Bread Financial

Bread Financial reported second-quarter diluted earnings per share of $3.55 as revenue increased 7% year over year and adjusted pretax preprovision earnings grew 11%. The company's return on equity remained strong at 17.1%.

Why it matters: These were solid earnings for the firm as improving credit performance, lower funding costs, and continued loan growth all supported the company's results. Bread continues to execute well, most notably in loan growth. Period-end loans grew 5% from last year to $18.5 billion, above the 2.5% growth rate included in our 2026 projections and the 0.5% decrease seen in 2025. For now, we will leave our projections in place, but there is potential upside to our fair value estimate if Bread can maintain this performance. Direct-to-consumer deposits rose 16% year over year to $9.4 billion, representing 50% of total funding, up from 45% a year ago. This improving funding mix continues to support earnings growth through lower funding costs and helped drive the bank's net interest margin to 18.49% from 17.71% last year.

The bottom line: Our fair value estimate for Bread is $79 per share. At the current price, the shares continue to be overvalued, as the market underestimates the cyclicality of Bread's earnings given its above-peer credit costs and the risks associated with its concentration in lower-income consumers. Although credit trends continue to improve, we believe that the current valuation leaves little margin of safety should consumer credit conditions or retail spending weaken. The company's customer base remains more economically sensitive than those of many traditional card issuers.

Coming up: Management raised its 2026 outlook following a stronger-than-expected first half and expects favorable operating trends to continue. Management expects average loan and revenue growth to increase at a low- to mid-single-digit rate in 2026, up from its prior outlook for low-single-digit growth.

Consumer credit quality has improved industrywide, and Bread has not been an exception. Delinquencies improved 48 basis points from last year to 5.25% of total loans, while the net loss rate declined by 90 basis points to 6.98%, prompting management to tighten its full-year net loss guidance to 7.0%-7.1%. Our own projection for 2026 is at the high end of this range at 7.1%.

We are increasing our fair value estimate for Bread to $86 per share from $79, which translates to a 2026 price/earnings ratio of 7.9 times. About $1 of the increase comes from the time value of money since our last update. Another $3 of the positive adjustment comes from lower near-term net charge-offs as we lower our credit costs projections across our coverage. The remainder comes from higher 2026 loan growth expectations. Our fair value estimate is sensitive to changes in the projected charge-off rate, loan growth, and expense growth.

We anticipate that net charge-offs will be modestly elevated in 2026 as affordability concerns continue to pressure Bread's consumer base, which is disproportionately made up of lower-income households. However, consumer credit quality has been better than expected in 2026 as the labor market remains surprisingly resilient. The bank's credit performance is improving, and our current projections include Bread's net charge-offs falling to 6.94% in 2026 and 6.55% by 2027. Bread has historically had higher credit costs than its peers, and future net charge-offs will be an important determinant of its value.

Bread has historically not benefited from higher interest rates, as the high rates charged on its cards leave little room to increase further, and a significant portion of the bank's reported net interest income comes from late fees. As a result, we do not expect the bank's net interest margin to depend on the path of interest rates. We project that its net interest margin will drift higher to 18.83% by 2030, up from 18.38% in 2025, driven by a shift in asset mix and Bread's improving funding structure.

We expect Bread’s credit card receivable growth to remain slow, as tighter underwriting continues to act as a headwind. Additionally, the risk of having its merchant partners poached by larger firms remains an ongoing challenge for Bread, which has suffered a number of major losses. Because of its focus on private label credit cards, the company also has more meaningful competitive overlap with buy now, pay later loans, which have seen rapid adoption by US consumers. With this in mind, we project that Bread's loan growth averages around 2.95% from 2025-30, materially slower than its larger peers.

We assign Bread a Morningstar Economic Moat Rating of none, as we do not believe it has a durable competitive advantage that would allow it to consistently earn excess returns. Bread’s private-label and co-branded general-purpose credit card business works by establishing long-term relationships with retailers using partnership agreements in which the retailer agrees to market Bread’s credit cards through both physical and online channels. Unlike its larger peers, Bread focuses primarily on small to midsize retailers. These partnerships are typically backed by long-term contracts lasting 3 to 10 years. While these relationships are typically long-lasting, Bread has had some high-profile losses, losing Wayfair to Citi in 2020 and BJ’s Wholesale Club to Capital One in 2022.

We typically see private-label credit cards as less attractive than general-purpose credit cards. Unlike a general-purpose credit card issuer, Bread faces material concentration risk, with 48% of its revenue coming from programs tied to its top five retailers. The loss of any one of these accounts would represent a material loss for the firm. Additionally, Bread operates at a substantial competitive disadvantage due to its size. Bread’s small scale prevents it from submitting serious bids for large anchor clients since the receivables volume these programs generate is too large for the company to reliably finance. With large premium partnerships out of reach, Bread has historically found success targeting smaller brands that do not capture the same level of competitive attention. However, this creates the persistent risk that if one of its retail partners grows too much, the associated credit card portfolio will attract the attention of larger firms.

Ultimately, we don’t think Bread has durable competitive barriers to protect its business from either larger card-issuing banks or rapidly growing buy-now-pay-later firms, leaving it exposed on both fronts. We generally assess bank rates derived from cost advantages and switching costs, neither of which applies to Bread. We see cost advantages for banks as stemming from three primary factors: excellent operating efficiency, a low-cost deposit base, and effective underwriting.

Like other digital banks, Bread benefits from a lean operating cost structure. The bank’s efficiency ratio is typically between 50% and 55%, while traditional US banks with a comparable asset size have historically seen efficiency ratios in the mid-50 to 60% range. This efficiency is driven by Bread’s national scale and lack of physical footprint. As a fully digital bank, Bread has no branches, carrying none of the costs associated with running a large branch network.

However, Bread’s reliance on online deposits leaves it with a substantial cost-of-funds disadvantage relative to traditional banks. While increased adoption of online deposits has allowed many digital banks to rapidly expand and improve the quality of their deposit bases, Bread’s lack of a strong brand has disadvantaged it. As a result, Bread’s cost of funds is the highest of all the digital banks we cover. Taken together, Bread’s decent operating efficiency is fully offset by its funding cost issues.

Bread also has the highest credit costs among major card issuers. Private-label credit cards are typically targeted at consumers with weak credit and who struggle to obtain general-purpose credit cards. Bread’s willingness to use loose underwriting is part of its value proposition to retailers, leaving it with structurally high credit losses. Additionally, Bread’s emphasis on small- to medium-size retailers leaves it unusually exposed to macroeconomic weakness. Private-label card portfolios have historically seen a spike in credit losses when the associated retailer goes bankrupt. Taken all together, Bread suffers from a cost disadvantage relative to its bank peers.

While most of Bread’s receivables come from long-term partnerships, we do not believe switching costs play a role in its business. Although not common, retailers can readily switch to a new private-label card provider if they are unhappy with their current issuer or receive a better offer. When this happens, the entire credit card portfolio associated with that retailer is typically sold to the new issuer, meaning that Bread can suddenly lose large chunks of its total business. Additionally, a significant portion of Bread’s revenue comes from products that cannot be used for daily spending. As a result, there is no cost or friction to prevent its individual cardholders from switching to a different product.

Additionally, Bread faces new competition from buy now, pay later lenders, which are most directly adjacent to private label credit cards, since both products tend to target consumers with weak credit quality. Moreover, the high interest rates and fees on private-label credit cards make them more vulnerable to disruption than normal credit cards. Signs suggest that buy now, pay later growth has become a headwind for Bread. Private label card issuers are seeing substantially weaker loan growth trends than general-purpose credit cards, with Bread’s receivable base remaining essentially unchanged since 2019. We expect this pressure to persist as buy now, pay later volume continues to expand rapidly in the US, and it is unclear whether Bread can maintain its interest and reward rates over time.

All in all, while Bread has historically outearned its cost of capital on average, we do not think the firm has sufficient competitive advantages to give us confidence that this will remain true in the foreseeable future. Bread faces intensifying competition at the low end of the consumer market from buy-now-pay-later lenders, and we do not think the firm has a discernible competitive advantage that will help it defend its position in the private-label card market or push into general-purpose credit cards.

Bread’s buy now, pay later offering could gain momentum as consumer adoption of the financing option increases.

Bread's credit quality is improving. If the bank is able to loosen its underwriting, loan growth could be stronger than expected.

The company's credit card business is well capitalized, which will help protect Bread if credit results deteriorate.

Bread's portfolio has materially higher credit costs than its peers, if economic conditions deteriorate we expect the firm to be harder hit.

Bread has a concentrated partnership base, the loss of one or more of its larger partnerships would be a material loss.

The private label card issuers are seeing limited loan growth. The rise of buy now, pay later firms could aggravate Bread's growth issues.