Bread Earnings: Otherwise Uninspiring Results Benefit From One-Time Gains on Sold Credit Card Loans

At first glance, Bread’s BFH first-quarter results were extremely strong, with a dramatic improvement in revenue and earnings. However, once the one-time gains associated with the sale of the BJ’s Wholesale Club credit card portfolio are stripped away, the underlying results showed declining profitability. Even so, we appreciate the positive impact the sale has had on Bread’s financial position.

Net revenue, including the $230 million gain on the portfolio sale, increased 40% year over year to $1.29 billion. When excluding the sale, Bread’s top line rose 15% to $1.06 billion. While net income increased to $455 million from $210 million last year, bottom-line results benefited from a $235 million reserve release, driven primarily by lower receivables due to the portfolio sale as well as typical seasonal declines as consumers pay off holiday spending-related card balances. Stripping away both the reserve release and the one-time gain on the sale, pretax earnings declined 43% from last year as higher operating costs and net charge-offs squeezed profitability.

As we incorporate these results, we do not plan to materially alter our $49 per share fair value estimate. While we view the shares as being materially undervalued, we highlight our Very High risk Uncertainty Rating for Bread as it is the most credit disadvantaged bank in our coverage during this period of economic uncertainty and rising credit costs.

Bread’s net interest income increased 13% from last year to $1.1 billion. The primary driver was loan growth, with average credit card receivables increasing 17% to $19.5 billion. That said, quarter-end loans only increased 7% from last year, setting the stage for slower net interest revenue growth in the near term. Bread’s net interest margin declined to 19.0% from 19.4% last year. The decrease is not surprising, as private label credit card companies like Bread have historically not been major beneficiaries of higher rates, even with its improved funding profile.