Bread Financial Earnings: Sustained Revenue Growth Despite Asset Sales and Deleveraging

No-moat-rated Bread Financial BFH reported solid second-quarter earnings as the bank made meaningful improvements to its balance sheet. While year-over-year revenue growth was modest, mostly due to the sale of the BJ’s Wholesale Club portfolio, the improvements Bread has made to its capital structure and funding sources made up for it.

Net interest income was up 6.6% from last year to $1 billion while net income was $0.95, which translates to a return on equity of 9.4%. As we incorporate these results, we do not plan to materially alter our $49 fair value estimate. We see the shares as undervalued at current prices, but we remind investors that Bread will be sensitive to economic conditions as it is the most credit disadvantaged bank in our coverage.

The increase in net interest income was driven by loan growth, with average receivables increasing 4% year over year, despite the sale of the BJ’s Wholesale portfolio last quarter for $2.5 billion. While Bread has struggled to retain its larger partnerships, the firm has had success in replacing them with new accounts, with the firm announcing it would be acquiring the Dell portfolio with the earnings release. That said, we expect loan growth to remain modest as spending volume on the company’s cards fell 13% from last year and the bank is tightening its underwriting.

While selling receivables last quarter was a headwind to growth, the injection of capital allowed Bread to reduce its debt level, including a $500 million reduction at the parent level. With the debt pay down, Bread now has a firmwide tangible equity/tangible asset ratio of 9.4%, up from 7.5% last year. This is still lower than we would like, but the increase represents a material improvement in a short period of time and places the bank close to the bottom end of the normal range for consumer finance banks. While we would still like to see more deleveraging, Bread has made clear and undeniable progress in improving its capital structure.