Earnings Call Transcript - BFH Q3 2023

Operator, Operator

Good morning, and welcome to Bread Financial's Third Quarter Earnings Conference Call. My name is Bruno and I'll 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 open for your questions. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.

Brian Vereb, Head of Investor Relations

Thank you, Bruno. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial, and Perry Beberman, Executive Vice President and Chief Financial Officer of Bread Financial. Before we begin, I would like to remind you that some of the comments made on today's call, 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 at breadfinancial.com. With that, I would like to turn the call over to Ralph Andretta.

Ralph Andretta, President and CEO

Thank you, Brian, and good morning to everyone joining the call. Starting with Slide three. Bread Financial's business model, which features an industry-leading risk-adjusted yield, conservative reserves, and strong capital positioning, is built to consistently perform well through the full cycle. Our third quarter results, which include net income of $171 million and a 25% return on equity, demonstrate our continued financial resilience despite losses above or through the cycle average in this current more challenging macroeconomic environment. Funded by strong cash flows from operations, we completed our authorized $35 million share repurchase in the quarter, which represented 935,000 shares. Additionally, we continue to deliver on our commitment to build long-term shareholder value as tangible book value per share exceeded $42, nearly triple the level compared to the fourth quarter of 2020 when I joined the company. During the quarter, we launched Ross Dress for Less, the largest off-price apparel and home furnishing chain in the U.S. Also, at the beginning of October, we successfully closed on Dell Technologies' consumer credit portfolio purchase of approximately $400 million and simultaneously launched the Dell program, which includes a broad suite of payment solutions and expands our position in the consumer electronics market. Through our industry expertise, technology, and data and analytic capabilities, we are well-positioned to drive value for both our new and existing partners. The economic environment remains challenging and consumers contend with numerous headwinds, including the compounding effect of persistent inflation relative to wage growth, high interest rates, the resumption of student loan payments, and gas volatility. Broadly speaking, these factors are weighing on consumers and, in part, led to the reduction in our credit sales in the third quarter, particularly within our retail and home industry verticals. For moderate to low-income Americans, who have depleted much of their excess pandemic-era savings, we noted a reduction in travel and entertainment spending as these consumers focus more on non-discretionary purchases. By contrast, higher-income consumers have continued to spend on health, beauty, and experiences. Prime and Super Prime cardholders remain resilient and are spending approximately the same amount as they did last year. However, as evidenced by many retailers' updated financial outlooks, economic pressures are expected to continue to manifest in terms of softer sales in the fourth quarter. Given the ongoing macroeconomic stresses faced by many consumers, we have continued to responsibly tighten our underwriting and credit line management. We proactively manage our exposure by tightening approval rates, pausing line increases, and implementing line decreases where prudent. While these adjustments limit sales and loan growth, we see these as the right actions to support improved credit performance over time. We are focused on responsible growth and will continue to manage underwriting to meet our risk-return thresholds. From a regulatory perspective, we are developing mitigation strategies in anticipation of the CFPB’s final rule on credit card late fees, which would have a significant impact on our business if unmitigated. We actively engaged with our brand partners regarding possible outcomes and strategies. Having effectively managed through significant regulatory changes and various credit cycles in the past, our seasoned leadership team is focused on addressing potential impacts to our business and is committed to generating strong returns through prudent capital risk management. Turning to Slide four, our key focus areas for 2023 remain unchanged. They are growing responsibly, strengthening our balance sheet, optimizing data and technology, and strategically investing in our business. As I mentioned on the last slide, our management team is committed to driving responsible growth that will deliver long-term shareholder value. We continue to expand and renew our partnerships with an emphasis on sustainable profitable growth. Strengthening our balance sheet remains a top priority and is integral to our long-term strategy. Our ongoing disciplined balance sheet management actions enhance our financial resilience and provide additional flexibility for capital utilization, including supporting business growth and further reducing debt. On the data and technology front, we are leveraging innovative capabilities gained from our platform conversion, system enhancements, and expanded product portfolio. In addition, machine learning remains one of the many tools we have utilized for many years to bring stronger credit risk models to continually enhance our underwriting, line management, and collections. We continue to invest in a range of technology innovations from data and customer analytics to self-service and digital capabilities. We strive to deliver exceptional value and experiences for our cardholders. Our goal is to continuously generate efficiency gains that enable reinvestment in our business, support responsible growth, and achieve our targeted returns. Moving to Slide five, we have significantly enhanced our financial resilience, strengthening our balance sheet and funding mix while effectively managing credit risk. Over the past few years, we have diversified our product mix through partner co-brand growth, the introduction of two proprietary cards, and the launch and expansion of Bread Pay. Co-brand spending now comprises approximately 50% of our credit sales, enabling us to capture incremental sales as consumer spending patterns shift under evolving economic conditions. Additionally, our broader product suite increases our total addressable market opportunity and diversifies our spend. We have generated significant growth in our direct-to-consumer deposits, which reached $6.1 billion in the third quarter. This additional source of funding has strengthened our balance sheet and enhanced our financial flexibility. We have also strengthened our balance sheet by reducing debt and building capital while maintaining a conservative loan loss reserve of 12.3% for the last three quarters. Our loan loss reserve rate is 300 basis points higher than our CECL day one rate in 2020. Our quarter-end total absorption capacity, which we define as our allowance for credit losses plus tier 1 capital divided by the total end of period loans, was 24%, providing a strong margin of protection should more adverse economic conditions arise. We remain confident in our disciplined credit risk management and our ability to drive sustainable value through the full economic cycle. We are committed to delivering responsible profitable growth, which may entail responsibly slowing growth during more uncertain economic periods. Turning to Slide six, our disciplined capital allocation strategy, which focuses on profitable growth and improving capital metrics and reducing debt has driven substantial growth and tangible book value over the past several years. Looking at the first chart, you can see that since the first quarter of 2020, we have more than tripled our TCE to TA ratio. Moving to the second chart, we are proud of the progress we have made with respect to debt reduction. In just over three years, we have reduced parent-level debt by 55%, paying down more than $1.7 billion. We aim to further enhance our capital metrics. From where we are today, we will balance achieving these targets with continued investment in our business and growth aligned with our capital priorities. Before I turn it over to Perry, I will again highlight the improvement in our tangible book value per share, shown on the last graph, which has grown at a 37% 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. We believe this growth, combined with our significant improvement in financial resilience and a strengthened balance sheet, should yield a company valuation that is multiple of tangible book value. Our significant accomplishments over the past three years demonstrate our focus and the success of managing our business responsibly to build long-term value for our stakeholders. We remain confident in our strategic direction and our commitment to drive long-term value creation. Now I'll turn it over to Perry to discuss the financials for the quarter.

Perry Beberman, CFO

Thanks, Ralph. Slide seven provides our third quarter financial results. Bread Financial's credit sales were down 13% year-over-year to $6.7 billion, reflecting the sale of the BJ's Wholesale Club portfolio in late February 2023, strategic credit tightening, and moderating consumer spending, partially offset by new partner growth. As Ralph highlighted, we have been proactive in tightening our credit, underwriting, and credit line assignments for both new and existing customers, given the economic uncertainties and pressures affecting a portion of our customer base. Average loans were flat year-over-year driven by the addition of new partners and a lower consumer payment rate, offset by the sale of the BJ's portfolio in February and softening credit sales. Revenue for the quarter was $1.0 billion, up 5%, while total non-interest expenses increased 3% year-over-year. Income from continuing operations was $173 million, up 29%, and diluted EPS from continuing operations was $3.46. Looking at the financials in more detail on Slide eight, total net interest income was flat year-over-year. Total non-interest income benefited from three factors. Higher cardholder and brand partner engagement initiatives in the prior year post our conversion, higher merchant discount fees and interchange revenue earned in the current year, and lower payments under our retailer share agreements due to lower credit sales and higher losses. Total non-interest expenses increased 3% from the third quarter of 2022, yet declined $28 million or 5% sequentially. The year-over-year increase was primarily due to an increase in card and processing costs, including fraud, and higher employee compensation and benefit costs. This was partially offset by reductions in marketing expenses and depreciation amortization costs. The sequential decline in expense has largely reflected lower fraud expenses, lower depreciation, and amortization costs, and our continued focus on driving efficiency through our prior and ongoing investment in technology. Additional details on expense drivers can be found in the appendix of the slide deck. Income from continuing operations was up $39 million for the quarter versus the third quarter of 2022, while pretax pre-provision earnings or PPNR grew for the 10th consecutive quarter, increasing by 7% year-over-year. Turning to Slide nine, loan yields continue to increase, up 140 basis points year-over-year. Loan yields benefited from an upward trend in the prime rate, causing our variable-price loans to move higher in tandem. Net interest margin was seasonally elevated in the third quarter at 20.6%. Looking at the sequential change from the second quarter, both loan yield and net interest margin benefited from a decrease in the reversal and interest in fees related to reduced sequential credit losses. Also, funding costs continue to rise and remain in line with our expectations. We expect net interest margin to move lower sequentially in the fourth quarter following typical seasonality and due to an increase in reversals of interest in fees related to expected sequential increases in gross losses. As you can see on the bottom right graph, we continue to improve our funding mix through our actions to grow our direct-to-consumer deposits, which increased to $6.1 billion in the third quarter. 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 efficiently fund our long-term growth objectives. Moving to credit on Slide 10, our delinquency rate for the third quarter was 6.3%, up from the second quarter as expected, driven by continued macroeconomic pressures. The net loss rate was 6.9% for the quarter compared to 5.0% in the third quarter of 2022 and 8.0% in the second quarter of 2023. The third quarter net loss rate was elevated compared to last year's levels due to more challenging macroeconomic conditions, pressuring the consumer’s payment rate, as well as actions taken to transition our credit card processing services in June of 2022 that benefited the loss rate in that quarter. The net loss rate declined sequentially from the second quarter as the final impact from the transition of our credit card processing services was reflected in our July credit metrics. The reserve rate remained flat sequentially at 12.3%. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model in anticipation of ongoing macroeconomic challenges and the consequential impact on our future credit losses. As macroeconomic headwinds persisted during the quarter, our credit risk score distribution deteriorated slightly compared to the second quarter, driven by downward score migration from existing customers, despite new account risk scores being well above the portfolio blend. Even so, our percentage of cardholders with a 660+ credit score remained above pre-pandemic levels, given our prudent credit tightening actions and our more diversified product mix. As Ralph touched on, we continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. We closely monitor our projected returns with the goal of generating risk-adjusted margins above our peers. Finally, Slide 11 provides our financial outlook for the full year of 2023. Our financial outlook is updated to reflect slowing sales growth as a result of both our strategic and targeted credit tightening as well as an expected continued moderation in consumer spending. For the full year, average loans are expected to grow in the low to mid-single digit range relative to 2022 based on the latest economic outlook. We anticipate year-end period loans to be around $19.3 billion inclusive of the recently acquired Dell portfolio of approximately $400 million. We expect revenue growth to be slightly above our average loan growth in 2023, excluding the gain on sale from BJ's, with a full-year net interest margin similar to the 2022 full-year rate. Full-year total non-interest expenses are expected to be up 8% to 9% compared to 2022, with fourth-quarter total expenses slightly higher than the third quarter driven by increased seasonal marketing and employee benefits costs. We updated our net loss rate outlook as we now anticipate the full-year 2023 rate will be in the mid-7% range, including impact from the transition of our credit card processing services in June 2022. While our tighter underwriting and credit line management should benefit future loss performance, these actions raise the loss rate in the near term by lowering our projected loan balance, which forms the denominator in the net loss rate equation. We now expect the fourth-quarter net loss rate to be approximately 8%, driven by normal seasonal trends, continued consumer payment pressure, and the denominator effect from lower loan growth. In addition, we expect the fourth-quarter delinquency rate to be relatively consistent with the third quarter. Sticking with credit, with the addition of the Dell portfolio in early October and the fourth quarter anticipated seasonal increase in transactor balances, it is likely the reserve dollars will increase, but the reserve rate could decline slightly at year-end. The increase in transactor balances will also temporarily reduce our capital metrics in the fourth quarter, as is typical each year-end. Our full-year normalized effective tax rate is expected to remain in the range of 25% to 26% with quarter-over-quarter variability due to timing of certain discrete items. One final item before wrapping up, as you can see in the financial tables provided in the Appendix, we are now reporting total company regulatory capital ratios and our double leverage ratio. As Ralph highlighted, you can see the disciplined management decisions and successful execution of our plans over the past three years. Briefly looking ahead to 2024, we will stay true to pursuing responsible, profitable growth. We expect consumer macroeconomic pressures to continue to drive softer consumer spending, which, coupled with our continued tighter credit underwriting and line management actions, will likely lead to loan growth remaining below our longer-term targets next year. Also, we currently project that our net loss rate will peak in 2024, subject to economic conditions. We will provide specific guidance for 2024 during our fourth quarter earnings call in January and more details around our intended mitigation strategies after the final CFPB rule is released. In closing, we are effectively managing risk-return trade-offs through an ongoing challenging macroeconomic environment while continuing to strategically invest and drive long-term value for our stakeholders.

Operator, Operator

We are now ready to open up the lines for questions.

Sanjay Sakhrani, Analyst

Thank you, good morning. Ralph, I appreciate that the CFPB rules are fluid from a timing perspective, but it seems like we're going to get something by the end of the year, and it's probably going to be close to that $8. I'm just curious if you've started to think about and implemented any mitigation efforts or tested to see what you might be able to do? And how comfortable are you with the mitigation?

Ralph Andretta, President and CEO

Yes, Sanjay, thanks for the question. We're waiting like everybody else for the final ruling from the CFPB. We'd like it to come sooner than later so we can just get focused on it even more. But we're testing different APRs in the marketplace and a variety of other types of fees to close gaps. We're working with our partners diligently. They understand what the issue is and the impact it could have on their business as it could have on ours. We continue to collaborate with them on mitigations. In terms of how long it will take, what the mitigations will be to close the gaps, we'll know more when the final ruling comes out. But rest assured, we're focused on it, testing different strategies, and working collaboratively and diligently with our partners.

Perry Beberman, CFO

I would like to add to what Ralph mentioned. It's challenging to implement some of the changes ahead of the final rule. We are currently waiting for that. We all understand that this will likely be subject to legal disputes. The pressing question is how long it will take before we need to implement these changes. Additionally, we anticipate that the initial impact on our total revenue will be more significant for Bread Financial compared to our peers, mainly due to our larger share of private-label credit card accounts and our in-depth underwriting practices.

Sanjay Sakhrani, Analyst

Yes, absolutely. Perry, I have a question for you regarding credit. You mentioned the reserve rate and that it’s expected to decrease in the fourth quarter due to the transactor build. As we look ahead to next year, could you elaborate on your observations regarding delinquency migration? The environment seems a bit unstable, but it appears relatively stable at this point. How do you foresee the reserve rate changing if that stability continues? Thanks.

Perry Beberman, CFO

Thanks, Sanjay. As we think about the reserve rate, I think it's dependent on what happens with the economy next year. We indicated that we were foreseeing things that perhaps a lot of the economic forecasts were not seeing in terms of what was happening with the consumers we serve, the pressure that this elevated inflation environment puts on the consumer base and what that means for future delinquency and losses. We were accounting for that when we increased our reserve rate to 12.3%. We did not expect unemployment to be the driver of this; it was more about the pressure from the compounding effect of inflation. The degree to which the Fed is able to get inflation under control, whether it's the back half of next year, you start to see inflation coming down, a lot of this depends on the Fed's view on rates. It’s going to affect how we see our losses next year. So our losses may peak next year, whether it's mid-year or remains a little elevated throughout the year is hard to know. But I would expect that as we think about the reserve rate, it should remain pretty steady throughout the year and will be macro dependent on when that rate can come down.

Sanjay Sakhrani, Analyst

Okay, that’s great. Thank you so much.

Robert Napoli, Analyst

Thank you. Good morning. I wanted to follow up on the main question. I'm sure you have various models to assess the impact of different factors. What is your confidence level in generating attractive returns after the adjustments, assuming we reduce late fees to the lowest level? How confident are you in achieving reasonably attractive returns at Bread under any scenario?

Perry Beberman, CFO

Thanks for the question. First of all, we don't know what the final rule is. So to your point, if we go to the current $8 fee, you should expect that we said in the past and it continues to be true that APRs will have to go up across the board for all customers. You will start to see some fees for credit where it means upfront origination fees, promotional fees on promotional bonds like for big tickets, or annual or monthly fees. That would be true. Then you’re going to have some restructuring of partner contracts. I mean, as Ralph talked about earlier, we're very engaged with our partners. We're in this together and trying to protect their economics as well as ours. But we've got to underwrite, as you said, to protect returns for shareholders. We expect some tightening of credit standards, which means we'll see fewer customers being extended credit. We might grow a little less than what we otherwise might have in, I'll say, private label, but that will free up capital to deploy into other product adjacencies. So there's a lot to sort through. But yes, there's a full expectation that we will be able to run a business delivering strong returns in the future. It might be a little bit of a burn-in period with the APR changes. But when you look to get to the other side of it, we have a full expectation to be able to deliver strong returns.

Robert Napoli, Analyst

And then I guess, given that your confidence there and given that your stock is so far below book value, tangible book value right now, what are your thoughts on capital, on capital return, and balancing that with the new potential regulatory changes coming up as well? But it seems like a good opportunity for confidence levels, is that high to increase tangible book value by reducing the share count even?

Perry Beberman, CFO

Yes. I think when we think about our capital structure, I'll first start by saying our priorities remain unchanged: supporting responsible, profitable growth, making sure we're investing in our technology and digital capabilities to serve our brand partners and customers. We're still not where we want to be on that front. Ralph talked about earlier, we're paying down our debt. We need to pay down our debt to get below a 115% double leverage ratio. We want to continue to build our capital ratios to fortify this balance sheet, and then we could think about things like you mentioned around further returns to shareholders. But in this environment, with the uncertainty around the macro side of things, it would not be responsible to take, say, a strong action like that. We did our share repurchase. As Ralph noted, we bought back $35 million in shares. If it weren't for those uncertain environments that we’re in right now, it certainly be more attractive, but I think that would not be the responsible thing for us to do at this time.

Mihir Bhatia, Analyst

Good morning. Thank you for taking my question. I wanted to start with the delinquency trends. I noticed your comments regarding 2024 at the end. Currently, delinquencies are at 15-year highs, as indicated in your trends. I understand the pressures on consumers, but I'm curious if you expect these trends to cause higher net charge-offs next year. In hindsight, do you believe Bread or the industry became too aggressive with growth after COVID? What factors are driving this? Could you elaborate on the tightening measures you're implementing to align with your long-term guidance on loss rates? Any additional insights on that tightening would be appreciated.

Perry Beberman, CFO

Yes. Let me address several aspects. Ralph will discuss the tightening of our credit strategy. In response to whether we grew too quickly, I would say we have been very disciplined in our growth. Unlike others who may have experienced significant vintages that have since seasoned, our lag loss rates remain manageable. This is not an issue for us. What we are witnessing is the economic impact on moderate and lower-income households, where wage growth is not keeping pace with inflation. Unfortunately, our customers are striving to make ends meet by adjusting their spending priorities and taking on additional jobs in this job-filled market. Regarding the increase in delinquency rates reaching a 15-year peak, it's important to note that this situation is not comparable to the great financial crisis, when losses were much steeper due to high unemployment and individuals facing negative equity in their homes, leading many to bankruptcy. The current macro environment differs fundamentally, as consumers are employed. The issue lies more with inflation, which we expect to stabilize eventually. While we anticipate some ongoing pressure on delinquency that may lead to higher losses, I do not foresee the severe losses experienced previously.

Ralph Andretta, President and CEO

Yes. We have a very robust and proactive risk management process across the life cycle of a borrower. We think from acquisition to line management to collections and account closures. We manage that very carefully. Our view is to make sure that we are not putting anybody in harm's way and we're managing their debt appropriately. For example, now that student loans have come back on track, we monitor those customers that have student loans, where we've included those student loans in their obligation and ability to pay, even when they weren't paying them. As we step through this uncertain time, we continue to focus on this across the life cycle of individuals in terms of their credit underwriting and their ability to manage credit. I feel very good about that. We were focused on this pre my arrival in 2019. We were very diligent and thoughtful through the pandemic when everybody was opening the box a little bit. We were very conservative and made sure that we were diligent in terms of underwriting and line management, and we'll continue to do that as we move forward. Now, as we said, some of that impacts our growth in the near term. But from a loss perspective long-term, we believe it's the right thing to do, and we'll continue to manage very thoughtfully through the process.

Perry Beberman, CFO

And I'll add one last comment to what Ralph just said. We are seeing the benefits of those credit strategies as we are seeing a little bit lower early-stage delinquency, which demonstrates that the credit actions are taking hold. The challenge is that once consumers get into delinquency, even though they're employed, they're struggling to get back to current. What that means is that your later-stage roll rates are higher than historically they've been, and that's what's driving the higher losses. So we're going to continue to do what we can to drive down the early stage and work with customers as they enter those later stages.

Mihir Bhatia, Analyst

Got it. Thank you for that. Maybe switching gears just to spending, but related to some of this tightening. Can you just talk about some of the changes you saw intra-quarter in consumer spending? Do you see a slowdown month over month, and maybe give us a glimpse of what you've seen month-to-date? I really want to try to understand how much more can spending slow down from here into the fourth quarter and as we think about the first quarter next year?

Perry Beberman, CFO

Yes. There's a noticeable slowdown occurring, particularly among moderate and lower-income groups, and this trend is beginning to extend into some prime segments as inflation persists. When considering the upcoming fourth quarter, our brand partners are forecasting a decline in sales for the holiday season, which aligns with trends observed over the summer. More retailers are likely to implement discounts, incentives, and rewards this year, unlike previous years when supply chain challenges limited availability of electronics and other items. Spending had previously surged earlier in the season, especially in early October. However, we anticipate that as consumers become more budget-conscious and seek out deals, the typical seasonal spending pattern will return, concentrating in November and December as shoppers look for bargains, prompting retailers to discount their offerings accordingly. It may resemble past cycles from previous years.

Jeff Adelson, Analyst

Hello, everyone. I appreciate the opportunity to ask my questions. Good morning. I wanted to revisit the comments regarding credit. I want to ensure I understand correctly. Are you anticipating that your loss rate will peak next year? Should we interpret the peak loss rate in relation to what you mentioned about the fourth quarter being around 8%? I thought we were expecting a bit more improvement next year, so I’d like to clarify those numbers.

Perry Beberman, CFO

I appreciate the direct question. You're right, we are definitely expecting fourth quarter to be around 8% and reiterate that's 100 basis points up linked quarter. Some of that is a seasonal increase, and the other half is a combination of the macro conditions affecting the consumer's ability to pay and the denominator effect. Yes, you can extrapolate that into next year because while seasonality will move around, I'm afraid that pressure on the consumer's ability to pay will continue to play out throughout next year as well as the denominator effect, as we will have smaller vintages from this year carrying into next year. Next year's vintage will also be smaller as a result. So that will put pressure on the net loss rate, and I don't think any of us are thinking that inflation is abating that quickly. The higher interest rates will have a lagged effect on the consumers in terms of higher costs of auto loans, home loans, credit card debt. Their debt is rising for them, which means they have more debt to pay with higher interest costs, and at the same time, student debt repayment is occurring. So I think there's going to be a play out for the next year, which will definitely put it in the higher end of their range.

Jeff Adelson, Analyst

Okay, great. And just to circle back on the NIM. I know this was seasonal lower reversals, and it's going to trend back down next quarter on seasonality as well. I think we're all pretty surprised by the strength in the NIM though. You've discussed yourself being a little bit more neutral to rates. I know there's a lag effect with the Fed here to the prime rate. But thinking forward, is there a case to be made that maybe you've got a structurally higher NIM or card yield going forward with people maybe revolving more? Or are you still more in the camp of hanging around this low 19% level?

Perry Beberman, CFO

I'm leaning towards maintaining the low 19% level. We'll offer more guidance on this as we move into next year. In the fourth quarter, we can expect a seasonal decline. Losses are still high; this quarter, they were 100 basis points lower than the last. Next quarter, they are likely to increase again, contributing to the reversal of interest and fees in the fourth quarter. Elevated losses will continue into next year, which will create further pressure. As we introduce smaller vintages, this will also impact higher quality vintages, potentially leading to less rollover and possibly lower pricing. I wouldn't want to speculate on a structurally higher net interest margin moving forward.

David Scharf, Analyst

Thank you for taking my questions. I wanted to circle back to just some of the planned mitigation efforts. As it relates to timing and ability to kind of roll things out, not looking for you to name names. But I'm wondering, as you reflect on maybe your top 20 retailer partners and the discussions you've had thus far, is there an unanimity in their reactions towards embracing certain mitigation efforts or pushback on others? I'm just wondering if there is a wide spectrum of support and resistance on various strategies among your partners, or do you think that there's a pretty uniform buy-in to what you're thinking and that, therefore, implementation should be pretty smooth?

Ralph Andretta, President and CEO

So let me start, and I'll let Perry finish up. Just a couple of things. Our partners and our interests are aligned to remain profitable during any kind of regulatory change. That said, they are focused on making sure that we do the right things for their cardholders, and we can still provide credit so that their baskets at the point of sale are as robust as they can be, given the challenges we would have in underwriting a sort of population with just an $8 late fee. They are aware of it, they understand our challenges, we understand their challenges, and we're working through the impacts of the changes we will need to make to keep them profitable and us as well. That may vary from partner to partner, but the collaboration and understanding of the challenge is consistent.

Perry Beberman, CFO

Yes. And I'll add to what Ralph just said. If you think about top 20 partners, they're all different, whether they're a big-ticket partner where they're, I'll say, a little less impacted by the late fee but still impacted in some way and then can pull levers on things like promotional fees, or others that are more private label concentrated and the soft goods who are more impacted. Those require different things. Each partner, because each of them are different in terms of their business model, the size of the average balance, and the customer they are attracting, require nuanced and different approaches. The team is doing a really good job of partnering with them. As Ralph said, it's a partnership where we're trying to protect their economics, protect our economics, and figure out how to underwrite as many customers as we can while still providing the right return for our shareholders.

Bill Carcache, Analyst

Thanks. Good morning, Ralph and Perry. It's great to see the total company CET1 ratio disclosure. By our math, that metric was actually negative when you took over, Ralph, which is a real testament to the significant capital that you've all accreted since taking over from the prior management team. But what's the right level of CET1 to target as you look forward from here? And then if you could layer into your response how you're thinking about the RWA inflation associated with the Basel III endgame, which many of your peers are working through, but it would be great to hear whether that's impacting how you think about capital.

Perry Beberman, CFO

Thank you for your question and for recognizing the excellent work Ralph has done in his role. When considering the Basel III endgame and its implications, it's important to note that this affects banks with over $100 billion in assets, and we are below that threshold. For us, this presents opportunities as larger players seek new partnerships and deals. Our capital requirements will differ, so this does not pose an impact for us. Regarding our ongoing targets, we are still refining those. We are working on stress models to determine the appropriate targets, taking into account the risk factors involved. We aim to adopt a disciplined approach similar to traditional banks. Currently, we are not yet at our desired position, but we plan to provide more information in 2024, likely at our investor event, outlining our long-term targets and our constraints.

Dominick Gabriele, Analyst

Yes, good morning, everybody. Thanks for taking my question. Just following up on the last line of questioning. The CET1 total company target, I do appreciate that as well. Is it fair to say that your target would likely be slightly above the industry average for credit card issuers just given the profile of the credit profile of the company? That's the follow-up.

Perry Beberman, CFO

Yes. That is a fair expectation.

Bill Carcache, Analyst

Thank you for taking my questions.

Reggie Smith, Analyst

Yes. Good morning, thanks for taking a question. I've got a few here. I guess you suggested that loss rates would peak in '24. It sounds like you expect inflation to moderate to the back half of the year. What's your, I guess, embedded unemployment assumption in that view? The loss rates were kind of peaking in '24. I guess new employment assumptions would fully appreciate that, right?

Perry Beberman, CFO

Well, as I've talked about repeatedly in the past, when we think about loss rates and where they're at this year, unemployment is low. It's really inflation-driven. When we talk about next year, the commentary of losses peaking next year, I'm talking a full year loss rate, but then even within some quarters, I expect the quarterly peak to happen next year. I expect that to be the case. It's less about what the unemployment assumption is and more about inflation. I expect it to be a rotation of inflation pressure getting replaced by some modest uptick in unemployment. The outlook that everybody is looking at is that inflation is going to be hanging around a little bit longer. But the good news is that means unemployment should stay in a good place for longer.

Reggie Smith, Analyst

Understood. That makes sense.

Ralph Andretta, President and CEO

Thank you all. I appreciate your time and your continued interest in Bread Financial. Everybody, have a terrific day.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.