Bread Financial: Navigating Stormy Waters to ROTCE Recovery – A Contrarian Play at 0.8x P/B?

Bread Financial (BFH) has long been a contrarian's favorite in the financial sector, but recent developments suggest its undervalued status could be temporary. Despite a hurricane-induced headwind in Q2 2025, the company's improving credit metrics, disciplined underwriting, and strategic growth initiatives position it for a rebound. With a price-to-book (P/B) ratio of just 0.8x—well below its historical average and industry peers—the stock offers a compelling entry point ahead of Q3's expected recovery and ROTCE expansion.

Credit Metrics Strengthen Amid Selective Underwriting

Bread Financial's credit quality has quietly improved, with its 30+ day delinquency rate dropping to 5.7% in May 2025, down from 5.9% in the prior year. This trend aligns with a net loss rate of 8.0%, a significant improvement from 8.8% in May . While macroeconomic uncertainties linger, Bread's focus on return on capital (ROC) over arbitrary loss targets has kept its portfolio resilient.

The company's subprime loan mix has been strategically reduced to the low 40% range, down from 50% in 2020, reflecting a shift toward higher-quality borrowers. This discipline is paying off: non-performing loans (NPLs) remain contained, and Bread's CET1 ratio—a key capital metric—hit 12% in Q1, with management targeting 13-13.5% by year-end.

Hurricane-Related Q2 Drag: A Temporary Storm

Bread's Q2 performance faces a headwind from Hurricanes Helene and Milton, which forced the company to freeze delinquency progression for FEMA-designated zones in late 2024. While this boosted Q4 2024 results artificially, the deferred losses are now hitting Q2 2025. The impact? An estimated $13 million increase in the net charge-off (NCO) rate, or 30 basis points.

However, this is a one-time drag. May's results already showed resilience, with the net loss rate down 83 basis points year-over-year, despite the hurricane-related headwind. Management expects Q3 to rebound as these effects fade, potentially driving a full-year NCO rate of 8.0%—the low end of its guidance.

ROTCE Expansion: The $20+ Target Is in Sight

Bread Financial's medium-term goal of achieving a ROTCE (return on tangible common equity) of over 20% is critical to its valuation. Current ROTCE stands at 16-17%, but strategic initiatives are closing the gap:
- Balance Sheet Optimization: The recent $150 million bond tender reduced interest expenses, improving net interest margin (NIM).
- Efficiency Gains: A new CTO is modernizing systems, targeting a lower efficiency ratio (non-interest expenses / revenue).
- Capital Discipline: Buybacks below tangible book value—$12.50 as of May 2025—enhance per-share metrics.

With subprime exposure reduced and credit quality stabilizing, ROTCE could hit 20% by late 2026, unlocking multiple expansion.

Crypto.com Partnership: A Growth Catalyst Ignored by the Market

Bread's collaboration with Crypto.com, set to launch its Visa Signature Credit Card in summer 2025, is a stealth growth driver. The card offers uncapped CRO rewards across five tiers, with higher tiers requiring CRO lockups for enhanced benefits (e.g., 5% rewards for the Obsidian tier).

This partnership taps into Crypto.com's 140 million global users, potentially expanding Bread's customer base while monetizing crypto's mainstream adoption. The welcome bonuses (up to $5,000 in CRO) incentivize high-spending users, boosting transaction volumes and fee revenue.

Valuation: A 40% Upside at 1.2x P/B

At 0.8x P/B, Bread trades at a 35% discount to its five-year average and a 40% discount to peer median. If ROTCE hits 20% and macro conditions stabilize, a 1.2x P/B—still below its 2023 peak—is reasonable, implying a 50% upside.

Even a modest recovery to 1.0x P/B (fair value for its sector) would yield 25% returns, excluding ROTCE-driven earnings growth.

Investment Thesis: Buy the Dip, Target 1.2x P/B

• Entry Point: Initiate a position at current levels, with a stop-loss below $10.
• Catalysts: Q3 earnings (post-hurricane drag), ROTCE progress, and Crypto.com card adoption.
• Risk: Macro deterioration (e.g., unemployment spikes), but Bread's subprime exposure is now minimized.

Conclusion

Bread Financial is a value trap turned value play, with structural improvements and strategic moves (like the Crypto.com card) finally aligning with its discounted valuation. The Q2 hurricane drag is a temporary setback, not a fundamental flaw. With ROTCE expansion and a P/B rebound on the horizon, now is the time to position for a recovery that could deliver 50%+ returns over 12-18 months.

Actionable Idea: Accumulate BFH below $12.50, targeting $15-18 by late 2026. The risk-reward here is skewed toward rewarded patience.