feeling and the lag effect of higher interest rates are coming through, so they are seeing the drawdown and your savings are seeing the mounting debt, there’s pressure and that’s why it’s credit actions that we take will take a little time to take hold, but that’s what gives us the confidence as we move into the second half of next year. I hope that answered that first part of your question.

Yeah.

And as it relates to…

Reserve rate…

… reserve rate, let’s see, I think, we have been very transparent about what our belief was going to be with the reserve rate and we got ahead a little bit, right? We are looking around the corner. We increased the reserve rate recognizing that a lot of reserve models are geared towards changing unemployment. We took an approach, we said, there’s a lot of things model don’t care for which is a period of rapid inflation, persistently high rapid rise in interest rates. So that conservatism that we had placed in there is playing out and we feel confident that we have sufficiently cared for what’s ahead of us in the first half of the year. And candidly in the guidance that I gave where we said, hey, this reserve rate should remain pretty steady through most of the year, it is possible as you enter the back half, we start to see lower delinquency formation, the roll rate starts to improve and better economic outlooks. I would expect that the reserve rate will start to come down.

Okay. Perfect. Thank you.

Thanks, Sanjay.

Our next question comes from Moshe Orenbuch with Cowen. Please go ahead.

Great. Thanks. Perry and Ralph, I am hoping you could talk a little bit just as to -- you -- maybe unpack a little bit your expectations for balanced growth in 2024. You talked about slowing spend, you talked about some other actions that you have taken. Maybe if you could a little more granularity about some of those things and what that means, and perhaps, what that might mean in terms of relationships with your partners? And I have got a follow-up.

Yeah. So some of it. Moshe, thanks for the question. Some of it is geared towards the environment we are operating in and we have talked about this since, Ralph, he took over this company and I joined and Val and Tammy. We are focused on responsible growth at any more challenging economic times, you tightened the credit buybacks, lines and fewer new accounts and so last year we put on a smaller vintage than we did the year before. We are expecting a smaller vintage in 2024. And it’s kind of math, right? When you have a period of time when losses are going to be over 8%, the gross losses are even higher than that. So the attrition that’s coming off the existing book, it’s not getting replaced at the same rate, because you have a smaller front book coming on and within the book that you are putting on you have lower lines and there is also not as much economic activity as consumers are trying to moderate their spend. So it’s -- then as you get towards the back part of the year, you start to have to resumption of spend lower losses and you kind of hit that trajectory, that inflection point, we should start to have growth again.

Yeah. Moshe, I think about it. I am comfortable with low single-digit loan growth like BJs. I think that’s -- given the economy, given the pressures, that we are seeing out there, given some uncertainty, I think, we are -- I am comfortable with that growth. I think would be concerning if we would came out with something much higher than that in this type of environment. So I think conservativism and managing our growth responsibly is what we have done from day one and we will continue to do that.

Okay. When you think about the mitigating actions post the implementation of the late fee thing. Are there any issues with respect to interest rate caps, either statutory caps or cap that you would impose in terms of the level of rates, particularly given the -- your kind of average balances per account as you think about implementing those actions?

Moshe, that’s a good question and one I think the industry is grappling with. This is -- you basically hit the mark on one of the issues that I think that the unintended consequence of the CFPB action is that is going to cause much higher rates for a much broader set of the population, everybody is going to pay for those that are late and how high the rates will go will be pretty much market dependent. It’s not comfortable pushing rates up into the mid-to-high 30%, but that’s where things are getting pushed to.

Yeah. I think, unfortunately, what -- the consequence of this action, wherever it lands credit is going to be more expensive for everyone and people that have access to credit today may not have access to credit tomorrow and I think, unfortunately, that’s going to be part of the outcome.

Got it. Thank you.

Our next question comes from Jeff Adelson with Morgan Stanley. Jeff, please go ahead.

Yes. Hi. Thanks for taking my question. I guess I just wanted to dig in a little bit more again on the late fee impact that you are outlining here with no partner considerations. Could you just clarify what that means, is that more than normal formulaic RSA that offsets or is that already considered or is it more just what your contracts allow you to do in the event of some adverse versus change to the regulatory environment?

Yeah. No. The -- thanks for the question. The RSA that’s already contractually there is already contemplated in there in that estimate, but because the rule is not final, there hasn’t been final negotiations with those partners. So I would be disingenuous for me to give you an estimate with assumptions of what each of those partners might be willing to do with a hypothetical situation. So that’s why we framed the estimate as we did.

Okay. Got it. And then just the revenue guide, just to make sure it’s crystal clear, I know you are saying no assumed gain on sale. But does the revenue base for 2023 considered in the growth rate include or exclude BJs. I think you mean to include BJs in the base, correct?

Yes. In the base forecast that included BJs in the 2023 numbers with the base guidance and then in my comments I had mentioned that it would have reduced -- it would have lessened that reduction, if it was excluded from the prior year.

Okay. Great. Got it. Thanks for taking my question.

Thank you.

The next question comes from Reggie Smith with JPMorgan. Please go ahead, Reggie.

Good morning. Thanks for taking the question. You -- like this year you guys talked about, I guess, efficiency and one of the things and it’s maybe a bad metric, but I looked at your employee headcount. When I compare it to, I guess, Synchrony and Affirm relative to credit sales or receivables, it attracted a lot higher. My question to you is, is there anything fundamental about your business that requires more headcount, maybe it’s the credit [ph] that you experience or whether and if you kind of reimagine this business from scratch using modern technology and automation, would you need fewer people, I know that’s a delicate subject with employees both, but anything you can share around that idea will be helpful? Thanks.

Yeah. Thanks for the question. I think when you think about the drivers of what you require people for, right? Think about the risk organization, technology, there is some fundamental things you have to have in place to serve our business and obviously scale helps when you are talking about businesses that are 5x to 10x our size, they get that leverage of scale. The second thing is you also have to look at the number of accounts that we serve. I mean we serve one in seven households in America. So the -- we have a lot more accounts for the size of assets we have compared to some larger issuers. The other thing I’d say is what you are not picking up in those numbers is, the amount of offshore meeting with third parties vendors where they maybe they use third-party servicing versus your own servicing. So there’s a lot of things that go into those numbers to try to come up with a reasonable, I will say, comparatives. But your point is a good one that and that’s what we talk about operational excellence over time, and I think you have seen this over decades, technology is our friend and the more proficient we can make the customer reps who serve our customers give them better tools to do so or give the customers the ability to self-serve through mobile or chat, things that they have become accustomed to using and they no longer need to speak to somebody. All of those things over time help those ratios and these are things that we have talked about and Ralph talked about it, the investments that we have been making in mobile and you will continue to see those advancements for us over the next couple of years, which also helped to improve our efficiency.

If I could sneak one more in just a point of clarification. I would imagine there’s some seasonality to kind of the late fees and I was curious if it’s 4Q is typically a heavier late fee quarter than maybe others. I am just trying to this think about like what that 2025, like how much of that is kind of seasonal and like where it kind of move? Thanks.

Yeah. It -- that -- so, you are referring to the 25% impact from the CFPB rule?

Correct.

Yeah. No it’s apples-to-apples…

Yeah. Yeah. Yeah.

Yeah. That’s why we picked the apples-to-apples comparison of the same...

No. No. So -- yes, I guess, what I am asking is that, in general, do you tend to have higher late fees in the fourth quarter relative to the other three quarters on the seasonal perspective…

There’s no --no. There’s no material movement. I mean it’s more about tracking delinquency, right? So, it’s really, when you think about movement in late fee, delinquent accounts pay late fees and so we look at…

Right.

… delinquency movements, you are going to see movement in that end. Right now, you have been seeing some fluctuation, sometimes you have some more sloppy payers. I mean it’s an interesting dynamic. You have people who missed by a few days and that’s you call, I will say, a sloppy pay versus those that are actually going 30-day, 60-day delinquent. So its variation. Right now it’s more macro-driven then, I’d say, month-to-month seasonality.

Got it. Okay. Thank you.

Your next question comes from Bill Carcache with Wolfe Research. Please go ahead, Bill.

Thank you. Thanks, Ralph and Perry for all the proactive disclosures. I guess, maybe first question I had was whether providing so much detail suggests in any way that you view eventual implementation is likely, it just seems like there’s still this scenario where the rule gets immediately litigated and industry gets a win in the 5th Circuit which would likely push the legal process beyond the 2024 election and given Trump’s appointing is an opportunity to overturn the rule, if we assume a Trump win and a Biden versus Trump 2024 rematch. I was just hoping you could speak to that dynamic and your view of what this says about likelihood of implementation?

Yeah. So, it’s hard for us to predict political climate, though, I like to your outcome to be. But for us, it -- we view this as a high potential and because it’s a high potential, we wanted to understand what the impact is to our business and how we get on top of it to mitigate. So if it doesn’t happen and it gets pushed off, that’s terrific. But we -- hope is not a strategy. So for us it’s out there, it’s highly likely and we are going to mitigate it with this seasoned team.

Yeah. And this is Perry. I will add. Bill, thanks for the question. And I also like your thesis and I am hoping you are right. But as you know from us being together in the past, we get a lot of questions on the potential impact and in the spirit of transparency and knowing that we are giving guidance for the year and that if you have a catalyst event, it gave us the opportunity to provide some more context to help investors understand what that potential impact would be. Even though with highly likelihood almost certain litigation and delays we felt it was appropriate to provide that transparency.

Understood. That’s very helpful. Thanks. And like if I could follow up on the expense guidance. Is the hypothetical sort of, I guess, like, sort of nominal positive operating leverage, it’s like roughly 3% decrease in year-over-year OpEx growth sort of the right zipcode, given your revenue guidance?

It would decrease slightly more than revenue decreases, right? That would kind of…

Right.

…way to think about the math.

Understood. Great. Thank you for taking my questions.

Thanks, Bill.

Our next question comes from the line of Dominick Gabriele with Oppenheimer. Please go ahead.

Great. Excuse me. Thank you so much for taking my questions. If you think about the long-term loan growth expectation that you have had of roughly 10%-ish or so and the fact that you would be paring back from some of the lower FICO bands, most likely given this rule if it comes into effect. How does that affect your long-term loan growth rate and given if it slows it to maybe mid-single digits or whatever it may be, how do you think about that dynamic with your long-term net charge-off expectation? And I just have a follow-up. Thanks.

Yeah. A couple of things. So we will provide more information at Investor Day as we move forward. But if you think about what we have been doing, we have really been diversifying our portfolio. So when that -- when -- if you think about potentially this will be going into effect and we may not be able to underwrite at the levels we have been underwriting. We have co-brands. We have direct-to-consumer now products -- proprietary products. Those are products that will continue to grow over the long-haul and invest in and lean into those hard. So at this point, I think, to me, I would not want to change anything until we get to Investor Day where we can be more transparent in terms of how we are thinking about the future and how we are looking over the horizon.

Perfect. Thanks so much for that. And Perry you kind of answered this in another answer, but I was hoping to get some an example out there just to gauge the magnitude of some of this late fee impact on the efficiency ratio. If I even take the fourth quarter, right, and I kind of do what your guidance is telling me to do on the revenue and I take out 25% and I keep expenses roughly flat, because, ultimately, like you have said, you need to invest, you need your employee base, that could push the efficiency ratio, if I am not doing something wrong into the high ‘60s. I am just curious if that -- if that’s even remotely in the ballpark and then, I guess, it would step down over time as you get some of this back to a level of recapture that that’s feasible. But does that magnitude sound correct? Thanks so much.

Yeah. Thanks for the question. I mean, look, everyone is going plug some numbers into the model with this downside scenario. What I share with you is, there -- the math is going to be the math, right? And whatever that math turns out, I mean, the first quarter of impact is an impact to revenue and then over time that will get mitigated. So you will take a hit to all of your return metrics inclusive efficiency ratio in the first quarter of implementation, that should be the worst of it and then it gets better from there to get back to places where we are comfortable.

Yeah. That makes perfect sense. It just feels like to me that, you want to keep your expense base strong because you are looking towards the future and in order to do that, you would have to grow expenses or whatever it may be. I really appreciate it. Thank you so much.

Thank you.

Our next question comes from John Pancari with Evercore ISI. Please go ahead.

Good morning and thanks as well for the detail on the late fee. Sorry to go back to it again. But just -- I just want to confirm a couple of things that, to see if you had provided it or not, sorry if I missed it. But did you know what the gross impact was from the late fee that you estimated versus the net that you provided? And then also, I believe this was asked earlier, but I am not sure you mentioned, ultimately, what do you view the net impact to be that 25%. Could that go down to something like 10% of an impact or how do you view that longer term at this point? Thanks.

Thank you for the question. We provided -- the number we provided, we do not provide a grossed up number if the net of some, I call, partial in flight mitigation that we expect to be put in place in advance of the actual implementation once the final rule is in place. And how far it gets mitigated against the original amount is anybody’s guess, but it will certainly mitigate over time. But as well there will be offset in other line items, as you think about reducing some underwriting, improving loss rate, reduced provision, lower expenses. I mean there’s going to be a number of things remarks through the 36 months following the final rule that will ultimately determine where we land and once that rule comes into play, once the team completes its work with all the partners, we will certainly be able to provide more information.

Okay. I appreciate it that you are not providing. The -- but one other way that, I guess, around the mitigation anyway to help us size up, like, what percentage of overall mitigation that you considered as this rule was put out there. Like, what percentage is in that number, about half of it, you think you got through all these other measures another half on its way. How can we think about that?

Yeah. So what I would do is, ask you to just take a peek back at the slide that I have prepared and shared with you guys at the last conferences and when you think about one of the largest levers is APR repricing. Due to the way cardiac work, it takes time for that to burn in and it will -- that’s why we said we are going to take some early movement on some things and that will get a jumpstart on it. But it will take some time for the existing accounts for those balances to cycle through, as well as the new vintages come online at the higher APR. So that’s going to take some time. And then once we start working with the partners, we will understand who wants to use more promotional rates, who wants us to do some fees, it’s just a lot of that goes into it. So I really don’t want to speculate on percentages of mitigation, but there’s a lot more mitigation to come after the rule goes into effect and the work is done with the partners. But again, we are very long-term focused on what we are trying to do here and we will -- we are fully committed to making sure that we get back to strong returns for the capital that we deploy against this business

Okay. Great. Thank you.

Thank you.

Our final question today comes from John Hecht with Jefferies. Please go ahead.

Good morning, guys. And sorry to ask, because you have talked a lot about the late fee stuff. I appreciate the details there. But I just want to a point of clarification, because you talked about this as a revenue hit thus far, but your -- the retail sharing arrangement is kind of expense net of the interchange in a different line in the P&L. Is there not some immediate offset in that design item that we should think about or are your arrangements different where they would exclude this type of revenue?

Yeah. No. That’s why we used revenue, because the retail share agreement impact happens. It’s a contra-revenue. So it’s already in there. That’s why we didn’t use net interest margin. We use revenue. So we were doing net of the retail share agreements.

Okay. That’s very helpful. Thanks very much.

You bet. Thank you for your question.

Firstly, I want to thank you all for joining the call and for your interest in Bread Financial and for all your questions today. Everyone have a just a wonderful day. Take care now.