Bread Financial Holdings, Inc. (BFH) Earnings Call Transcript
May 26, 2020
Earnings Call Speaker Segments
Thanks, everyone, for joining virtually. For those who don't me -- know me, I'm Ashish Sabadra, senior analyst at DB, covering payments as well as business and information services companies. We are excited to have Tim King, CFO of Alliance Data on the call with us. Tim, thanks for giving us this opportunity.
We'd like to kick off the conversation with the pace of recovery. Tim, if you could provide any color on the credit sales, how they've improved as the states have started to open up. The consumer confidence, for me, that came out today morning, was very encouraging. How could those help translate into credit sales? Just any color on the spending patterns of your average credit cards or card customer?
Sure. So thanks for having me, Ashish, and welcome, everybody. I appreciate you taking some time to hear the Alliance Data story. Yes. A little bit of color on the recovery. It's not a big mystery to anybody that is very specific to the states and the retailers that are opening back up. So to give you some color, Texas and Florida are both states that have been opening back up. And as those states have opened up, we've seen our sales go increasing with each progressive week. Not -- we don't ever expect them to get back to the same level as they were before, but we're seeing a pretty dramatic increase in those states. States that haven't been opening back up again, Michigan, for instance, as you'd expect, our online sales are doing fine, but our bricks-and-mortar are still almost 100% down, 95% down from where they were a year ago.
That's very helpful, Tim. And then maybe just a quick question on stimulus payment. There were a few retailers who called out pickup in discretionary spend. I was wondering, did you see any benefit on your side?
So you mean the stimulus, the checks that the consumers have been getting?
Yes, that's right.
Not so much the increase in spend. We certainly haven't been able to correlate it, but we have seen a nice increase in the payments. So as those stimulus checks that started coming in, we have seen an increase in our payments from our consumers. It's hard for me to correlate, specifically, did consumer A get a stimulus check and therefore, pay us because I don't know who got the stimulus check, but I just know in aggregate, the stimulus checks to consumers correlated, timing-wise, to an increase in payments from our consumers.
That's a good segue into my next question around how do these credit sales translate to receivables. Receivable growth obviously slowed down as expected in April. And I think you provided some good color on the payment rate. But I was just wondering if you could add more to that one. And then what should be the expectations for receivables for the rest of the year?
Yes. So obviously, we haven't given any guidance as to what we think the sales will decrease. Honestly, that was as much because we were trying to assess it as much as anybody else. We did run a number of scenarios of sales over the course of the year. We did talk about some of those scenarios on the earnings call. For instance, one of the more draconian that we ran was sales being down 25% on year-over-year was the scenario we ran. And I then said that is not -- that's 25% on the year or 33% year to go. So that's just to give folks an idea about some of the highs and lows we ran. Again, we're not giving guidance because we just didn't have enough color. What we felt that, that would translate into receivables is for about every dollar we give up in sales, we think it's about 50%, maybe $0.25 of receivables, so if you want to be conservative about $0.50 of my receivables for every dollar of sales. Of course, that means that, that is a function of people slow down their payments a little bit more and the folks that are still around, of course, are more likely to be revolvers. So about $1 sales, we think, translates into about $0.50 of receivables.
No, that's helpful. And then anymore -- any incremental color on payment rate? Obviously, the stimulus payment helped that, but what are you seeing on the payment rate front?
The payments in dollar terms are remaining fairly consistent year-over-year. And as we expected, we are seeing a shifting of who pays us. We're seeing less pays in fulls but we're also seeing less folks who are not paying their minimums or zero pays. So the dollar amounts are staying about the same, but we're seeing actually more individuals pay us. That's pretty indicative of the consumer's mindset, which is they're going to conserve cash, so not pay us in full or be mindful of their payments, and so they're not going to be late on a payment. They're not going to miss a payment, and therefore, not incur a fee. So we're seeing a much more conscientious consumer, keeping our payments about the same, but actually increasing the number of people who are paying us.
That's good. That's positive. Maybe just switching gears a bit. Questions that we often get from investors is the retail partners bankruptcy risk. There were some examples like J.Crew filed for bankruptcy, investors are concerned about risk to other mall biz retailers. I was just wondering if you could provide any color on what percentage of your portfolio is now mall biz retailer. How your portfolio has evolved? How should we think about any potential risk to your portfolio from a retailer bankruptcy?
Sure, Ashish. One of the things we've always never broken out is the number of retailers who are 100% mall-based because, of course, nobody is 100% mall-based anymore. We have talked about the number of sales that come from mall-based locations and that's about 25%. So for instance, we take a Williams and Sonoma, we're talking about just the sales that would happen in a physical location for Williams and Sonoma, that would be about 25% of our sales. Having said that, of course, there are some of those retailers who are having trouble part. But that doesn't hurt us financially short term. Those -- we actually make money regardless of whether they're in a reorganization or not. What we, of course, have to be very conscious of is just making sure we replace those retailers so we can continue to grow.
That's helpful. And then just maybe on the consumer credit risk side, right, the unemployment levels are elevated. How should we think about the characteristic of the portfolio? Now the company has taken a lot of good actions, you provided a lot of good color on the call. The credit exposure is lower by 25%, maybe inactive accounts are closed, tightening of the credit, overall credit. We were just wondering, are those sufficient? Or as we understand the economic impact, would there need to be other further actions to be taken?
Yes. Ashish, we'll always look at the book of business and make sure that we're taking the appropriate credit actions. Kudos to my partners over in the credit risk group. They were in front of that curve, making some credit changes well before COVID-19 hit. We were able to take, like you mentioned, 25% of our exposure out at the beginning of the year. We'll continue to watch that. As far as what that translates into and what COVID-19 translates into as far as the average creditworthiness of our consumers, not sure yet. And of course, we haven't given guidance as to what we think our charge-off rates will be. And it's actually -- it's both because we don't know with COVID-19, but also what the forbearance programs will do for that credit worthiness of the consumers. We think we will get an increase in our charge-offs in the latter half of the year, specifically in Q4, as folks if they've had troubles that manifests itself in the latter part of this year charge-off, but we just haven't been able to quantify that yet.
Yes, that's helpful. And that's a good segue into my question on forbearance. So on the call, it was mentioned, I believe, 3% of the customers accounting for 4% of the balance had requested forbearances of first quarter '20 earnings call. How has that trended? And what are your expectations for forbearance program going forward?
Yes. So we mentioned, as you just stated that at the time of the call, about 3% of our accounts, 4% of our balances were in a forbearance program, and we expected that, that potentially get into the 10% range. We feel that number is still appropriate. There's no reason for us to come off that. We have seen consumers paying us a little bit better. So we don't think there's any risk to that number. Of course, the forbearance programs, we are offering a number of different ones. And so we'll start getting a better look at that as people come out of one of the forbearance programs. What do I mean by that? We have skip-a-pay forbearance programs, skip-a-month, potentially skip 2 months. We have 3-month, 6-month and 12-month forbearance programs. The skip-a-pay programs, those individuals still have charging facilities, they just get to skip a payment. Finance charges still accrue at the contractual rates. We won't see if that would -- any benefit of those for at least a month, if not 2 months. So if we put somebody in a skip-a-pay in April, they got their March statement, comes due middle of April, they call us up and say, "Boy, I'd like to skip a payment." Now it's May. Do they start to roll? Meaning, do they start to go into the delinquent bucket and start going towards charge off, call us up and ask us maybe for another month of a deferral program. That's the first group we'll get to read and determine if there's any increase in our charge-off as any issues there. The other 3 types of forbearance programs, the 3, 6 and 12 months, those individuals no longer have charging facility on their cards, but they do have a lower interest rate. And they're a lower payment. And of course, if you're in a 3-month program, I'm not going to know the benefit of that until, obviously, 3 months after they get put into that and watch the programs. I do know that traditionally, during the last recession in 2009, that if we were able to get somebody into a forbearance program, the likelihood that they charge-off was a decrease by 50%. So we do think they have some benefit, but we do have to talk to them. We do have to get them into the forbearance programs, but we do think it should have some material effect on our overall charge-off rate.
Yes, that was very helpful color. Maybe switching gear and talking about the allowance build. The company increased allowance significantly in the first quarter. The reserve rate roughly doubled from 6% to 12%. Can you just help talk through how much of it was driven by CECL adoption versus taking some conservative scenarios for COVID impact? And just any color on those worst-case scenarios?
Sure. So very specifically on our Page 8 of our earnings call, we called out the adoption of CECL and what, obviously, the increase in the COVID was doing to our charge-off. So if we look at that slide, $644 million increase was due to CECL adoption, so just north of a 50% increase. I believe it was 55% taking our balance up to $1.815 billion. The remaining $300 million -- $336 million was specifically a function of our change in environment. There is a little bit of a rate volume there. Our receivables being down, obviously, would have been a decrease in our allowance requirement. And then of course, the offset would be our outlook at the end of the quarter, knowing everything we did about the environment and the economy, we added $336 million, which took us up to that 12.15%. I think it was 12.15%.
And as we think about these reserves levels, what's the more reasonable reserve levels in the longer term? Is there a way to think about those levels, particularly post-CECL?
Sure. I think the easy answer would be just go and look back to what we thought on January 1, when we added the $644 million and took our reserves up about a little north of 50%. In the ASC 450 environment, we are covering, in general, about 12 months' worth of allowance coverage, meaning 12 months' worth of charge-offs that we could see. This is basically saying we're covering about 18 months' worth of charge-offs, and that should give folks a pretty good idea of what you think the life of a loan is, not average life of a loan, but the average life alone because CECL's requirement is, I need to cover every dollar charge-off that I know on my book of business through the life of the loan. So in essence, this is saying that I think the loan is some place in the 18 to 19 months before I absorbed every dollar charge-off. That would be the normal, I think, spot we'd be in the future.
Just switching to yields. Yields expanded in first quarter '20. However, what are the puts and takes going forward? If you can just help us understand the implication of lower interest rate, forbearance and then just lower portfolio held for sale compared to the last year?
Great question. So obviously, we had been expecting our yields to start increasing late into Q4, we got that pickup finally in Q1 where the slower growth, the spooling up of older programs, allowed our yield to increased 140 basis points. The go forward, of course, the decrease by the Fed in the discount rate and hence, the primary of 100 basis points, will obviously go right to our yields on a go-forward basis, call it, 70%, 80% of our book of business is variable rate, so you can do that math. And clearly, that's going to have a material effect on our yields go forward. Offsetting that is going to be the number of folks who were transactor versus revolvers. I make no finance charges on a transactor and if, for example, math example, if 20% of my book of business was a transactor, meaning they never got a finance charge and I've lost all my incremental new sales, all my transactors go away. Therefore, my yield will go up, in my example, by 25%. Clearly not that much, meaning that 80% of my book would go to 100% now getting transactors. Now it's not quite that simple, but it gives you a pretty good idea about if you lost all your transactors, your yields would go up fairly dramatically. And we did lose a lot of our transactors and people paying any finance charges but not paying any finance charges with a decrease in sales.
That's very helpful. And then maybe just how do we think about the impact of forbearance? Do you lose any late fees? Does that negatively impact yields?
Yes. That's a great question. One I've been asked a couple of times, and I wish I had a more specific answer because we're still trying to figure out the number of people that we would have never gotten a late fee for in the old environment, from an old environment, and therefore, we gave up nothing. What do I mean by that? In order to do a skip a pay program, that meant that we never -- you were not delinquent. We wouldn't allow you to go into that program if you had been delinquent in the last 12 months. They'll call us up and say, well, I'd like to skip my payment in the month of April. If you have been delinquent in the last month, our standard policy would have been to not let you go into a skip-a-pay program. That meant we never got a late fee from you in the last 12 months and therefore, to not get one in the 13 months of April, we gave up nothing. The other programs, the 3, 6 and 12-month program, almost by definition, you would have had to have been delinquent before we put you in a forbearance program. Most of those people were delinquent. We call them up and say, we're going to put you in a program where we're going to freeze you where you are from a delinquency standpoint, waive all your late fees and then puts you in a program where you have a lower interest rate. And I don't have a very good breakout yet between the people on short-term programs, one skip a pay versus the three, 6 and 12 months. And I need to also look at that versus prior because, of course, we've always had forbearance programs. And therefore, I haven't been able to quantify that. I can unequivocably say it will cost us late fees. I just don't know to what magnitude that is yet.
That was very helpful color. Just moving on to the cost savings. The company had taken pretty strong cost takeout measures. Wondering if you could just provide more color on that front? Also the progress on the cost actions and when do we see those cost savings flow to the bottom line?
Well, sure. So clearly, you saw some of those cost savings flow through the bottom line and the Q1 number is where we are at $90 million. It was actually $87 million exactly in benefit. That was spread across our corporate entity, our L1 entity and our card services entity. So you're seeing those actions, you're seeing them across the board. It's salary, it's rent, it's consulting fees, it's marketing expense. So it's across the board. And I was very careful to pull out the ongoing operating expenses. So on my slide, you'll see that I put in the normalized cost. I mean, I did -- I wasn't having any mark-to-market or any exogenous that was 100% the run of the business, and it was $87 million better. That was basically the $150 million that we talked about late last year of 2020 savings. And to context that, we initially said $200 million of cost savings. We realized $50 million of that in Q4. Now we've obviously recognized another $87 million in Q1. Most of that is the $50 million plus a little pull forward from Q2. We'd expect another 50-ish in Q3, so -- excuse me, $50 million in Q2 and Q3 for the whole $150 million. Further, we talked about -- Ralph talked very specifically about identifying another $100 million. We should start seeing the benefit of that as we get into Q3 and Q4, more heavily weighted into Q4. Again, spread across marketing facilities, consulting across all the lines of business that you just -- it's blocking and tackling, and Ralph has done a really nice job of looking at the business with a different perspective and those of us who have been here 10 years, and identify some areas that we can save some money as well.
That's great. And then maybe just if you can quickly talk about LoyaltyOne, what's happening on that part of the business. AIR MILES saw some pretty good issuance in the first quarter. How are you seeing the trends on issuance on the AIR MILES side? And then obviously, on the redemption side, you'll see some pull back on the travel, but how should we think about the revenues and EBITDA, just issuance revenue and EBITDA for AIR MILES generally?
Yes. Just to give some color to everybody about the way we earn in Canada is -- on the AIR MILES program, we don't recognize the revenue generally until somebody goes and redeems their points. However, we get the cash once an AIR MILE is issued. So a consumer goes out to a grocery store, a liquor store, a gas station and charges and uses their coalition loyalty program to get points on that. That then accumulates in their bank of points. We don't -- at that point, we have deferred liability, and we get the cash for that particular program, and so we don't get to recognize revenue. However, we do know we're going to get to recognize that revenue in time. It's just a question now of when the consumer redeems those points. We saw a dramatic decrease in the redemptions because a little less than 50% of the rewards are for travel in Canada. And of course, nobody was traveling. So our revenue will be down as a result of that. Having said that, those are not revenues given up, those are revenues that we'll get in a later period. So in essence, Tim King earns 100 points of -- he's going to go charge 100 points worth of travel or buys goods for the home, where I may have spent $50 in 2020 and $50 in 2021, I may only charge $20 in 2020, but now I'm going to charge $80 in 2021 because I still have those points, and that's when I get to recognize the revenue. So by virtue of getting less revenue in 2020, as long as miles issued hasn't decreased, I'm going to get that. I'm just having less in 2020 for more in 2021.
Okay. That's helpful. And then just quickly on BrandLoyalty. Any color on that front? Particularly, they are more exposed to the European market and where we have seen much bigger impact from COVID. So any thoughts there?
Yes. The spot that we're -- that's troublesome for us with the BrandLoyalty program is they are such a grocery-based rewards program and very short-lived. The one thing that did not suffer through COVID here in United States, in Canada or more specifically in Europe, has been groceries. People have been buying plenty of groceries. And as you imagine, most of the groceries don't want to incent people to buy more groceries, they don't need to incent them to buy more groceries, so those reward programs certainly were suffering. We've starting to feel some comeback for those programs. It's going to take a while before we get back to some form of normalcy with the grocery programs, which is the vast majority of what we do in BrandLoyalty. So I wouldn't expect that to rebound until the latter part of this year, but we are starting to see some recovery.
Okay. That's helpful. We're going to see, Tim, a few questions on the online portal. Again, investors, if you have more questions, feel free to send it through the portal or e-mail me. But if you don't mind, I would like to go through some of those questions. First question -- the first question was early delinquencies have actually gone down in April, how much of this is due to forbearance? Can you give us some color on the percentage of your receivable portfolio that is either in forbearance or now in TDR? So any color on that front, delinquencies in April?
Sure. So we haven't broken out what the benefit has been for the forbearance programs on those delinquency numbers. It certainly has helped. COVID-19 made it worse. So the forbearance is going to help that, and we have not broken that out. So I can't give you a specific. The -- but I will tell you, obviously, we did say on the call that 3% of our accounts, 4% of our balance will be in some type of a forbearance program. We do expect that to get to a 10%-ish number sometime in Q2. Again, that was the earnings call. When I get to the TDR calculation, it gets a little bit harder for those of you who are arcane accountants like I know that a TDR, once a TDR, always a TDR, meaning the only way you get out of our disclosure on our 10-Q, 10-K for the TDRs, either you charge off or pay off. If you are an account in good standing in 5 years, if you were a TDR 5 years ago, you're still in our TDR program. I would expect that anybody in our 3-, 6- and 12-month programs go into the TDR program. I do expect our TDR balances to increase, certainly not by the 10% because the majority of the people going into our forbearance programs are going into the skip a pay, which are not TDR programs. Sorry, a little arcane accounting, my apologies.
No, no, no, that's very helpful. That's very helpful. The second question was, can you comment on the competitive dynamic out there in this current environment? So with Synchrony capital in the city, are you signing new customers? What does the bidding process look like?
Yes. It's -- certainly, we're out actively looking for new clients. I know some of our competitors are as well. We're bumping into them in various spots. Certainly, the last 3 to 4 weeks, I'll tell you the one thing I have noticed is folks trying to kick the can down 3, 6 months for the bidding process. They'd like to get out of this weird environment called COVID, both the issuers as well as the retail partners. So we've seen a little bit of that. The other thing I've seen is I've seen a little bit more reluctance of taking portfolios in the old environment. Taking a portfolio meant that I had purchase accounting associated with that, which actually had an optics benefit on your charge-off rates, the way you could do your accounting and how you bled if you paid a premium back into your P&L. Under CECL, I need to take a fairly immediate hit to my P&L. I have to post up on day 1 for that. That's expensive. And then the other, of course, is everybody is a little bit worried about the credit environment and what purchasing portfolio would look like from a credit environment. So I see the portfolio is getting less competitive. I see the programs, the new programs, de novo programs with some of the brand name retailers. I think the competition is still there, albeit they're trying to kick the can down for 3 and 6 months, so that they get a normalized environment to look at them.
Sure. That's helpful. Another question that we got from the webcast was, can you ask what the conversion rate will be from the 10% of customers that are expected to be in forbearance? So what will be the conversion to charge-off? Any color on that front?
Yes. So when we went back and looked at 2009, the people that we put into a forbearance program, we had about a 50% save for charge-off. So if my normal charge-off rate on my book of business was 6%, those people on a forbearance program would have only been 3%.
Okay. That's helpful. And then maybe just any color on online sales. Obviously, that had gone up quite a bit. How do you think about in a more normalized environment? How do you think about post-COVID, the online sales trend?
Yes. I think it's going to continue to increase. And I got this question during one of the one-on-ones. And I joked a little bit, which is, of course, my online sales have gone up 100% of my overall sales from about 40% to 100% because I don't have any bricks-and-mortar sales right now. That's not nearly that bad. But the point was that, of course, my online as a percent of my overall book has increased fairly dramatically. But once I get to some type of normalcy back, I don't think you're ever going to get to the same spot of 60% on bricks-and-mortar, 40% online, the -- from my total sales, because I think people have just made a seismic shift now to I like getting things delivered, I know how to do that. And I'm very comfortable that in some cases, I don't want to be exposed. So I think you're going to continue to see an increase in my online sales, and I would expect that to actually ramp up here in the next 2 years.
That's helpful. Just a question on cap structure and then ability to do dividend. So your banks are pretty well capitalized. You have sufficient liquidity to your own capital. What's the optimal capital level? Is there opportunity to dividend some cash back to the parent? How do we think about it?
Yes. So I'll answer that, which is, of course, we're going to run, and as we have in the past, we'll continue to run those banks very, very conservatively. There's -- there -- you set your capital levels based on what type of -- your ability to withstand any type of stresses that come at your bank in a variety of different stress scenarios, we will run on an ongoing basis. A fairly good indication I would point to investors to is how -- what type of capital we had at the banks independently and collectively the last 3 to 4 years. And I think there was -- one of our banks was below 15% for 1 quarter, generally above 15%. But it's also -- that is a point in time, I also need to think about my capital go forward. So when you look at a COVID environment and I start stressing my banks, I want to make sure that I was seeing anything that might come at us in this type of recessionary environment. The ability to then, which is the next question, dividend from the banks is with conviction from our bank, Board of Directors, from me, from the bank management team, we would then dividend up to the parent. But the first thing would be making sure we felt the banks were very solid. We're able to withstand any type of hit that they might have in the future. In an uncertain time like this, we're certainly going to be on the high side of those numbers. And inclusive of that, we can't lose sight of the fact that I also have to contemplate what my receivables look like. If my receivables are going to grow, of course, I'm going to hold more capital now. If I think my receivables are going to go down, I'm going to factor that into how much capital I need to hold my parent company. And then lastly, I want to make sure that we stay income positive at the banks, because that certainly is going to add to the capital of the banks. So those are all the factors, which you get a pretty good idea about the range, how we feel and where we feel it should be targeted going back and looking at the last few years. I used the last few years because if you go back 6, 7, 8 years ago, it was just a different environment and different requirements of the banks. I think the last 3, 4 years is a pretty good indication of what we like to target.
Sure. And then there has been a lot of focus on the tangible book. I was wondering what the company could do in order to improve the tangible book value? Any color that you can provide?
Yes. Pay down all our debt. The -- and I kind of tongue in cheek that to a certain extent, but the answer is there's 2 portions of tangible book, which is the underlying thought and concern, a tangible book that you have the double leverage of the parent, therefore, you have debt. Therefore, it's obviously making your tangible book go in the wrong direction. And the easiest way to address that is solid earnings, make sure the earnings come up to the parent company in the form of cash, making sure you take that cash and paying down the debt. Paying down that debt post making sure you have plenty of cash on the balance sheet and the asset side to withstand any type of hit, which obviously, we feel strong on the balance sheet with the parent company since the bank is in a good spot, and then make sure you just address that. You've got to manage that over time. Generally, there's not a silver bullet there, which you -- in order to get that tangible equity and where it needs to go, you need to make sure you have earnings go up. Obviously, you go to retained earnings, taking any cash that you have after a strong balance sheet, paying down the debt and it's something you manage over time.
Yes. I know, that was very, very helpful. Maybe one more quick question before we wrap it up. But just one about the current structure, the advantage or disadvantages of bank holding company structure and talk about is there any plans to change -- or any thoughts about looking at that structure?
Yes. The -- one of the things we've always liked about the non-bank holding companies that's allowed us to own entities like BrandLoyalty and some of the subsidiaries in the BrandLoyalty. We've also been able to pull out the bank servicing entity out from the bank umbrella. And we manage that separately. So we like that ability. It doesn't exonerate us from scrutiny from the regulators at the holding company. We recognize that. So there is not a big structural benefit so much as just what can we hold within that entity that we like. I can't see us changing that structure.
Okay. No, that's very helpful. And Tim, anything else that you would like to add before we wrap up our chat?
No. I appreciate the chance. And clearly, market's reacting nicely to the retail environment. And it's one of the things that hopefully, everybody is getting out of here as we think we've managed this organization to a spot where it's got a very strong balance sheet. We've taken a lot of costs out of the organization. We feel like we're positioned nicely to go forward. It doesn't mean it's not going to be bumpy for a little bit of period time. And mostly, we're very excited about having Ralph come on board and the direction he's going to be able to supply and where he takes the business. So we really appreciate the opportunity to be able to tell our story.
Thanks again. Thank you very much, Tim. Thank you for giving us this opportunity. Have a wonderful day.
Great. Thank you, too. Thank you. Bye-bye.
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