Bread Financial Holdings, Inc. (NYSE:BFH) Q1 2024 Earnings Call Transcript

Bread Financial Holdings, Inc. (NYSE:BFH) Q1 2024 Earnings Call Transcript April 25, 2024

Bread Financial Holdings, Inc. misses on earnings expectations. Reported EPS is $2.73 EPS, expectations were $2.92. Bread Financial Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. And welcome to Bread Financial’s First Quarter Earnings Conference Call. My name is Shannon and I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today’s presentation, the floor will be opened for your questions. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.

Brian Vereb: Thanks you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are based on management’s current expectations and assumptions, and are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC. Also on today’s call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors.

Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call. Starting with the key highlights from the first quarter on Slide 3. I am pleased with our solid start to the year. During the quarter, we generated net income of $134 million and earnings per diluted share of $2.70, driven by a strong risk-adjusted loan yield despite higher credit losses as expected. Importantly, we continue to strengthen our balance sheet. We increased our tangible book value by 20% year-over-year to nearly $46 per share, increased our direct-to-consumer deposits to $7 billion, and continued to improve our regulatory capital ratios. Our solid financial position was acknowledged by the investment community as evidenced by strong investor demand for our 2023 senior unsecured notes offerings, which we opportunistically upsized in January of this year.

This extended the majority of our debt maturities to 2029. At the same time, we reduced our parent level debt by $100 million. Additionally, we completed $11 million of our $30 million share repurchase authorization in the quarter. On the economic front, consumer spending in the first quarter continued to moderate given persistent inflation and higher interest rates. We observed a continued reduction in discretionary and big ticket spending in the quarter with many consumers focusing on non-discretionary purchases. Although consumers increased the frequency of shopping in-store and online, average transaction value decreased on the non-discretionary purchases, pressuring sales and loan growth. First quarter loan growth was further impacted by elevated gross losses as well as our proactive credit tightening initiatives.

We remained disciplined with our credit risk management actions given economic pressures affecting consumers spending and payment capacity. Evidence of our credit action impacts can be observed through our improved linked quarter delinquency rate, which we are observing improvements, particularly in early stage buckets. In response to the CFPB’s final rule regarding credit card late fees, we have continued taking necessary steps to improve our financial resilience and adapt our pricing to the rule change. I am pleased that we have made meaningful progress in the quarter, working closely with our brand partners to jointly identify necessary actions and determine timing to implement our plans. This resulted in improved financial projections and better visibility of the expected net financial impact of the rule versus what we previously disclosed, regardless of the effective date.

Perry will share more details when he discusses our outlook. Some of the early mitigating actions underway include various consumer-pricing actions such as increased APRs and statement fees, among others. The combination of our mitigation strategies and the diversification of our products and industry verticals and our improved credit profile over the past five years position us well to adapt to the rule change over time. We are closely monitoring the ongoing litigation related to the final CFPB late fee rule, but we’ll continue to implement our mitigation strategy given the uncertainties surrounding the timing and outcome. I would like to reiterate what I have said in the past. We, along with prominent industry and business associations, continue to believe this late fee rule negatively impacts consumers.

Not only will a lower late fee serve far less as a deterrent or penalty for consumers paying late, meaning more customers will pay late and therefore impacting their credit scores. The CFPB late fee rule change will also ultimately result in consumers paying more for credit through higher APRs and additional fees, and in some cases, consumers losing access to credit. Regardless of the litigation against CFPB, we remain focused on ensuring we deliver long-term value for our shareholders. Turning to Slide 4. Our disciplined capital allocation strategy focuses on funding responsible profitable growth, improving our capital metrics, reducing parent debt, and driving long-term shareholder value. Looking at the chart on the left, you can see since the first quarter of 2020, we have more than tripled our TCE to TA ratio to 10.6% and we see room for further improvement.

We will host an investor event on June 18 where we will further discuss our capital targets and allocation strategies and how we will balance achieving these targets with continued investments in our business while driving long-term growth. We’re also making progress on debt reduction. As shown in the second chart, in just over four years, we have reduced parent level debt by 58%, paying down more than $1.8 billion, including the most recent $100 million pay down in January. We improved our double leverage ratio from over 400% to 118% during this time period. As previously mentioned, we have $100 million remaining in our 2026 bonds, which we intend to pay off later this year, reducing our leverage ratio. Finally, our tangible book value of $46 per share has grown at a 31% compounded annual rate since the first quarter of 2020.

Supported by our strong cash flow generation, we expect to continue to grow our tangible book value further over time. We believe this growth, combined with our financial resilience, which we displayed this quarter and strengthened balance sheet, should yield a valuation that is multiple of our tangible book value. Our experienced leadership team has a decade’s long track record of successfully managing through economic cycles and regulatory changes. We remain focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders through challenging economic and regulatory environments. Turning to Slide 5.

Our key focus areas for 2024 have not changed. To reiterate, they are growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings, and driving operational excellence. We are laser focused on generating responsible growth while further scaling and diversifying our product offerings to align with the challenging economic landscape. Although our sales and loan growth may moderate in 2024, reflecting ongoing, challenging macroeconomic conditions, we are focused on creating long-term value for our shareholders. Managing the macroeconomic and regulatory environment effectively is fundamental to our success. With the CFPB credit card late fee rule effective date looming, we continue to execute numerous mitigation strategies intended to help offset the anticipated financial impact as I discussed.

Accelerating our digital and technology capabilities remains a top priority, throughout 2024; we will focus on further building out our capabilities to enhance customer experience and satisfaction, including the continued rollout of our mobile app to brand partners customers. Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise wide efficiency and reduced risk and value creation is embedded in all our decision-making. We have seen early success in our customer care area where we are utilizing our investments in digital technology, machine learning and bots to better serve our customers. For example, our enhanced interactive voice response system provides cardholders with self-service options and enhanced issues classification, leading to first call resolution, higher satisfaction, and lower cost to serve.

Our goal is to consistently generate operation and expense efficiencies that enable a reinvestment in our business, support responsible growth, and achieve our targeted returns. As I mentioned earlier, we will host an Investor Day on June 18, where our leadership team will provide a more comprehensive update on our business strategy and refresh long-term financial targets. Now I’ll turn it over to Perry to review the quarter’s financials and discuss our outlook.

Perry Beberman: Thanks, Ralph. And good morning, everyone. Moving to Slide 6, which provides our first quarter financial highlights. During the first quarter, credit sales and average loans were down year-over-year as the first quarter of 2023 included approximately two months of BJ’s activities. The quarter was additionally impacted by moderating consumer spend and our credit tightening actions. Revenue was $1.0 billion in the quarter, down 23% year-over-year due to the gain generated from the BJ sale in the prior year coupled with lower net fee revenue and higher interest expense this year. Income from continuing operations decreased by $320 million as the prior year benefited from the BJ’s gain on sale and related reserve release.

Looking at the financials in more detail on Slide 7. Total net interest income for the quarter decreased 6% year-over-year, driven by a combination of lower average loans and lower net interest margin resulting from the higher reversal of interest and fees due to elevated gross credit losses. Total non-interest income in the quarter was pressured by lower merchant discount fees as a result of moderating sales on big-ticket items. We would expect this pressure to continue in the coming quarters as consumers continue to make smaller non-discretionary purchases versus larger big-ticket purchases. Total non-interest expense increased 12% year-over-year, primarily driven by a decrease in card and processing costs, including fraud and a reduction in marketing expenses and depreciation and amortization costs.

Additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Pretax pre-provision earnings or PPNR decreased $236 million, or 32% driven by the gain on portfolio sale in the prior year. PPNR less the gain on portfolio sale was down $6 million, nearly flat to a year ago. Turning to Slide 8. Loan yield increased 40 basis points year-over-year, benefiting from the upward trend in the prime rate, causing our variable price loans to move higher in tandem. Both loan yield of 27.0% and net interest margin of 18.7% were pressured sequentially from an increase in the reversal of interest and fees related to higher sequential gross credit losses. This continued pressure, together with normal seasonal trends and higher funding costs is expected to result in a sequential reduction in net interest margin in second quarter of 2024.

On the funding side, we are seeing total funding costs moderate as deposit costs are beginning to stabilize. Additionally, as you can see on the bottom right chart, our funding mix continues to improve fueled by growth in direct-to-consumer deposits which increased to $7.0 billion to end the first quarter, as well as meaningful reductions of our unsecured debt as previously disclosed. Direct to consumer deposits accounted for 36% of our average funding, up from 28% a year ago. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding to opportunistically and efficiently fund our long-term growth objectives.

Moving to credit on Slide 9. Our delinquency rate for the first quarter was 6.2%, down from the fourth quarter and showed a linked quarter decrease beyond seasonal trend expectations. The signs of stabilization and improvement are a result of our ongoing credit tightening actions. The net loss rate was 8.5% for the quarter compared to 7.0% in the first quarter of 2023 and 8.0% in the fourth quarter of 2023. The first quarter net loss rate was elevated compared to last year’s level due to more challenging macroeconomic conditions, pressure in consumer payment rate as well as ongoing credit tightening and slower responsible loan growth impacting the denominator. We expect the net loss rate to peak in the second quarter of 2024 at around 9%, with May marking the high point for the year.

Given the inflection in delinquency, we have optimism and confidence that the net loss rate will improve in the second half of the year. The degree of improvement will remain macro dependent. As expected, the reserve rate increased sequentially to 12.4% as transactor balances decreased seasonally in the first quarter, with the rate returning to levels seen in the first three quarters of 2023. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model until we see sustained improvement in delinquency and improved macroeconomic outlooks. Looking at our credit risk distribution mix, the percentage of cardholders with 660 plus credit score remained above pre-pandemic levels despite continued inflationary pressures.

This improvement is a result of our prudent credit tightening actions as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are compensated for the risk we take. Moving to Slide 10. We have significantly enhanced our financial resilience by strengthening our balance sheet and balancing credit risk with returns. Our financial resilience was evident this quarter as despite elevated losses we generated high quality earnings, growing our tangible book value. Our commitment to strengthening our balance sheet is highlighted by our reduced parent debt level, growing regulatory capital ratios, and conservative loan loss reserve. Our loan loss reserve rate is more than 300 basis points higher than our CECL day one rate in 2020.

Our quarter end loss absorption capacity, which we define as our allowance for credit losses plus tangible common equity divided by total end of period loans was 25%, providing a strong margin of protection should more adverse economic conditions arise. We continue to proactively manage our credit risk strategy across the account life cycle from time of acquisition to ongoing credit line management to account closures as necessary. On a risk adjusted basis, our new account approval rates are more than 100 basis points lower than last year and nearly 500 basis points lower than pre-pandemic. The average vantage score of new accounts is now up 5 points year-over-year to 715, driven by continued credit tightening and improvements in our product risk mix.

The products mix shift has also resulted in more than 50% of our credit sales coming from co-branded proprietary products. Additionally, we have also prudently paused line increases and expanded line decreases for vulnerable segments, all of which have reduced our risk exposure. We remain confident in our disciplined credit risk management and ability to drive sustainable value through the full economic cycle. Delivering responsible profitable growth remains a top priority, even if doing so requires a disciplined, slower rate of growth during periods of economic uncertainty. Finally, Slide 11 provides our 2024 financial outlook. We have updated our 2024 financial outlook to include the potential impacts from the final CFPB late fee rule. While uncertainty remains regarding the final outcomes of the legal proceedings regarding the rules, implementation and timing, we felt it would be helpful to provide a full year outlook with a May 14th assumed implementation date.

Our outlook contemplates continued slower credit sales growth as a result of further moderation in consumer spending and ongoing credit tightening, both of which pressure loan and revenue growth and net loss rate in the near-term. In addition, our 2024 outlook still conservatively assumes three interest rate decreases by the Federal Reserve in the second half of the year, which is expected to slightly pressure total net interest income. We acknowledge an increasing likelihood that rates will remain higher for longer, which would be a slight tailwind to our net interest margin, but would also indicate more persistent inflation, which would continue to pressure consumer spend, ability to pay, resulting loan growth, and potentially credit losses.

Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses and visibility into our new business pipeline we expect 2024 average loans to be down low-single-digits on a percentage basis relative to 2023. Moving to revenue, I will share three possible outcomes. First, a scenario where the CFPB fee does not take effect in 2024, implying a legal stay decision before May 14th. Second, our current updated guidance which assumes the CFPB rule goes into effect on May 14th. And third, a hypothetical October 1st rule effective date for a consistent comparison to what we shared on our last earnings call in January. So first, assuming the CFPB late fee rule does not go into effect this year, we expect full year revenue growth, excluding gain on portfolio sales to be down around mid-single-digits for the year in line with our previous guidance.

The year-over-year revenue reduction is driven by lower average loans, higher reversal of interest and fees due to expected higher gross losses, lower merchant discount fee from lower big ticket originations and is inclusive of three projected interest rate reductions by the Federal Reserve. In the next scenario, which is our current updated guidance outlook, we are assuming a May 14th effective date for the late fee rule. Full year total revenue growth for 2024, excluding gains on portfolio sales is anticipated to be down in the mid- to high-teen range. Additionally, when looking specifically at the fourth quarter of this year and still assuming a May 14th effective date, the CFPB late fee rule is expected to reduce fourth quarter total revenue in the mid-teen range on an isolated basis relative to the fourth quarter of 2023.

Our estimates are net of mitigation actions that we believe will positively impact this year’s results. Lastly, assuming a temporary stay is granted and using a hypothetical effective date of October 1, 2024, our updated estimate is that the rule would be expected to reduce fourth quarter 2024 total revenue by approximately 20% on an isolated basis relative to the fourth quarter of 2023 net of mitigation actions. The improvement from the 25% impact we announced on our fourth quarter earnings call to the 20% now incorporates final rule details and highlights the continued progress we have made since the final rule was released. As a result, discussions with our brand partners regarding customer pricing actions and clarity on the timing of implementation, we have higher levels of confidence in the success of our actions.

We continue to expect the financial impact of the late fee rule will lessen over time as our full spectrum of mitigation actions are phased in and mature. As we adapt and evolve our products, our mitigating actions are focused on preserving program profitability and returns over the long-term and ensuring safety and soundness of our banks throughout all periods. Going back to our guided scenario of a May 14th effective date for the CFPB late fee rule, we expect total non-interest expenses to be down low- to mid-single digits for the year, as we remain focused on expense discipline and operational excellence. As Ralph highlighted, we continue to strategically invest in technology modernization, digital advancement and product innovation that will drive future growth and efficiencies.

In the year, we expect certain CFPB late fee mitigation strategies to include additional expense. Estimates for these expenses are included in our updated guidance. We expect a net loss rate in the low 8% range for 2024, peaking in the second quarter at around 9% as inflation continues to pressure consumers ability to pay and moderates their spend. Our outlook is inclusive of our ongoing credit tightening actions and expected slower growth impacting the net loss rate. We are projecting a lower loss rate in the second half of 2024 versus the first half as a result of the credit actions we have taken and assume gradual, modest improvement in economic conditions throughout the year. Finally, our full year normalized effective tax rate is now expected to be in the range of 27% to 30% higher than previously guided 25% to 26% range due to the CFPB late fee rule change lowering earnings before tax.

Quarter-over-quarter variability will continue due to timing of certain discrete items. In closing, we are confident in our ability to successfully manage risk return trade-offs through this challenging macroeconomic and regulatory environment while continuing to make strategic investments that drive long-term value for our stakeholders. Operator, we are now ready to open up the lines for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.

Mihir Bhatia: Hi, good morning and thank you for taking my question. Just wanted to start with the late fee rule and some of the mitigation actions you’ve taken, and maybe just talk about a couple of things here, right. The first is what actions have you taken already and what’s worked well? What are you seeing? Where are you seeing pushback? What are you hearing from customers, retail partners? Like I guess, just trying to understand what all has happened already versus what’s still planned to be happened and what kind of response you’re seeing?

Ralph Andretta: Yes, it’s Ralph. I’ll start now and I’ll ask Perry to chime in. So, actions we’ve taken to date already to mitigate are product and portfolio diversification. We’ve made certain pricing actions inclusive of fee and some policy changes, and then we have our ongoing discussions with partners. So far from a customer behavior perspective, we haven’t seen anything dramatic. Its early days, so we haven’t seen anything that would be alarming to us, it’s kind of what we thought we would see. But I’ll caution that with that, we need to take a longer term view about that. Our partners realize that this is a reality now, and they’re working with us collaboratively to agree with the change everyone will make in making sure that quite frankly, that the changes are accepted by the partner and us and, and are well executed as we move forward, that’s what we’re seeing. Perry, anything to add?

Perry Beberman: Yes. Just in terms of a little, more color. I mean, I’ll tell you that at the end of last year you started to see us take, I’ll say, a half step into some pricing actions around higher APRs. As an example, there was a – we used to have, like, we call it a soft cap on APRs not going above [indiscernible]. We removed that. We increased the spread over the prime rate index and again, not taking it up to where I think the end state on APRs will be, but a half step because you don’t want to get dislocated from what was in the market. So that was happening and now you’re seeing that the final rule with the date came along, you’re seeing it in the marketplace, and you’ll see it with us in the coming months. More pricing actions inclusive of additional fees and policy changes, as Ralph mentioned.

Mihir Bhatia: Thank you. And then maybe just switching to a little bit on the credit side; you’re obviously expecting credit to peak here. But I wanted to dig in a little bit more on the credit actions you’ve been taking to tighten underwriting. And I guess when I look at Slide 9, like you know the greater than 660 piece of the credit distribution is not getting higher. So, like, I’m trying to understand some of the credit actions. I’m basically trying to square that circle. Like, you’re taking credit actions; you’re saying you’ve taken actions to tighten credit, which is going to help delinquencies. And we see that improvement in the delinquency rate, but we’re not seeing the risk distribution improve. Like, can you help me with that a little bit? Thank you.

Ralph Andretta: Yes. So we’ve been proactively managing our credit risk strategy across our entire life cycle, from acquisitions to line management, to account closures. And if you think about it on a risk adjusted basis, our approval rates today are 110 basis points lower than nearly 500 basis points lower than pre-pandemic. And our new account average vantage score is higher than it’s ever been, so the distribution is higher. We’re pausing some line increases to prime and sometimes prime plus. And we are expanding line decreases where we think appropriate. So but this broad braced inflationary pressure, it’s difficult to isolate into a remedy. But however, we’ve continued to proactively assign the right lines and proactively manage lines. So we make sure people don’t get overextended as they move forward.

Perry Beberman: Yes. And I’d add one more thing to what Ralph just said, right? When you’re looking at the risk distribution that we put on the chart, everything Ralph just spoke about is happening on the new accounts coming in at the best risk scores that we’ve seen, coupled with lower line assignments, all those things, and that we’re doing to protect the existing base. But then what’s happened is you have FICO or risk score migration, right, so as you book accounts in the past few years that were higher risk, higher credit quality in an environment like this, their risk scores migrate downward. So that’s what’s causing you not to see the improvement. That is fully reflective of all the actions we’ve taken. So the fact that it’s actually stabilized is reflective of all the actions that we have put in place.

Mihir Bhatia: Thank you.

Operator: Thank you. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is now open.

Sanjay Sakhrani: Thank you. Good morning. Just on the back of these mitigation actions, obviously it’s very positive that you’ve been able to mitigate the impact into fourth quarter – as early as fourth quarter. Maybe you could just talk about how much work there is to be done to even get that impact lower, like, is it possible you can even get it lower? And then maybe, Perry, you could help with the path of offsetting the entire impact into the future. Like, what would be the timeline, roughly as you sit here today? Thanks.

Ralph Andretta: Yes. I would say that in terms of path to continue to reduce the impact, the team is feverishly working non-stop with brand partners, coming up with other policy changes, other things that can help close that gap. But I think in terms of, I’ll say, the time to implement and what’s in front of us, we’re trying to give you our best view at this point. And then as we move into 2025, we expect to continue to see improvements on that. And the second part of your question was.

Sanjay Sakhrani: Yes. Just like how much, like, is there a potential you could even cut that 20% down as early as the fourth quarter? Like the 20% you got, 25% down to 20%, can it even be lower with the work that you guys are doing or is that sort of the best at this point?

Perry Beberman: I think we have line of sight into the final rule. There’s still ongoing partner negotiations so we’ll update that as we have more information.

Sanjay Sakhrani: Got it. And just one on…

Perry Beberman: Sanjay, so I mean the other part of that is, right, is with the APR changes. We’ve said this before; it just takes time for those to burn in and have their full effect, while some fees that get implemented obviously have the near-term impact. But we’ve reflected for what we have the high confidence in right now. It’s possible to improve a little bit, but I don’t expect material movements from that.

Sanjay Sakhrani: Okay, got it. And just one question, I know Mihir asked about the credit, but just on the reserve rate that went higher and I think your credit outlook was consistent, if not slightly better. Just as we look ahead, what drives this reserve rate going forward?

Ralph Andretta: Yes. And I appreciate that question. It did go higher by I think about 8 basis points, right. And if you think about the reserve rate, it’s been pretty steady from the first quarter of 2023 and it’s moved around a few basis points up and down, and that’s all this is. We didn’t change a lot of assumptions in the model. And what was interesting, I mean, as you would imagine, there’s a lot of complexities that go into the CECL reserve rate and the modeling. We didn’t change our risk weightings, and to your point some of the early stage delinquency came in better, but you also in the model and the output is this peak second quarter losses that are expected to materialize, but that was already cared for. So what really changed this model was the separation between the baseline economic outlook and the adverse and severely adverse outlooks that get weighted into the risk overlay.

And surprisingly, when that runs through a model, it creates a little bit larger overlay by a little, it’s not a ton and it didn’t seem like the right time to reduce weightings in the overlays just to keep the number flat, full transparency. So what my expectations are, as the peak losses are in the rearview mirror at the end of the second quarter and delinquencies improve, we should start to see some improvement in the reserve rate, and I would expect to exit the year with a lower reserve rate than what we exited 2023.

Sanjay Sakhrani: Perfect. Thank you very much.

Operator: Thank you. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

Moshe Orenbuch: Great. Thanks. I wish, getting back on the late fee issue, could you just talk a little bit, Perry, about the steps that you’ve actually already taken, the steps that you expect to be taken by May 14th and how long that takes to kind of flow into the earnings? Because which I’m trying to parse through some of the things you’ve said about the three different scenarios and that would be helpful? Thanks.

Perry Beberman: Sure. So the actions that have been taken, as mentioned earlier, it’s some of those early APR increases that were already in flight. And as you and I have discussed before, take some time for those to burn in. And now what you’re going to see come through is further increases in the base APRs for new transactions on existing accounts, higher APRs on new accounts. You’ll see an introduction of statement fees that will roll into the market in a sequenced way with different partners starting, I’d say, in the next few months. And so really it’s a matter of the timing of when these hit markets and the value that they will have. And then on top of that, you’ll start to have some additional underwriting changes and product strategy changes that will happen later in the year and perhaps into early next year, and then some other fees. You’ll start to see things like promo fees on big ticket purchases and the like.

Moshe Orenbuch: Okay, thanks. On the credit side, I mean, you’ve talked a lot really over the last year and change about the impact of inflation on your customer base. What do you think it takes for the – for things to be closer to a normal situation like, is it just continued wage growth like in how much time do you think about that as a and have a thought about how that could be reflected in your credit metrics?

Ralph Andretta: Yes. That’s a great question. Something that, there’s a chart that I love to look at, which is a cumulative gap between inflation and wage growth. And we had a couple months this quarter where it was actually closing, which was encouraging, but then it kind of reversed course a little bit in March. I’d like to see that continue to improve. To your point, wage growth outpacing inflation is good for the consumer, particularly those that we serve. That’s what wind up giving them relief. I mean, the encouraging part is they’re not over levering. I mean, they’re really trying to do the best they can and use discipline to repurpose their spend into things that are non-discretionary and make sure they’re able to manage their finances.

I think that will help, obviously, lower interest rates, help consumers more broadly. But unemployment’s been good. So I think I’m optimistic of the future. And then for us, the credit actions that we’ve taken, putting on a better book will also improve our delinquency and losses. And then as you start to have the tailwinds of the improved economy, and that if the wage growth outpaces inflation, then you’ll start to see us be able to unwind some of the restrictive line increases, more approvals come through, which would be a tailwind to growth as well.

Moshe Orenbuch: Okay. Thanks very much.

Operator: Thank you. Our next question comes from the line of Bill Carcache with Wolfe Research Securities. Your line is now open.

Bill Carcache: Thanks. Good morning, Ralph and Perry. Following up on Sanjay’s question about how long it will take to mitigate the effect, can you discuss how you’re thinking about the earnings power and return generating ability of the business, how that’s evolved as we look to the other side of implementation, both in terms of ROA and ROE? You mentioned, Perry, that there would be some underwriting and product changes. Just curious how that you see that impacting returns and overall profitability?

Perry Beberman: Yes. I think what I would direct my response back to is what we’ve said before is that our goal is to deliver strong returns on the other side of this. And with all the pricing and APR changes that go into effect, particularly APRs, if you recall that chart we put out there, one of the investor conferences, it takes a few years for the full value of APR changes to work its way through. But our goal is to get back to strong returns, obviously as fast as possible, and we’ll give more guidance on that at our Investor Day.

Bill Carcache: Okay, thank you. And then separately on capital, your largest peer targets, and 11% CET1 ratio, how does the 12.6% that you’re at currently compare relative to what you would view as sort of your longer-term target? I know this will probably come up during Investor Day, but maybe some initial thoughts now. And since you’re not aggressively growing loans currently, are we approaching a level where we could see you return capital more aggressively?

Perry Beberman: Yes, you nailed it. We will give more direction on that at Investor Day. But I would tell you that we have more room for improvement in CET1. And I know it’s – we all want to do a compare ourselves to different peers everybody has a different capital stack and structure. So we all have different binding constraints. So we’ll go through that more at our Investor Day.

Bill Carcache: Okay, thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.

Jeff Adelson: Hey, good morning. I was just wondering if we could, just a little bit more head on why the 20% came in lower than the prior 25%. I know you’re expressing more confidence in that view there, but Perry, I think you mentioned before that some retailers were kind of holding out until the rule actually came through. Are you noticing maybe more retailers now coming on board with your plans, giving that, hey, it looks like we’re sitting here less than three weeks away, and this might potentially come through. Just maybe speak to what kind of progress you’re seeing on retailers that have kind of held out on doing anything yet?

Perry Beberman: Yes. You really summarized that pretty well, right? 90 days ago, and it’s a long time in this process. And the final rule came out when we gave our initial estimate. We tried to give an estimate based on our degree of confidence of what we believe we could execute and where we were with partner discussions. And over the past 90 days, we had more clarity into the final rule as well as it brought a lot more clarity to the discussions and actions that had to happen with partners and more of those partners agreements in terms of what we were going to deliver with them. So it’s really just continued progress.