Alliance Data Systems(BFH) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Bread Financial reported credit sales of $8.1 billion, up 10% year-over-year, with revenue increasing 17% compared to Q2 2021 [22][23] - Average loans rose by 11%, while end-of-period loans increased by 13%, driven by strong credit sales and moderating payment rates [22][23] - Net income was $12 million with diluted EPS of $0.25, impacted by a $166 million CECL reserve build and a $21 million write-down related to Loyalty Ventures [25][26] Business Line Data and Key Metrics Changes - The company experienced strong growth in consumer deposit balances, with retail deposit balances up 75% year-over-year [8] - The American Express Bread Cashback Card showed early success, particularly among millennial and Gen-X consumers, with strong spending in everyday categories [9] - The company signed over 50 new small- and medium-sized partners in the second quarter, focusing on profitable lending [16] Market Data and Key Metrics Changes - Delinquency rates increased to 4.4%, while the net loss rate was 5.6%, reflecting normalization from historical lows [23][34] - The reserve rate increased to 11.2% due to heightened economic uncertainty and a potential recession [35][36] - The company noted that consumer sentiment has weakened, but retail sales continue to rise, indicating a resilient consumer base [11] Company Strategy and Development Direction - Bread Financial is focused on sustainable, profitable growth, with strategic investments in technology modernization and digital advancement totaling over $125 million [42][44] - The company aims to diversify its portfolio through new partnerships and acquisitions, including a significant relationship with AAA [13][58] - The management team emphasizes a proactive approach to credit risk management and has implemented a recession readiness playbook [46][50] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the consumer's financial position despite concerns about a potential recession, noting low unemployment and rising wages [11][12] - The company anticipates continued loan growth in the low double-digit range for 2022, driven by strong sales activity and new business signings [39][40] - Management remains cautious about the economic outlook, adjusting reserve rates to reflect increased recession probabilities [35][56] Other Important Information - The company completed a significant technology migration to the cloud, enhancing operational efficiencies and scalability [18][19] - Noninterest income was negatively impacted by a $21 million write-down related to Loyalty Ventures, but excluding this, it correlated closely with credit sales growth [27][28] - The company is not planning to be a strategic investor in Loyalty Ventures and intends to monetize its remaining stake [80][81] Q&A Session Summary Question: Credit outlook and reserve build - Management expressed confidence in the portfolio mix but acknowledged the need for a conservative approach due to rising unemployment scenarios [51][52][54] Question: Return on equity targets - The company continues to target a mid- to high 20% return on equity, with growth pace being a variable factor [57] Question: AAA portfolio size and implications - Management did not disclose the exact size of the AAA portfolio but indicated it would contribute significantly to growth [58][59] Question: Reserve rate outlook amid recession - Management believes the reserve rate may remain elevated during economic strain but expects it to decrease once the economic outlook improves [60][68] Question: Portfolio yield and NIM guidance - The company anticipates a lag in passing on rate increases to consumers, with NIM expected to hover around 19% [75][76] Question: Performance across different cohorts - Management reported strong spending across proprietary and co-brand cards, indicating consumer engagement despite inflationary pressures [73][74] Question: Late fees and regulatory engagement - The company is adapting to regulatory changes and diversifying its portfolio to reduce reliance on any single product [90][91]