Bread Financial is facing an uncertain holiday sales season, as its credit card customers pulled back sharply on spending during the third quarter in response to rising interest rates, the resumption of student loan payments and higher gas prices.
The Columbus, Ohio-based firm's credit sales declined 13% during the quarter that ended September 30, to $6.7 billion, while the rate of delinquent and charged-off accounts also rose, CEO Ralph Andretta told analysts Thursday during an earnings call.
The results echoed Bread's
"For moderate- to low-income Americans, who have depleted much of their excess pandemic era savings, we noted a reduction in travel and entertainment spending as these consumers focus more on nondiscretionary purchases," Andretta said.
By contrast, higher-income customers in Bread's portfolio have maintained their usual levels of spending on health, beauty and "experiences," Andretta said. In response to recent trends, Bread has tightened its overall credit underwriting standards, and in some cases it's paused credit extensions and cut some users' credit limits.
"While these adjustments limit sales and growth, we see these as the right actions to support improved credit performance over time," Andretta said.
Because Bread caters to middle-income consumers and those with lower average credit scores, it has a higher exposure to credit risk than many other card issuers that target high-end consumers, such as American Express. But the percentage of Bread customers with a credit score above 660 is higher now than it was before the pandemic, Bread executives noted.
Bread has also worked to diversify beyond its historic reliance on partnerships with apparel and home goods retailers, although the firm recently added a new credit card program from that former category by signing a contract with Ross Dress for Less, Andretta said.
"Over the past few years we have diversified product mix through partner co-brand growth, the introduction of two proprietary cards and the launch and expansion of Bread Pay [point-of-sale installment loans]," Andretta said, noting that Bread recently completed the integration of Dell Technologies.
Co-brand credit card spending now accounts for approximately 50% of Bread's credit sales, leaving opportunity for its general-purpose proprietary cards to offset the ups and downs of discretionary items like apparel and jewelry.
The credit spending slowdown has stalled Bread's loan portfolio growth, but the firm's leaders say that with disciplined underwriting, the company can ride out the present economic pressures with minimal damage.
Unlike during the 2008 economic crash, when many consumers were forced into bankruptcy because of underwater mortgages and job losses, there are plenty of jobs in the present economy, Perry Beberman, Bread's chief financial officer, told analysts.
"It's a job-full market," Beberman said, noting that — even as many Bread customers are picking up second jobs to make ends meet — he expects overall retail sales to soften in the fourth quarter.
Bread is also exploring ways to offset potential negative effects from the Consumer Financial Protection Bureau's implementation of a final rule that will cap credit card late fees. If the fee cap lands at the reported level of $8, it will drive up annual percentage rates across the industry, Beberman said.
Strategies under consideration could include new fees for originating loans, charging a fee for low promotional APRs, or introducing monthly or annual fees, he said.
"You're going to see some tightening of credit standards, which will result in fewer consumers being extended credit. So we might grow a little less than what we otherwise might have," Beberman said.
Bread's revenue for the quarter was $1 billion, up 5% from $979 million during the same period a year earlier. Net income was $173 million, up 29% from $134 million. Bread ended the year with total loans of $18 billion, about flat compared to a year earlier.
Consumer deposits, powered by Bread's direct-to-consumer bank account, reached $6.1 billion, up 17% from $5.2 billion a year earlier. The company's total assets at the end of the quarter were $21.6 billion.
Despite downward economic pressures, analysts said Bread's results came in well above expectations.
"Bread Financial continues to tighten its credit box," analysts at JPMorgan said in a Thursday note to investors.
