Bread Financial Holdings, Inc. (BFH) Q4 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to Alliance Data's Fourth Quarter Full Year 2021 Earnings Conference Call. My name is Charlie and I will be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Alliance Data. Sir, the floor is yours.

Thank you. Copies of the slides we'll be reviewing and the earnings release can be found on the Investor Relations section of our website. Today on the call, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; and Perry Beberman, Executive Vice President and Chief Financial Officer of Alliance Data. 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 subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures that we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com. With that, I would like to turn the call over to Ralph Andretta. Ralph?

Thank you, Brian, and thank you to everyone for joining the call this morning. Before I begin with the slides, I would like to address the news last week regarding our contract with BJ's Wholesale Club. As you may be aware, a lawsuit was filed noting the nonrenewal of the contract. While we cannot speak further about this matter on the call today, we firmly believe we are in compliance with the terms of our contractual agreement. What I can comment on is our steadfast commitment and track record of delivering the highest level of service and support to our value brand partners, including operating responsibly and with the utmost integrity. Our leadership team has decades of industry experience and understands the importance of building trusted relationships with our partners and working together to drive long-term success for all of the parties involved. We will be highlighting our achievements on this call this morning as we look back over at 2021, a record year for new brand partner signings, successful renewals and continued significant progress on our transformation. Regarding the BJ's nonrenewal impact on our receivables growth and financial outlook. Our forecast contemplates business activities, including new brand partner wins not yet at announcement stage, thoughtful assumptions around our ongoing new business development pipeline and renewal probabilities and expected but not yet announced nonrenewal and portfolio optimization decisions like BJ's. We will maintain financial discipline in both signing new partners and renewing existing ones. As I said before, we will not chase unprofitable deals simply for the sake of growth. We remain committed to delivering responsible economics. With these factors and assumptions, we have clear visibility across our portfolio activity through 2023, underscoring our confidence in our outlook for continued growth. More importantly, we remain committed to our long-term financial target of $20 billion in average receivables for the full year of 2023. As the year progresses, I look forward to sharing updates regarding ongoing success of new brand partner wins supporting the achievement of our goal. Now moving to the slide deck. I will start on Slide 3. Slide 3 highlights just a few of the major accomplishments we achieved in 2021 as part of our business transformation. We made great strides in simplifying our business model, including completing the spin-off of Loyalty Ventures in the fourth quarter. The spin-off allowed us to strengthen our balance sheet by improving our capital ratios and reducing our leverage ratio, as well as enabling a sharper focus on our investments and future growth plans. The spin-off marks the culmination of a 3-year strategy implemented by our Board to simplify and streamline the company, the outcome of which is a stronger, more focused business profile with increased flexibility and sustainable growth potential. We continue to develop our full suite of lending products to provide consumers with a diverse set of payment options. For example, we had great success introducing our new proprietary card as it grew to 1 million cardholders at nearly $650 million in outstanding balances at the end of 2021. We project continued success with this product, which provides a diversified growth driver and helps balance our portfolio risks. Our diverse product set, including private label and co-brands, installment lending and split pay unlocks graduation and optimization strategies that increase the lifetime value of a customer for us and our brand partners. Product choice allows us to meet the needs of a wide variety of consumers in a way that increases conversion while allowing brands to manage the product mix and optimization profitability. We recently celebrated the 1-year anniversary of the Bread acquisition, which added buy now, pay later offerings, including digital installment lending and split pay products. These additions to our product set were instrumental at the time of increasing omnichannel focus by our partners and consumers, increasing digital payment preferences. Our versatile payments platform provides new opportunities to deepen our relationships, expand our total addressable market and have provided a new strategic relationship with RBC, Fiserv, Wayfair and Sezzle. These partners leverage our nimble and flexible fintech platform to expand and improve their customer experience while also offering greater payment choices to consumers. We will continue to strategically invest in our digital platform, product innovation, marketing efforts and technology monetization with a planned incremental investment of over $125 million in 2022. Also in 2022, we are scheduled to complete the conversion of our core processing system to Fiserv, which will allow us to be more nimble, manage risk effectively and leverage new capabilities to drive both revenue opportunities and operating efficiencies. Last, but not least as highlighted in our environmental, social and governance report, we have continued to refine and prioritize our ESG strategy with Board level oversight. We have an outstanding Board of Directors, which is aligned with and confident in the strategic direction of the company and is supportive of our ability to make disciplined financial decisions to drive long-term value for our stakeholders. Moving to Slide 4. I will highlight a few key updates for the quarter and full year. I am happy to announce that we exceeded our 2021 financial guidance, driven by stronger-than-expected revenue growth, thoughtful expense management and positive credit performance. We are well-positioned to build on this momentum in 2022. Consumer activity remained strong with credit sales up 15% in the fourth quarter from the prior year period. Our beauty and jewelry verticals remain the front runners with holiday sales up more than 30% in each category. We saw a particular improvement among millennials and Gen Z, spending and transaction activity during the holiday season exceeding prepandemic levels. While diverse purchasing options across all channels is important to our brand partners, we did see a notable year-over-year increase in in-store transactions in the fourth quarter. As previously discussed, our business development pipeline remains robust, and you are seeing the results in our announced new signings and renewals during the quarter. Moving to Slide 5, I will highlight a few of these names. We signed several large partners -- several new brand partners in the fourth quarter, including the National Football League with its tens of millions of fans and their 32 affiliated club shops located at their stadium. Michaels, the nation's largest retailer of arts and craft materials with over 1,000 stores across 49 states. B&H Photo, which went live last week and is one of the world's largest independent retailers of photo, video, audio, computer and creative technology equipment with nearly 50 years in the business. And finally, TBC Corporation, one of North America's largest marketers of tire repair and automotive services delivered to a multichannel strategy for over 65 years. TBC has more than 3,000 franchising company-operated tire and automotive service centers under brands like National Tire & Battery, Big O and Midas. We look forward to working with these new partners to drive incremental sales growth and customer loyalty through our comprehensive product suite and exceptional customer service. These new partners are prime examples of our ongoing vertical diversification efforts. And we continue to actively add new brand partners, which we will announce in the coming months. This morning, we announced the early renewal of a long-term agreement with Ulta Beauty, a top millennial brand and one of our largest and fastest-growing brand partners selling over 25,000 products at more than 1,300 stores and on ulta.com. The Ultimate Rewards credit card is designed to enhance the benefits of Ulta's loyalty program and increase engagement and spend among the 36 million loyalty members. Importantly, this renewal reinforce our industry-leading position in the beauty vertical. We have a demonstrated track record of growth that was important to Ulta for our continued relationship. Our breadth of lending products provides customer choice, increases top of the funnel conversion while allowing Ulta to optimize the product mix for lifetime customer value. We have also renewed our relationship with Toyota, a preferred Gen Z brand; and Lexus, which further extends the growth of our diversified portfolios. With these renewals, nearly 90% of our year-end receivable balances, excluding BJ's, are now under contract through 2023. This clarity should provide additional confidence in our long-term receivables outlook and overall growth potential. Additionally, we continue to successfully add new online merchants through our direct acquisition platform channels, doubling new merchant additions in the fourth quarter compared to the third quarter. This success provides additional merchant diversification and is another source of our ongoing growth. A select few of the partners added to the platform are displayed on the right side of the slide. Also, our strategic partnerships continue to progress with new merchant additions to the RBC platform as well as to the Fiserv platform pilot in the fourth quarter. We will be better positioned to provide additional details on the platform activities for Fiserv as we move from pilot stage to a full rollout, and for Central and Wayfair following our expected launch in the first half of 2022. We continue to monitor the changing buy now, pay later landscape, particularly in split pay or paying for environment. As with any business, the consumer, economic, competitive and regulatory landscape is continuously changing. However, the vast majority of our platform, businesses and pipeline opportunities are aligned with our digital installment lending product where the returns and growth opportunities remain strong. We will remain responsible and disciplined with adding new partners to ensure we are receiving acceptable lifetime customer returns. We remain the only provider who is primarily focused on deeply integrating with merchants and partners, allowing the customer to stay on the merchant's site throughout the shopping journey rather than being directed to a third-party site or app. This is an important distinction as many third-party sites promote multiple merchant offers and their number one priority is having their app downloaded so they could become the entry point of the shopping journey. This ultimately disintermediates the merchant. Our number one priority is sales conversion for our brand partners. We've launched bank-compliant project -- products that follow regulatory guidance, have strong underwriting discipline, lower cost funding and industry experience that gives us confidence in making the appropriate responsible decisions to drive long-term shareholder growth. Finally, I am confident that with our full spectrum of lending products, we can compete, win and drive growth with any size partner or merchant from large brands like Victoria's Secret, Signet and Ulta to smaller merchants. Our ability to drive strong results for our many brand partners has been and will continue to be the key to our success. I'll now turn it over to our CFO, Perry Beberman, to review the financials and our outlook for 2022. Perry?

Thanks, Ralph. As a result of the Loyalty Ventures spin-off, our income statement and balance sheet have been recast with the LoyaltyOne segment and spin-related items reflected as discontinued operations. As you can see on Slide 6, this impacted net income for the quarter by $44 million, which was primarily comprised of related transaction costs, the release of a net investment hedge and allocated interest expense. The remainder of the slides will focus on the continuing operation portion of the business. Slide 7 provides our fourth quarter highlights. Credit sales were up 15% year-over-year to $8.8 billion as consumer spending continue to recover. Average receivables were up 2%, driven by strong credit sales and the recovery economy providing for year-over-year momentum as we enter 2022. Revenue for the quarter was $855 million and income from continuing operations was $61 million. Revenue increased 11% year-over-year, while total noninterest expenses declined 12%. Diluted EPS from continuing operations of $1.21 was impacted by a higher provision for credit losses, primarily due to provision build of $187 million for continued portfolio growth and the seasonal increase in year-end receivables. Credit metrics remained strong with net loss and delinquency rates of 4.4% and 3.9%, respectively, for the quarter. Moving to Slide 8. Slide 8 highlights the key financial metrics for the full year. Credit sales were up 20% year-over-year to $29.6 billion. Revenue for the year was $3.3 billion and income from continuing operations was $797 million. Revenue was nearly flat year-over-year, while total noninterest expenses declined 3%. Diluted EPS from continuing operations of $15.95 improved, driven by a lower provision for credit losses due to lower credit losses and a lower reserve rate at year-end. Our net loss rate was 4.6% for the year, remaining well below our historical average. Turning to Slide 9. As part of our ongoing efforts to provide additional transparency and comparability in our reporting, we have transitioned our financial reporting to more closely align with the presentation of traditional bank holding companies. Looking at the fourth quarter financials. Total interest income was up 7% from the previous year attributed to higher average receivable balances and improved loan yields. Total interest expense improved 24% due to continued improvement in our cost of funds, which you can see on the following slide. Noninterest income, which primarily includes merchant discount fees and interchange revenue, net of the impact from our share agreements and customer awards, declined slightly in the quarter driven by higher credit sales activity. Total noninterest expenses declined 12% year-over-year in the fourth quarter, largely due to one time $48 million real estate optimization activities in the fourth quarter of 2020, partially offset by 15% increase in employee compensation and benefits costs in 2021. The increase in employee costs were driven primarily by continued digital and technology modernization-related hiring as well as higher volume-related staffing levels. We have provided additional details on the new expense driver slide in the appendix of the slide deck. Overall income from continuing operations was down 18% for the quarter, driven by provision build of $187 million this quarter versus a relief of $82 million in the fourth quarter of 2020, while pretax pre-provision earnings, or PPNR improved 52% year-over-year, as you can see on the graph to the right of the page. We are pleased with the PPNR growth over the last 3 quarters and expect this momentum of year-over-year PPNR growth to continue into 2022 as we profitably grow our portfolio and improve our efficiency. Turning to Slide 10. As part of our updated financial presentation and quarterly disclosures, we are providing increased transparency into the components of our net interest margin or NIM. The left side of the slide highlights our earning asset yields and balances. Fourth quarter loan yields came in stronger than we had expected in October as consumer payment behavior begins to gradually move back towards prepandemic levels. Excluding the impact of Fed rate increases, we expect loan yield to remain fairly steady this year as the benefit from payment normalization is offset by continued growth of our co-brand and proprietary products. On the liability side, we continue to benefit from the maturity of our longer-dated funding as new balances are added at current lower rates. As you can see from the stacked bars on the bottom right, our direct-to-consumer deposits have grown from 6% of our average interest-bearing liabilities in the first quarter of 2020 to [ 15% ] this last quarter. As this growth continues, we anticipate our cost of funds continuing to improve in the first quarter. However, once interest rates begin to rise, the benefits from lower cost of funds will reduce. Overall, rate increases will be nominally accretive to the net interest margin as variable priced assets slightly offset increases in funding costs. Moving to Slide 11. I will start in the upper left. Our delinquency rate increased 10 basis points versus the previous quarter due to normal seasonal trends. On a year-over-year basis, the delinquency rate was down 50 basis points. On the upper right, you can see that we had a loss rate of 4.4% for the quarter, still well below historical averages. Turning to the bottom left of the page. Our allowance increased sequentially due to seasonal balances. The overall reserve rate remained steady at 10.5%. We anticipate that the reserve rate will stay in this range until greater economic certainty emerges. Lastly, on the bottom right-hand side of the page. Our revolving credit risk distribution was consistent with the third quarter. Our risk mix and associated delinquency and losses are the result of our ongoing thoughtful management of our book as well as the strong payment rates indicative of the general health of the consumer. We expect these rates will begin to trend back towards historical averages in 2022 as COVID-related federal stimulus programs wind down. Slide 12 provides our financial outlook for full year 2022. We remain optimistic for a steady normalization of both economic activity and consumer behavior and we remain vigilant in monitoring COVID conditions and the impact on consumers and our brand partners. Our outlook assumes a moderation in consumer payments throughout 2022 with payment rate volatility leading to the ranges provided. Four Fed rate increases are included in our 2022 outlook with our models indicating that these rate hikes would result in a nominal benefit to total net interest income in 2022. Our full year average receivables are expected to grow high single to low double digits as continued sales momentum, net brand partner addition and direct-to-consumer products will drive strong growth. We expect year-end 2022 year-over-year receivables growth to be slightly stronger than our average receivables growth. As Ralph said, our previously provided outlook contemplated the BJ's nonrenewal. Timing of the BJ's relationship wind-down will likely cause some quarterly volatility within our forecast but that does not have an impact on our long-term outlook of $20 billion in average receivables for the full year of 2023. We expect revenue growth to be aligned with average receivables growth in 2022. Net interest income growth is expected to be slightly favorable to average receivables growth as our NIM benefits from lower funding cost earlier in the year. This change in year-over-year noninterest income is anticipated to offset the slight favorability in net interest income. Note that conservatively, our guidance does not include any potential impact from the monetization of our 19% equity stake in Loyalty Ventures or any potential gains from portfolio sales. We are targeting modest full year positive operating leverage in 2022. As Ralph already mentioned, we plan for incremental strategic investment over $125 million in technology modernization, digital advancement, marketing, product innovation to fuel growth opportunities and future operating efficiencies. A large portion of the investment is expected in employee expense as we continue to hire digital engineers and data scientists to drive our continued business transformation. We also plan for higher marketing expenses in 2022 as a result of portfolio growth, new partnerships and new products. Information processing costs will increase as a result of our ongoing technology modernization, including the conversion of our core process into Fiserv this year. Our strategic investments will be thoughtfully balanced with our revenue growth outlook. We are making investments now to stay ahead from a technology perspective in today's dynamic environment. Regarding our net loss rate. Both loss and delinquency rates were at historical lows in 2021. We expect credit metrics to begin to gradually normalize throughout 2022. We anticipate that the full year 2020 loss rate will remain in the low to mid-5% range, still well below historical averages. As we discussed at our investor event last year, our disciplined portfolio and partner management focus on risk-reward trade-off enables us to drive profitability and growth even at slightly higher loss rates. I would also reiterate our confidence in our long-term outlook on average through the cycle net loss rate below our historical average of 6%. Overall, we are excited for the opportunities in front of us for 2022. We are making thoughtful investments and decisions to ensure we are driving long-term value creation for our shareholders. Operator, we are now ready to open up the lines for questions.

[Operator Instructions] Our first question comes from Sanjay Sakhrani of KBW.

I had a couple of questions just on the marketplace. Obviously, it's very competitive and you guys have had wins and losses. And while we don't know what this other win might be but Ralph, maybe you could just talk -- or Ralph, maybe you guys could just talk about what this means, right? Because some of the losses you have are good customers, and there were merchants that were growing well. We obviously don't know what you're getting. But maybe you could just talk about what the dynamics are and how competitive it is and how you expect win going forward?

Of course, Sanjay. So the nature of our business is you have wins and losses. That's the business we're in. And what makes me confident and successful is we have far more wins and renewals than losses. So if you think about 2021, it was a better year for us. Double-digit renewals, double-digit wins. When you lose something, you put it behind you. You plan for it and you put it in you, and we did that. But if you look about the wins, we just talked about today, Michaels, NFL, B&H and Ulta as a renewal. Thousands of locations, national brands with millions -- literally tens of millions of customers and loyalists, that's our sweet spot. We're going to grow that with our -- through our existing and new partners. That's what we focus on. And the flexibility of our business enables us to go -- to compete with the big guys. And some of the things we talk about are takeaways from the big guys and also small and midsize and to grow those partners as well. So you never like to lose a partner, but we move forward with new partners and renewals. And we have a broad product set that really appeals to new partners. And as we renew, we just demonstrate to our partners like Ulta, that we're going to grow the pie and lean in hard on digital and omnichannel servicing.

Okay. And then just a follow-up, Ralph, you mentioned the regulatory pressures on buy now, pay later and some of the merchants actually viewing them as disintermediators. I'm just curious how you think this shakes out? I know you guys have a little bit of a hedged model, but do the merchants get it? And how are they responding to that?

Yes, I think the merchants are starting to get it. Last year, there was a little desperation in the marketplace. They wanted volume. And I think buy now, pay later gives them the volume. But it's that second to next transaction that the merchants aren't seeing. And I think that's causing them some pause. As I mentioned, the buy now, pay later space, and it's very competitive, that was on the regulatory scrutiny and it's all about I want to be the entry point. We're very different. We have partnerships. We want to drive that next transaction with our partners. And we've been in this business for a long time. We've built a regulatory product. We know what the regulations are. We know how to underwrite. And I think for us, that gives us a really good hedge and a really good advantage going forward because we're ready to go with a compliance thought and others are going to have to pay a little bit to catch-up, and they run to a little bit of scrutiny. The other thing, Sanjay, before we get off this question. If you think about our product, it's split pay and installment loan -- installment lending. So installment lending is -- plays where there's real profitability for us. We'll be in split pay business, but installment lending is where there's real profitability and growth.

Our next question comes from Bob Napoli of William Blair.

So just on the -- your long-term ROE targets. How are you going to have an ROE target? Or what should be the return on equity for this company? And I mean, are you going to give EPS? Do you plan to give EPS guidance? I know you gave all the pieces, but I just wanted if you're going to take that a step further.

Yes. I don't think we're going to be planning to give an EPS target at any point in the near term. But we have previously communicated mid- to high 20s in our long-term plan. And that's what we're building the business for. I mean, you heard Ralph talked about we're focused on profitability, and that holds true for our partner renewal, new products that we launched, the partnerships, so that's what we're focused on. Now with that said, I think you all know from [indiscernible] the faster you grow, you put on a little bit of that CECL growth tax, but that -- you moderate growth in the long term, that kind of dissipates. So I think you're going to see a little bit lower ROE when you're at a high-growth mode and then it'll temper. But the long term targets of what we're building towards is absolutely that mid to high point.

And I guess the Ulta renewal, congratulations on that. Can -- any -- and if it follows on Sanjay's question on the industry, what were the economics? How different were the economics on Ulta? And I guess mid- to high-20s ROE speaks to what your view is of the economics of the industry. But has there been -- I know if you go back years ago, portfolio's never really changed TAM. I mean that changed but has -- how is the economics on the Ulta renewal and how do you feel about -- is the -- or are the economics for the overall industry moderating?

We feel the Ulta economics were fair for both stocks. And when you enter a partnership, a renewal partnership, that's exactly what you want. We demonstrated to Ulta that -- well, we've demonstrated that we're growing that portfolio, and we will continue to grow that portfolio. And our enhanced product suite, again, was confirmation for that. So we are thrilled. It is a high-growth vertical for us. And we will grow the overall pie, so there'll be benefits for both Ulta and us. And so we feel very comfortable about that new relationship and the renewal.

Just to sneak in one last one and following up on buy now, pay later. Ralph, do you feel like the model that is settled for the -- for ADS or for the industry, the profit model? I mean there's some big players out there that I think it's still moving around on the discount rate versus the interest income and other fee income. But how confident are you in the profit model around buy now, pay later?

So if I kind of bifurcate buy now, pay later, to me, there's two parts, right? You have installment loan. And I think, yes, our installment loan is settled and there's profitability and growth there. So I think, yes, from that perspective, it is settled. I think with buy now, pay later, which is four payments and so forth, a lot of work to be done. I think that market is still unsettled and particularly from a compliance perspective, right? So there's a little bit of regulatory pressure. For us, we're used to that regulatory pressure. We've had it for years and we respond to it well. But I think that split pay, and I want to be particular -- be specific on the four pay and that split pay is where I think there's some settlement. But installment loan, I think, has been around for a very long time. We have a very digital, flexible platform, and we see growth there.

Yes. And I would add to what Ralph said, the installment loan product has a bigger ticket, and we know how to underwrite that, whereas your split pay tends to be lower. And so when you think about where we're going to lean in and grow, we're going to do it responsibly and we'll be advantageous at the right time. So if split pay looks like it's not providing any economics, we're not going to lean in as much there. So we'll try to [ loop ] them down, but we're ready to pounce when the market settles out on split pay.

Our next question comes from Bill Carcache of Wolfe Research.

So Ralph and Perry, thanks for the additional disclosures in the deck. I guess, what would you view as your steady state reserve rate given your risk appetite and expectation of sub 6% through the cycle NCOs? You said, Perry, I believe it should hold at 10.5% until there's greater clarity. So does that suggest that you'd expect it to eventually move lower once we move beyond the pandemic? It seems like you have lower loss content in your book than you did on Day 1, but not due to be running with higher reserves. Maybe if you could just frame for us how you're thinking about that.

Thanks, Bill. Great question. I think when we spoke last quarter, we had said that -- from our position, trying to be cautious given the degree of uncertainty. And if you think about last quarter, COVID cases has gone up 5x since that point. Omicron took off, and I feel it was pretty prudent that we held that posture. So now, as we're moving through this, we're starting to -- again, we're in a position where we're trying to wait and see and be prudent with that. Now remember, we're only 12% to 13% above Day 1 CECL reserve rate. Others are still above 20%, somewhere obviously less, but I think everybody is taking a different position and there's a number of different possible outcomes. Our customers benefited more greatly from the government stimulus. And so we're going to be -- you're going to see us probably have an earlier normalization. And so what happens in the next 3 to 6 months will help drive that. But I would expect, as we're -- as you said, and as I said, we're going to have a through the cycle loss rate below the 6% average, that would give us a good line of sight that at some point, we should still start to reduce that reserve rate, all else equal.

That's very helpful. Separately, can you discuss how you're thinking about the relative importance of starting up the buyback again on one hand and on the other, building capital back up to peer levels where CET1 gets up to that, call it, 10% to 11% range at the enterprise level? And then just, I guess, extending the -- maybe the question that Bob asked earlier about ROE. Could you maybe just close the loop on us and tell us what that translates into in terms of ROTCE?

Yes. Let me comment on the buyback. I mean, Ralph talked about it in the past. When we think about capital, number one is growing this business. We're going to deploy capital for growth and then make sure we're getting the right returns. And then over time, we obviously need to get our capital ratios up to, we'll call it, peer levels where it should be. And then at that point, we'll be able to put in front of the Board, options for a buyback program. And I think the only thing we're giving guidance around right now is total ROE. So that as that Ralph [indiscernible] Offer that, but I think that's consistent with what we've said.

Yes, the mid-20s ROE, and it's consistent. And we said that our view is we'll get there in 2023 when we get there responsibly. And buybacks and Board to us, use of capital continue to grow the business, pay down our remaining debt and then obviously, return to shareholders, whether it's dividend or buyback. And we'll put that in front of the Board when appropriate. Our balance sheet is strengthening. It just got to shot of adrenaline with the spin-off. We'll continue to do that. And when we believe our ratios are appropriate, we'll confront the Board.

The next question comes from Mihir Bhatia of Bank of America.

First, let me just also add my thanks for the incremental disclosures in the presentation. And I really hope you'll continue to provide those consistently going forward. Maybe -- look, I understand you can't talk about a specific renewal or make any announcements right now. But given BJ's is around 9%, 10% of your receivables, if the press reports are right, you can imagine there's a little bit of consternation with your investors. So maybe talk broadly about a couple of things. First, just should the expectation be that BJ's gets backfilled with like one of your big portfolio announcements? Or is it going to be a series of smaller announcements? And then just in terms of your pipeline with regard to 2022 opportunity. Are there certain verticals or products that you're focusing on 2022? And then just lastly on the same topic is just about future nonrenewals contemplated in the guidance. Are there more nonrenewals we should be aware of that could happen in 2022 or 2023?

That's a long question. Let's see if I can take all those parts. So listen, this will probably be my final comment about BJ's. Nobody likes to lose a partner but they're in our rearview mirror, quite frankly. We will do what's appropriate and have an integral separation from the company. But at the end of the day, our focus is on growth. And the new partners we talked about, the NFL, Michaels, B&H, TPC, the Ulta renewal, we'll talk -- and then what we have yet to announce. Now we're not going to announce something prematurely. But I will tell you that our guidance hasn't changed. Our guidance contemplated a loss of a partner and addition of partners, and our growth comes from more organic and inorganic. And we are confident in our 2022 guidance and that $20 billion of average receivables in 2023. So I'm -- as I said, we're focused on the future and the future of a partner we mentioned today in the renewals and the partners we'll mention and announced during 2022.

Yes. And then to add on to what Ralph said, you asked a question around additional products. We've talked about this before, diversifying our product set, growing installment lending, proprietary card products. So that combined, again, those strategies all in and we're sticking to the strict strategy we've laid out and executing against those, and that's what will drive us to the targets around receivables growth.

Got it. And then, I guess, just to confirm, maybe you don't want to answer, but are there any other nonrenewals contemplated for 2022 because I think you also...

Your question had so many parts I forgot them. My Apologies.

Sorry. I apologize.

No worries. Listen, all I would say is 90% of our A&R through 2023 is secure. So you could do the math from that. You could make differences from that. 90%.

Got it. And then just as a last...

But it doesn't mean 10% are not renewing. It just means that those are still yet to be worked on and are being worked on for our continued renewal.

Got it. No, that's helpful. And then just the last one was, I guess, just switching topics, maybe completely, just on credit. Are you seeing -- we've heard from one other issue about a little bit of different pace of normalization between different FICO buckets. I mean, to be clear, nothing to be worried about but there is -- we're starting to see some differences. Are you seeing the same thing? Anything worth calling out there? And then I'll just stop there.

Yes. And I think I've mentioned that earlier a little bit, right? If you think about that we have a concentration in the private label space, our consumers who are, say, more near prime are seeing a little bit faster normalization than those customers that are high risk scores, that are really strong, that have more transactor behaviors. And to give context, if you think about that there's still close to $2 trillion to $2.5 trillion of savings pent up out there. That's sitting in the -- let's put it this way, it wasn't directed to the low income folks or the near prime. It was -- it's sitting out in those savings accounts. People who need to spend the money or have spent the money and the stimulus is unwinding. So that's where you're starting to see that. And with us, we've got a balanced portfolio, and we've got some mix of both. So we can see what's happening to the full spectrum of those customers. But the -- that's what's driving our delinquency up to say, a little bit sooner. But I think it -- but I would tell you this, we're actually better than we thought we were going to be at this point right now with the most recent quarter. So things are normalizing, but I think we're very positive on the outlook.

The next question is from Jeffrey Adelson of Morgan Stanley.

Just as we think about the loan growth target for this year, I know you guys have spoken in the past about your long-term loan growth or receivables growth being roughly 2/3 coming from organic growth, 1/3 from inorganic growth. Are you thinking about a similar mix of growth this year? And then I know we're basically done with the BJ questions, but is there anything you can do to help us with the timing of that portfolio? I think that there's some speculation that's more of an obvious state. If anything you can help us think through the timing and growth math there would be helpful.

Yes. I think as you think about the -- how we're growing, there's absolutely a mixture of organic and inorganic. And that will vary in any given year, any given quarter based on the business development activity that we have. So I really can't comment specifically on that and a year like this, you got and that going out, we got into the net positive coming in, we're going to be net [indiscernible] growth. The wins and loss, they net. So how we get there is probably actually probably a bit more on the organic side when you think about the wins and losses of the partners. In terms of the timing of the nonrenewal, that's something that is in active discussion and something we can't comment on. But there's definitely -- we'll add a little volatility into whatever quarter that happens in. So we do have a central view in our guidance that we provided.

Understood. And then just maybe switching to expenses. I know you've given the guide for modest full year operating leverage in '22. Are you guys thinking about targeting potentially inefficiency ratio over the medium and long term as you kind of continue along this path? I think you're at 50% right now and your peers are more in the 40% or so range.

Yes. I think if we deliver positive operating leverage, and that's the goal that Ralph and I talked about is we want to give the team flexibility to invest in our future. And if revenues come a lot stronger this year, we may lean in harder to be opportunistic on those investments. But the investments that we're making will provide continued long-term revenue growth and at the same time, we have a big portion of investments are driving efficiencies in our cost to serve. So our expectation is over the long haul, we expect an improvement in our efficiency ratio.

The next question comes from John Hecht from Jefferies.

Your yield increased nicely in the second half of 2021. And I'm wondering how much of that was -- whether it was mix or fee -- there was enhancements from some fees, maybe from some contribution from Bread? And then outside of rate hikes, what might influence that yield in 2022?

Sure. So one of the biggest thing that's happening is some of the payment behavior is starting to normalize. And when you think about payment rates normalizing, the rollover behavior, some additional delinquency drive some fees. So that starts to normalize in. And that will happen, say, the near-term, drive throughout 2022. But the same, your product mix shifts occurring. And so when you put on higher credit quality, co brands and proprietary card often comes with lower yield but also lower losses. So when you think about the interplay between revenue yield and credit losses, they have to be [Audio Gap]

That's helpful. And then second, I mean your commentary on Bread is interesting. The installment component, it's profitable, but the split pay is -- you perceive it as potentially not profitable. What about the split pay is not profitable? Is it skip payments? Is it customer acquisition? Is it the cost to manage the process? I'm just interested because that's an interesting take on that product relative to other things we've heard.

Yes. Maybe I -- let me clarify that. It can be profitable if it's done correctly, right? And I think that, to me, is the part of our focus, is to do it correctly and make sure that we are compliant. We're not chasing transactors, that visibility to cross-sell, that there's -- our ability to extend the relationship with the customer. But all that make -- that's how you do it. And its stickiness and longevity. And that's why I think we have the right product for the merchants because it's about driving that next transaction, not just loading an app and disintermediate the merchant. We're on the merchant side. And I think it's going to -- the profitability is going to evolve and mature. It's going to be a mature market. It's a hot new market that's starting to sell. You know a market is starting to settle when it gets the attention of the regulators, quite frankly. And we anticipated that. That's why we spent the right amount of time making sure that we have a compliant bank product that can span a test of review. And that, I think, gives us a good advantage and that's how you do it.

The next question is from Mengxian Jiao of Deutsche Bank.

Ralph and Perry, I wanted to sort of get your thoughts on in-store versus digital. I mean clearly, we've seen that said quarter of last year was a benefit to online but that's sort of fallen back down to roughly historical levels or even below. I guess my question is, why do you think that percentage of digital sales hasn't really been sticky? Do you guys feel necessary to sort of increase in these current levels? And if so, how would you accomplish that?

Yes. It's interesting. I think there's a strong social aspect to purchasing. People like to go in the store, feel something, try it on. I'll speak for myself. It's hard for me to buy soft goods online. I'd like to go and feel and see what it is. And so I think there's some social aspect to that. I think digital will always be important. I think people have gotten used to the hybrid model now, the in-store model and the digital model and people will pivot based on the environment. But importantly, when they pivot, we are there to pivot with them. So I think it will -- as long as they're transacting with us, whether it's digital or in-store, we're happy and we can accommodate them.

Got you. Great. And then I guess, Perry, a question for you. I wanted to follow up on your comments regarding deposit costs, specifically the lower cost of funding in 2022. And just sort of can you give us more color on the cost of deposits and how those trends from sort of current levels, especially as you mentioned [indiscernible] later this year?

Yes. I think when you think about the deposits, what we've talked about in the past is a large part of the loan growth accounts the receivables growth that we're going to see over the coming year or 2 are going to be funded by more direct-to-consumer deposits. So when you look at the rates of our deposit rates of our funding of different instruments, we're replacing -- or say, not replacement, but we are growing into a lower cost of funds product than other instruments. Now as it depends on how far rates rise in terms of what that guidance would look like, we've modeled in four rate hikes. So we'll see some early period benefits as we fund the growth with deposits. But remember, our assets are largely variable rate as well. So as cost of some of our funds go up on deposits, they're offset by increases for our variable portion of the portfolio.

Got you. Great. And then just one quick one. Sorry about that split. But have you sort of seen any impact from Omicron recently and how sales have trended relative to that relative to that in January?

Yes, so sales were strong in the fourth quarter. Both Perry and I mentioned the 15% year-over-year growth. We did see sales growth -- it's early days. We saw some sales growth in January. But you can see that Omicron is having a bit of an in-effect on growth.

Yes. And I would add to that is just as the last time, we're very confident going forward. I mean, this spike in Omicron is going to pass. It's already -- it should start to settle out. And candidly, we're surprised at the extent it didn't slow people down through the holiday season, and more recently. But if it gets much as of an impact of people being getting -- being able to get into work as is their desire to shop. So we feel confident. And I think now that we've seen it with two different variants that this will pass.

I think the last thing I'll say is people are now shopping with a purpose. When they go, they're not browsing. They're shopping. And so that you see that, that gives us confidence in our sales projections.

The next question comes from John Pancari of Evercore ISI.

I know you had indicated that your guidance assumes the nonrenewal on BJ's. Just one clarification. The -- does that mean that you do assume that the back book is sold as well, not just the discontinuation of the relationship for the new purchases?

Well, we can't specifically talk about anything within about the contract with BJ's. But typical in these transactions, the back book is often considered for sale.

Got it. Okay. All right. Thanks for clarifying. And then separately, on the revenue share agreements. Can you possibly help size up where your RSA stands now from a ratio perspective? And then maybe give us thought on the trajectory, how we should think about that, if we are able to begin modeling that out here?

Yes. So right now, the RSA is included in our noninterest income. And you should think about that as largely growing in line with credit sales. Again, there's a lot of different unique relationships. But if I was looking to give you a proxy, I would give that as a proxy.

Okay. All right. And then lastly, in terms of the rate assumptions, I know you indicated you have four rate hikes dialed in. Could you just maybe help us with the sensitivity to your net interest income from 25 basis point increase in rates?

Yes. So it will vary over time, right? I mean -- so that's -- the sensitivity, what I would tell you is -- we've indicated, it is a nominal impact so it's slightly accretive. But again, it goes back to a point in time where if it goes up dramatically, there may be a different view. But in the near term, for what's expected with the four rate increases in 2022, you could think about that as nominally accretive.

The next question comes from Bill Ryan of Seaport Global.

A couple of questions. One, in the guidance you talk about noninterest income. Year-over-year change expected to offset the favorability in net interest income. I was wondering if you can elaborate on that a little bit more, kind of follows along the last question? Is that anticipation of a little bit higher RSAs or rewards on your new proprietary cards, credit sales? If you could just kind of provide some color on that. And then second, has there been any geography change in the revenue recognition associated with Bread in the new presentation format because I believe you were fitting it all in the effective yield under the prior presentation format?

So MDF is in noninterest income for Bread. So I'll answer the Bread one first. So that's what we have for that setting. The -- as it relates to your question on the RSA. I mean, that will go up with sales and your proprietary card was another growth piece. So if we have incentives to grow, proprietary card or customer awards, those things are typical of what you've seen there. Again, that's netted against interchange income that we would receive. And then for the yield component of Bread products, that is NII, in net interest income.

The next question comes from Dominick Gabriele of Oppenheimer.

So if we just think about the year-over-year that you would need that you're kind of assuming, that would reach you to your roughly $20 billion average balance in 2023, how should we think about that growth rate? And then I just have a follow-up.

Yes, I think of it is in terms of the general rule of thumb, it will grow in line with average receivables growth. Now that can depend on product mix and revolving balances. So if we put on a lot more transactors, well, then clearly, the receivables -- the spend would have to grow faster to achieve that. But if you put on more PLCC that has high revolve, those balances will grow online. So overall, I think it's a good proxy to think about it growing in line with average receivables guidance.

And I guess if we just think about -- you know Mastercard just reported U.S. credit sales of up 33% year-over-year at the U.S. If we think about that number in general purpose in general versus private label growth in credit card and some of the dynamics that are playing out between consumer desires as you look and the shift in spend. Maybe you could just talk about where that's been? How you think that might affect your business going forward as the shift in spend as maybe experience versus store sales? Anything that could help us understand just general positioning and whatnot.

I saw that data. And some of that I would think as pent-up travel demand, some of that spend. And I think travel demand is a big ticket and I think some of that demand was that. So I was very comfortable with 20% year-over-year growth in our portfolio. That portfolio was both private label and our general purpose cards. So a 20% average is really healthy without travel as a dominant factor. I think if you look at two of our growing verticals, jewelry and beauty, those grew 30% year-over-year in the fourth quarter. So I'm -- I think there is growth there, but I think that some of that was -- that 30-plus number was some pent-up travel demand.

The next question comes from Reggie Smith of JPMorgan.

Not to beat a dead horse. I know folks have asked about the BJ's, the number [indiscernible] my question, it doesn't have to be specific to BJ's but I wanted to know when I think about those types of retail relationships where that card had a pretty rich reward feature [indiscernible] cash bag. And I would still, correct me, if I'm wrong, the APR is probably below, I guess, your line average yield for the company. And I guess my question is, is it safe to -- from a [indiscernible] that probably the economic impact will be less than with reported kind of headline [indiscernible] Portfolio, am I thinking about that right? Or am I being a little [indiscernible]?

Yes. I mean, I think traditionally with co-brands, the margins are thinner, and they get thinner on renewal. So I think your assumptions are directionally correct that while it is -- as they reported a portfolio of size, the profitability wasn't equal to the size of the portfolio, the way I think about it. So we'd say the transactors in that portfolio and the impact from a bottom line would -- again, we plan for it and the significance wasn't as great as the loss would indicate.

Yes. And I would add to what Ralph said in your comment. I mean, these are highly competitive deals, and there's a point where the team walks away from a deal because it's an addition by subtraction. So if we -- I'll say we're not going to be specific to this partner, but there are sometimes, the right decision for the company is to not pursue at any cost.

And [indiscernible] if I can squeeze 2 quick ones in. I know you guys talked about the payment rates kind of normalizing next year -- beginning to normalize. Are you seeing anything in positive -- portfolio that kind of supports that motion beyond the obvious [indiscernible] is the payment rate [indiscernible] covered already? And then my last question, I'll bundle them together. With the new win that were announced, what, if any, impact did great capability to have on those wins? Was it top of mind [indiscernible] some -- those new partners, are those going to be at some time kind of like legacy [indiscernible]?

So let me answer the last question first, and I'll turn it over to Perry for the payment rate question. So when we talk to new partners in renewals, we leave with a basket of products and capabilities. We give the partner a choice. So as we sign these partners, it's primarily a cards deal because we're good at that and we demonstrated how we can grow the pie. But with each of these partners, certainly, the brand capabilities, particularly around installment loan is under negotiation and we'll work with them to implement that. One of the things that is we do when we get a new partner, we install that digital suite. So all of our products become ease of integration. And that's the important part. So we offer the partner choice. We offer the customer choice. And the ease of integration of that choice is -- makes it easier for us to bring more products to the consumer and to the partner.

Yes. And I'll answer your question on payment rate. And we spoke about that earlier, you may have missed it. We believe payment rates are going to normalize. We're starting to see some of that from where they peaked out in midway this past year. So that is starting to occur. I wish we had a crystal ball where we could see what that was going to be and exactly when, but that's what we gave our guidance in our AR range. If payment rates remain really high, it could be on the lower side. If they come in better, it'll be on the high side. So I think we're all across the industry, trying to figure that out. And we're all watching it.

The final question comes from Vince Caintic of Stephens.

Just one quick one. On the receivables guidance, so the 10% year-over-year that excludes BJ's. I guess, if I were to use the news reports number of the BJ's portfolio size, that implies that the rest of your portfolio is growing at 20% year-over-year for 2022. So I guess, first, if -- maybe if you could talk about if you're able to give the BJ's side to talk about whether that math is directionally correct. And if so, the sustainability of that growth rate going into 2023, I think it might seem that maybe the -- at least, $20 billion might be conservative, if that's sustainable.

Yes, but we'll just reiterate. We've given guidance in high-single to low-double digit growth in our receivables. We're not going to comment on the size of the nonrenewables or the timing of when that might happen. But what we can tell you is we have a good line of sight into our pipeline, we understand our product strategy, and I'm very confident in achieving the arrangement we put out there. And what that means to the following year is we have -- we can on the pipeline for that year. We have plans in place to achieve the $20 billion.

Good. I want to thank you all for joining today and your continued interest in Alliance Data. I must say 2021 was a transformational year for Alliance Data. We look forward to building our success in 2022 and beyond. Thank you, all, and everybody, have a terrific day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.