Bread Financial (BFH) Q1 2023: Direct-to-Consumer Deposits Surge 70%, Reshaping Funding Mix
Bread Financial’s first quarter revealed a decisive shift toward funding diversification and balance sheet resilience, with direct-to-consumer deposits jumping sharply even as consumer credit quality trends diverged. Management’s conservative posture, focus on capital strength, and operational investment signal a business intent on navigating macro volatility with disciplined execution and an eye toward long-term partner stability.
Summary
- Deposit Base Transformation: Direct-to-consumer deposits now make up a much larger share of funding, strengthening liquidity.
- Credit Quality Management: Elevated loss rates reflect macro pressure, but risk-adjusted returns remain a core focus.
- Strategic Capital Allocation: Leadership prioritizes debt reduction and platform investment over near-term shareholder returns.
Business Overview
Bread Financial is a tech-enabled financial services company specializing in private label, co-brand, and general-purpose credit cards, as well as installment lending and savings products. Revenue is primarily generated through interest income on credit card loans, interchange fees, and partnership agreements with major retailers and brands. Its business is anchored by relationships with retail partners and a growing direct-to-consumer deposit platform, Bread Savings, which provides funding diversification and balance sheet strength.
Performance Analysis
First quarter results were shaped by a combination of portfolio actions, macroeconomic headwinds, and the company’s evolving funding strategy. Credit sales rose year-over-year, but growth moderated through the quarter as consumer sentiment weakened and discretionary spending pulled back. The sale of the BJ’s portfolio was a material event, boosting reported revenue via a $230 million gain but also reducing ongoing loan balances and requiring a loan loss reserve release.
Non-interest expenses climbed on the back of increased hiring for technology modernization and customer care, as well as higher transaction and systems costs. While net interest income grew on rising average loan balances, loss rates and delinquencies moved higher, reflecting both macro pressure and one-off impacts from last year’s credit card processing transition. Notably, direct-to-consumer deposits grew 70% year-over-year, now representing 28% of total funding, up from 19% last year—a significant shift in funding composition.
- Funding Mix Shift: The expansion of FDIC-insured direct deposits improved liquidity and reduced reliance on wholesale funding.
- Credit Risk Management: Reserve rates and net loss rates rose, with management maintaining a conservative stance amid macro uncertainty.
- Expense Discipline: Sequential expense moderation was achieved despite ongoing investment in technology and operations.
Underlying profitability benefited from the portfolio sale, but recurring earnings growth was more modest, highlighting the importance of sustainable margin management as the economic cycle evolves.
Executive Commentary
"Our current initiatives center on four key focus areas, growing responsibly, strengthening our balance sheet, optimizing data and technology, and strategically investing in our business."
Ralph Andretta, President and Chief Executive Officer
"Our direct-to-consumer average deposits grew 70% year-over-year to $5.6 billion for the quarter. These deposits represented 28% of our total funding mix versus 19% a year ago."
Perry Beiberman, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Funding Diversification and Liquidity
Bread Financial’s pivot to direct-to-consumer deposits through Bread Savings, its online savings platform, is reshaping the company’s funding base. Over 90% of these deposits are FDIC-insured, providing stability and reducing exposure to wholesale and brokered funding volatility. This shift is intended to support both growth and resilience in uncertain markets.
2. Credit Portfolio and Risk Management
Credit risk discipline is a core tenet of the business model. Management continues to update underwriting criteria and proactively manage credit lines and balances, especially as consumer payment rates normalize and macroeconomic pressures mount. The reserve rate is expected to rise further, reflecting anticipated credit stress and a conservative economic outlook.
3. Technology Modernization and Operational Investment
Significant investment in technology platforms—notably the Fiserv platform and Alveria collections system—aims to drive operating efficiency, speed to market, and enhanced customer experience. The company is accelerating up to $30 million of technology investment from the portfolio sale proceeds to bring forward these benefits.
4. Partner Stability and Business Development
Securing long-term partner contracts—such as the extension with Signet—has resulted in Bread’s five largest brand partners being locked in through at least 2028. The business development pipeline remains active, with new launches across diverse verticals and a focus on both large and mid-sized partners.
5. Capital Strength and Debt Reduction
Balance sheet improvement remains a top priority. The tangible common equity to total assets (TCE/TA) ratio has tripled since 2020, and parent-level debt is down nearly 40%. Management is focused on further deleveraging and restructuring parent-level debt maturing in 2024 to support future flexibility.
Key Considerations
This quarter’s results underscore a business in transition, balancing growth with risk management and long-term operational positioning.
Key Considerations:
- Consumer Behavior Shift: A move from discretionary to non-discretionary spend is underway, with Bread’s diversified card offerings helping to retain general-purpose spend.
- Credit Quality Watch: Delinquencies and net loss rates are rising, but management expects stabilization in the second half as transition-related impacts dissipate.
- Expense Outlook: Tech modernization and digital investments are peaking in the first half, with expense relief projected for the back half of the year.
- Capital Allocation Priorities: Leadership is prioritizing debt reduction and capital build over share repurchases, signaling a conservative approach to capital returns.
Risks
Macro headwinds remain the most material risk, with persistent inflation, potential for rising unemployment, and consumer stress impacting credit quality. Regulatory uncertainty—particularly around late fee proposals—could pressure fee income and require business model adjustments. Additionally, the recent portfolio sale reduces ongoing revenue streams, and further credit normalization may pressure margins if loss rates remain elevated longer than anticipated.
Forward Outlook
For Q2 2023, Bread Financial guided to:
- Total expenses approximately flat versus Q1
- Net loss rate trending up to around 8%, peaking above 8% in May before moderating
For full-year 2023, management maintained guidance:
- Mid-single-digit average loan growth (excluding portfolio sale impact)
- Revenue growth in line with average loan growth (excluding gain on sale)
- Net interest margin (NIM) similar to 2022’s 19.2%
- Full-year net loss rate near 7%, with improvement expected in the second half
Management highlighted that technology investment will be front-loaded and that credit normalization and macro trends will drive quarter-to-quarter variability. The outlook assumes inflation stays elevated but moderating, with gradual unemployment increases.
- Expense relief expected in H2 as tech amortization declines
- Risk reserve rates to remain elevated, reflecting economic caution
Takeaways
Bread Financial is leaning into funding diversification and balance sheet strength, while proactively managing credit risk in a challenging macro environment.
- Deposit Growth as a Strategic Lever: The rapid expansion of direct-to-consumer deposits is enhancing liquidity and reducing funding risk, positioning the company for greater resilience.
- Operational Focus on Credit and Technology: Elevated loss rates and rising reserves are being met with disciplined underwriting and accelerated tech investment aimed at future-proofing the business.
- Long-Term Orientation Amid Uncertainty: Investors should watch for continued execution on debt reduction, partner pipeline strength, and the impact of macro trends on credit normalization through 2023.
Conclusion
Bread Financial’s first quarter reflects a company deliberately shifting its funding, risk, and operational profile to weather macro volatility and support long-term growth. While near-term credit trends remain pressured, the strategic realignment of funding and capital signals a business intent on emerging stronger from the current cycle.
Industry Read-Through
Bread Financial’s funding transformation is a clear signal to the consumer finance sector of the value in cultivating stable, insured deposits to offset wholesale funding volatility. The company’s experience with credit normalization and the impact of macroeconomic stress on consumer payment behavior is indicative of trends likely to affect other card issuers and specialty lenders. Rising loss rates and regulatory scrutiny on late fees are sector-wide issues, suggesting that disciplined underwriting, expense management, and diversified funding will be critical competitive differentiators through the remainder of 2023 and beyond.