Teleconferência de Resultados do 3T26 da Bread Financial (BFH): Crescimento de Empréstimos e Melhora no Crédito

Principais destaques

• Os empréstimos no final do período aumentaram 7% na comparação anual, para US$ 18,9 bilhões, enquanto a média de empréstimos subiu 6%, para US$ 18,6 bilhões, impulsionada por novas parcerias, gastos de uso geral e menores perdas brutas.
• A receita cresceu 5%, ou US$ 46 milhões, enquanto o lucro líquido foi de US$ 156 milhões e o LPA diluído foi de US$ 3,82. O lucro antes dos impostos subiu 6%, excluindo tributos.
• As métricas de crédito melhoraram: a taxa de perdas líquidas com crédito recuou 99 pontos-base na comparação anual, para 6,40%, e a taxa de inadimplência caiu 47 pontos-base, para 5,57%.
• A administração melhorou sua projeção de taxa de perdas líquidas para o ano de 2026 pelo segundo trimestre consecutivo, ajustando-a para 6,9%–7,0%, em comparação com a faixa anterior de 7,0%–7,1%.
• Os depósitos de varejo aumentaram 21%, para US$ 9,9 bilhões. A Bread Financial também concluiu a fusão de seus dois bancos em 1º de outubro e teve sua nota de crédito elevada pela Moody’s.
• A empresa recomprou US$ 75 milhões em ações ordinárias e aumentou seu dividendo ordinário trimestral em 9%, embora a administração preveja recompras mínimas no 4º trimestre na ausência de uma emissão de ações preferenciais.

Principais dados financeiros

Desempenho operacional e dos negócios

O crescimento dos empréstimos se beneficiou de parcerias lançadas recentemente, vendas mais fortes de uso geral e tendências favoráveis de perdas brutas. A administração destacou que os gastos permaneceram resilientes, porém cada vez mais intencionais. Cartões de crédito de titulares de maior qualidade de crédito continuaram gastando, enquanto consumidores de menor pontuação demonstraram maior seletividade e focaram em valor e compras essenciais.

De acordo com a administração, a Academy Sports + Outdoors e a AAA apresentaram um desempenho particularmente forte. A Furniture First, a Raymour & Flanigan e o relacionamento do Bread Pay com a Vivint também continuaram ganhando tração. Artigos esportivos, reforma residencial e beleza foram citados como áreas de gastos sólidos.

A Bread Financial renovou e estendeu acordos de longo prazo com a Signet Jewelers e a Sephora. A parceria com a Signet foi expandida para incluir um novo programa de cartão de crédito da Blue Nile antes da temporada de festas.

A receita líquida de juros subiu 6% na comparação anual devido ao crescimento dos empréstimos e a menores despesas com juros. As receitas não provenientes de juros ficaram negativas em US$ 78 milhões, queda de US$ 17 milhões na comparação anual, à medida que a melhoria na dinâmica dos programas levou a um aumento nos acordos de participação com varejistas. A administração afirmou que os programas mais novos e as renovações recentes incluem cada vez mais estruturas de compartilhamento de lucros.

As despesas não provenientes de juros aumentaram 2%, ou US$ 11 milhões, impulsionadas principalmente por investimentos em software, contratos de serviços de tecnologia, salários e remuneração de incentivo. Esses aumentos foram parcialmente compensados por menores despesas com depreciação e marketing.

A Bread Financial concluiu a fusão de seus dois bancos em 1º de outubro. A administração afirmou que a combinação deve proporcionar maior flexibilidade para financiar ativos com depósitos diretos ao consumidor e melhorar a eficiência de capital por meio de um balanço patrimonial maior e mais diversificado.

Projeções da administração

Para o ano de 2026, a administração espera agora:

• Crescimento médio dos empréstimos de aproximadamente 4% na comparação anual, afunilando a perspectiva anterior de crescimento de um dígito baixo a médio.
• Crescimento da receita total de aproximadamente 5%, impulsionado principalmente pelo crescimento médio dos empréstimos.
• Margem líquida de juros ligeiramente acima do nível de 2025.
• Taxa de perdas líquidas com crédito de 6,9%–7,0%, uma melhoria em relação ao intervalo anterior de 7,0%–7,1%.
• Taxa de imposto efetiva normalizada de 25%–27%.
• Alavancagem operacional positiva, excluindo o impacto antes dos impostos de recompras de dívidas.

Para o 4T26, a administração prevê que a margem líquida de juros recue modestamente em relação ao 3T26 devido à sazonalidade normal, menor faturamento de taxas por atraso e à pressão de alta em todo o setor sobre as taxas de depósito. Espera-se que as despesas aumentem na comparação trimestral devido aos volumes sazonais e aos investimentos contínuos em capacidades e iniciativas de eficiência.

A administração espera que a taxa de provisão do 4º trimestre caia na comparação trimestral, à medida que os gastos das festas de fim de ano aumentarem os saldos de pagadores integrais (transactors), seguida de um aumento trimestral típico no 1º trimestre à medida que esses saldos forem quitados.

Pensando em 2027, a administração afirmou que a taxa de perdas líquidas poderá cair ainda mais se o cenário macroeconômico permanecer favorável, embora seja pouco provável que a melhoria atinja a mesma redução em pontos-base alcançada em 2026. Espera-se que a margem líquida de juros do ano todo fique estável a ligeiramente menor à medida que a carteira migra para cartões co-branded de menor risco, cartões próprios e empréstimos parcelados, e que o faturamento de taxas por atraso continue a diminuir.

Riscos e pontos de atenção

A administração permanece cautelosa em relação à fraqueza persistente da confiança do consumidor, ao efeito acumulado de taxas de juros mais altas e aos orçamentos domésticos mais apertados. Conflitos geopolíticos e custos elevados de energia podem adicionar pressão inflacionária e limitar os gastos discricionários.

A concorrência por depósitos é outra consideração. Novos depósitos usados para financiar o crescimento dos empréstimos serão precificados às taxas de mercado atuais, e a administração prevê que os custos de captação aumentem com o tempo se o ambiente de taxas subir. A empresa descreveu seu balanço patrimonial como próximo da neutralidade em relação às taxas de juros.

Os gastos com as festas de fim de ano continuam sendo uma variável para o crescimento dos empréstimos no 4T. As comparações também se tornarão mais difíceis, pois os programas no segmento de móveis lançados no 4T25 agora estão incluídos na base de comparação anual.

Destaques das perguntas e respostas dos analistas

• Perspectiva de crédito: A administração afirmou que as tendências de inadimplência, os pagamentos e a composição da carteira permanecem construtivos. Espera-se que as perdas com crédito continuem a melhorar em 2027, sujeitas ao emprego, à inflação, às taxas de juros e ao comportamento do consumidor.
• Dinâmica da carteira: A migração para cartões co-branded e empréstimos parcelados pode pressionar a margem líquida de juros reportada, mas também deve reduzir as perdas com crédito. A administração permanece focada em retornos ajustados ao risco, em vez do rendimento nominal dos empréstimos.
• Acordos de participação com varejistas: Espera-se que a parcela referente a esses acordos (RSA) como porcentagem das vendas a crédito aumente gradualmente à medida que mais programas adotem modelos de compartilhamento de lucros. A administração vê isso como um alinhamento de incentivos com os parceiros varejistas.
• Motores de crescimento dos empréstimos: Espera-se que parceiros existentes, programas lançados recentemente, menores perdas brutas e empréstimos parcelados sustentem o crescimento. A administração destacou os parceiros que utilizam múltiplos produtos da Bread Financial como uma oportunidade importante.
• Alocação de capital: A Bread Financial continua almejando um índice CET1 de aproximadamente 12%–13%. A emissão de ações preferenciais permanece sujeita às condições de mercado, enquanto as prioridades de capital são o crescimento lucrativo, investimentos em tecnologia e IA, níveis adequados de capital e retorno aos acionistas.
• Composição da captação: Os depósitos médios de varejo representaram 53% da captação total, ante 47% no ano anterior. A meta de longo prazo da administração é de 60%–70%, embora ela preveja que a transição levará vários anos.
• Eficiência: A empresa permanece comprometida com uma alavancagem operacional positiva em 2027, embora a administração tenha sinalizado que o ganho pode ser menor à medida que os investimentos em tecnologia, atendimento e IA acelerem.

Transcrição completa da teleconferência de resultados

Transcrição completa da teleconferência de resultados

Comentários da administração

Operator

Good morning, and welcome to Bread Financial's Third Quarter 2026 Earnings Conference Call. My name is Olivia, I'll be coordinating your call today. [Operator Instructions] 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

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breatfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliations of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Ralph Andretta

Thank you, Brian, and good morning to everyone joining us today. Bright Financial delivered another strong quarter through disciplined execution across our core priorities, including responsible growth, a focus on operational excellence, precredit underwriting and thoughtful capital allocation. We produced meaningful results in the quarter. End-of-period loans grew 7% to $18.9 billion, driven by momentum in our new partnerships and strong credit sales. that performance translated to revenue growth of 5% and net income of $156 million.

These results underscore the continued success of our business model and our ability to generate sustainable, profitable growth for our shareholders. Additionally, credit sales grew 9% year-over-year, driven by contribution from both new and existing brand partners alongside continued strength in general purpose spending. On the macroeconomic front, consumer behaviors remained resilient, though spending was increasingly intentional.

Higher credit quality cardholders remain a consistent source of strength while consumers with lower credit risk scores showed greater selectivity in their purchasing patterns. We also saw consumers adapt to higher fuel costs and persistent inflation by focusing on value and managing discretionary spend. Partners offering multiple bread financial financing products such as Academy Sports and outdoors and those focused on essential spending in gas like AAA are performing particularly well.

Our new home furnishing partners, including Furniture First and Raymour and Flanigan continue to gain traction as did our Breadpay relationship with Vivint, a leading home security and smart home company. Again, -- this quarter, we made measurable progress in our credit risk management, both the delinquency rate and the net loss rate improved year-over-year. reflecting the sustained effectiveness of our underwriting discipline, portfolio management and shifting product mix.

Notwithstanding the broader macroeconomic backdrop, our improving credit metric trends to reinforce our confidence and the quality and the resilience of our customer base. Based on year-to-date results and our ongoing favorable trajectory we are improving our full year 2026 net loss rate guidance for the second consecutive quarter, now expecting a full year net loss rate below 7%.

We -- during the quarter, we renewed and extended long-term agreements with 2 of our top 10 partners, Signet Jewelers and Sephora, important proof points for the resilience of our relationships and the value of our business model. With Signet, we are building on a long-standing relationship across Kay, Zales and the Jared brands through enhanced technology and data-driven marketing capabilities. We also expanded our card programs at Signet to include launching a new credit card program for the Blue Nile brand ahead of the holiday season.

Together, we are supporting Signet's evolving businesses and delivering seamless credit experiences around meaningful purchases. Our long-term renewal agreement with Sephora positions us to deepen brand loyalty through our card offerings. -- we will continue advancing personalization, relevant marketing and seamless in-store, online and mobile experiences through analytics and digital capabilities. Both of these renewals reflect the trust, collaboration and partnership mindset that defines our strongest brand partner relationships.

We are pleased to announce that on October 1, we successfully merged our 2 banks. The milestone along last week's credit rating upgrade from Moody's provides further evidence of our ongoing transformation progress and the strength of our enhanced enterprise risk funding and capital management. Consumer deposits grew 21% to $9.9 billion at quarter end. This trajectory reflects our sustained focus on improving our funding profile and confidence in our deposit offerings.

Our strong capital position and consistent cash flow generation provides flexibility to invest in growth while returning capital to shareholders. Tangible book value per share grew 19% year-over-year, reflecting the compounding benefits of our earnings power. During the quarter, we repurchased $75 million of common stock and increased our quarterly common stock dividend by 9%. And -- both of these actions reflect our Board's confidence and our positive long-term financial outlook.

Looking ahead, we remain focused on disciplined investments that support long-term growth and strengthening our competitive positioning with priority on technology, data and analytics and product innovation. These investments also include the responsible use of AI to improve productivity, enhance risk management, enable greater personalization and simplify the customer experience. We are collaborating with our retail brand partners and technology industry leaders to advance opportunities in AgenticSearch, commerce and servicing.

As with all of our innovation efforts, we are focused on practical use cases with clear business value, delivering better outcomes for our partners, customers and shareholders. I am pleased with another strong quarter for Bread Financial as our associates continue to execute with focus and discipline. Our transformation is increasingly evident in our solid financial performance balance sheet strength and partner momentum. We entered the final quarter of 2026, confident in our strategy, encouraged by an improving credit trajectory and focused on achieving our long-term financial objectives. Now I will pass it over to Perry.

Perry Beberman

Thank you, Ralph. Turning to Slide 3, which highlights our third quarter financials. As you just heard from Ralph, our third quarter results demonstrated another period of strong financial performance and disciplined execution. Average loans increased 6% to $18.6 billion, while end-of-period loans increased 7% to $18.9 billion benefiting from growth in our new partnerships, increased general purpose sales as well as a lower gross loss rate.

Revenue increased $46 million or 5% year-over-year, driven primarily by loan growth lower interest expense and higher merchant and interchange fees. These gains were partially offset by higher retailer share arrangements and lower billed late fees. We generated net income of $156 million and diluted EPS of $3.82 and Net income decreased $32 million or 17% year-over-year as the prior year included a $38 million favorable discrete tax item.

Excluding taxes, pretax income increased $13 million or 6%. The -- moving to Slide 4 for more detail on the financials. Net interest income increased 6% year-over-year, driven by strong loan growth, resulting in higher finance charge revenue as well as lower interest expense. Noninterest income was negative $78 million, lower by $17 million year-over-year and $32 million sequentially, in line with guidance we provided during the quarter.

As we generated increased credit sales, improved loan yields and reduced credit losses, we are able to share more value with our partners, resulting in higher retailer share arrangements or RSA Additionally, our new partner programs and recent partner renewals incorporate more of a profit share component, which further share program economics. This further aligns interest between Bread Financial and our partners. Looking ahead, we expect net interchange revenue in the fourth quarter to be similar to the third quarter as a percent of credit sales.

The higher provision for credit losses in the third quarter reflects a reserve build of $21 million this year compared to a release of $28 million in the prior year period. As loan balances continue to grow, we expect the allowance to build accordingly to support that growth. Total noninterest expenses increased $11 million or 2% and driven by higher information processing and communication costs and employee compensation and benefits costs, partially offset by lower depreciation and marketing expenses.

Specifically, information processing and communication costs increased primarily due to new software investments and increased technology-related service contract costs. Employee compensation and benefits costs increased primarily due to higher wages related to annual merit increases and incentive compensation.

Finally, PPNR increased $35 million or 7% year-over-year. a reflection of our focus on responsible profitable growth and ongoing expense discipline. Turning to Slide 5. Net interest margin of 18.9% was essentially flat year-over-year but expanded sequentially, consistent with our typical seasonal patterns. This was partially offset by lower billed late fees, which continue to decline versus the prior year, reflecting the positive trajectory we're seeing in delinquency rates.

Looking ahead, we expect fourth quarter net interest margin to compress modestly on a sequential basis driven by normal seasonality, the ongoing decline in billed late fees and broader upward pressure on deposit rates across the industry. On a year-over-year basis, funding costs declined, reflecting the deliberate steps we've taken over the past several years to optimize our funding mix.

As Ralph noted, our consumer deposit platform continues to maintain momentum. Average consumer deposits represented 53% of total funding in the quarter, up from 47% a year ago. The ongoing improvement in our funding mix was recognized in our recent credit ratings upgrade from Moody's. This marks our second upgrade from Moody's in back-to-back years, a testament to the successful execution of our transformation and underscores confidence in our long-term strategy.

Additionally, we completed our bank merger on October 1, and which provides greater flexibility to continue to grow consumer deposits as a core funding source. We are monitoring the competitive deposit rate environment including increased pressure from higher CD rates and shifts in the yield curve and remain confident in our funding position. Our near neutral asset sensitivity profile supports our ability to navigate these dynamics effectively.

Moving to Slide 6. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.1 billion at the end of the quarter, representing more than 30% of total assets. At quarter end, deposits comprised 83% of total funding with the majority being FDIC insured consumer deposits, underscoring the quality and stability of our funding base.

Turning to capital. We ended the quarter with a CET1 ratio of 13.1%, down 90 basis points year-over-year, reflecting our deliberate capital stack optimization efforts. As shown in the upper right of the slide, core earnings contributed 310 basis points to CET1, offset by 340 basis points from common stock repurchases and preferred and common dividends. [ 70 ] basis points related to RWA growth as well as approximately 20 basis points from costs associated with debt repurchases since the third quarter of 2025. We -- this included repurchasing $24 million in subordinated debt during the current quarter.

During the quarter, we announced a 9% increase in the quarterly common stock dividend and return capital to shareholders through repurchases of 700,000 shares for a total cost of $75 million, ending the quarter with $374 million remaining under our current stock repurchase authorization. Given our strong loan growth momentum and the anticipated seasonal increase in holiday spending, we expect minimal repurchase activity in the fourth quarter, absent a preferred stock offering.

Execution of an additional preferred issuance will be opportunistic and remain subject to market conditions. Finally, looking at the bottom right of the slide, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 24.6% of total loans, reflecting a substantial margin of safety against potential deterioration in economic conditions.

We have a proven track record of building capital and generating strong cash flows, and we remain well positioned across capital, liquidity and reserves. This strong foundation provides the stability and financial flexibility needed to navigate an evolving economic environment while continuing to create value for shareholders. Our commitment to disciplined capital allocation remains unchanged. We manage it through 3 clear priorities.

First and foremost, -- we support responsible profitable growth at the right returns, the kind that regenerates capital for years to come. This should continue to represent a significant use of capital going forward.

Second, we continue to strategically increasing our investment in our core technology and proven AI capabilities to support existing and new partners, enhance the customer experience and strengthen risk management. keeping us competitive and more efficient over time.

And finally, we returned excess capital to shareholders through dividends and share repurchases while maintaining the appropriate capital levels.

Moving to credit on Slide 7. Our third quarter delinquency rate was 5.57%, down 47 basis points year-over-year and up 32 basis points sequentially, outperforming normal seasonal trends. Our net credit loss rate of 6.40% improved 99 basis points year-over-year and 58 basis points sequentially. And Together, these results reflect the compounding benefits of our disciplined credit risk management, sophisticated underwriting, product mix shift and the continued seasoning of higher-quality new account vintages.

Consumers continue to demonstrate resilience throughout the quarter. Tax season provided a tailwind and generally healthy employment and wage growth helped mitigate persistent inflationary pressure, including elevated fuel prices. contributing to strong sales and payment activity and continued improvement in our credit risk score mix.

Our third quarter reserve rate improved 60 basis points year-over-year to 11.2% and driven by our improving credit metrics, higher credit quality new vintages and a more favorable credit risk distribution with 64% of cardholders having a prime score above 650. Sequentially, the reserve rate improved 11 basis points. Looking ahead, we expect the reserve rate to decline sequentially in the fourth quarter, impacted by higher seasonal transactor balances related to holiday spend.

The reserve rate then typically increases sequentially in the first quarter as seasonal transactor balances are paid down. With respect to our credit reserve modeling, we continue to apply prudent weightings on downside economic scenarios, reflecting the wide range of potential macroeconomic outcomes, including ongoing uncertainties stemming from global conflicts and their downstream effects on inflation and consumer behavior. -- these weightings are consistent with those applied in the prior quarter.

Turning to Slide 8. Our revised 2026 outlook is grounded in the results we have delivered year-to-date. -- and a macroeconomic forecast that assumes continued consumer resilience, inflation remaining above the Federal Reserve's 2% target and a generally stable labor market. We are pleased with the solid loan growth we produced in the third quarter.

With strong year-to-date results and only 2 months remaining in 2026, we are sharpening our full year 2026 guidance with average loan growth up approximately 4% year-over-year compared to our previous guidance of up low to mid-single digits. Growth continues to be supported by our stable partner base, new business launches driving strong credit sales and continued improvement in gross credit losses.

Total revenue growth is expected to be up approximately 5%, primarily driven by average loan growth. We anticipate full year net interest margin will be slightly higher than 2025, in part reflecting improved funding costs. As discussed earlier, we expect fourth quarter net Energage revenue as a percent of credit sales to be consistent with third quarter results. We manage expense growth based on revenue generation and continued investment in our business. and we remain on track to deliver positive operating leverage in 2026, excluding the pretax impact from debt repurchases.

We -- we anticipate expenses will be higher sequentially in the fourth quarter, driven by seasonal volume-related growth and continued investment in capabilities and efficiencies consistent with the trajectory we communicated earlier in the year. Over the long term, we will continue investing to drive growth, build new capabilities for our partners and customers and deliver meaningful operating efficiencies, reflecting the continued improvement in our credit metrics, we have improved our full year net loss rate guidance to be below 7.0%.

We with an expected range of between 6.9% and 7.0% compared to our prior guidance of 7.0% to 7.1%. This updated guidance incorporates our visibility into the current delinquency pipeline, stable macroeconomic conditions, continued risk and product mix shifts and an overall resilient customer. We expect our full year normalized effective tax rate to be in the range of 25% to 27% and with quarter-to-quarter variability due to the timing of certain discrete tax items.

This quarter's results reinforce the quality and resilience of our earnings model and the underlying financial discipline. We enter the final stretch of 2026 with strong momentum and a robust strengthened balance sheet, well positioned to support continued responsible growth and the achievement of our long-term financial targets. Operator, we are now ready to open the lines for questions.

Operator

[Operator Instructions]

Our first question coming from the line of Sanjay Sakhrani with KBW.

Perguntas e respostas

Sanjay Sakhrani

I guess first question is on the health of the consumer and just the path of credit quality. Maybe, Ralph, like obviously, lots of things happening in the macro and geopolitical backdrop. Just maybe any frontline commentary on how the consumer is doing. It sounds like they're doing quite well based on your credit, but just any other context there. And then Perry, good solid performance on credit. But as we look out to next year, obviously, the growth has accelerated. As we think about further improvements to credit, thinking about the portfolio mix and obviously the growth, what's the direction of travel on losses and such? .

Ralph Andretta

Yes, this is Ralph. I said in my prepared remarks, the consumer is resilient. If you look at the consumers, kind of bifurcated the high-end consumer continues to spend, but they spend intentional. They're focused on spending thoughtfully and correctly. And so they'll continue to spend. It's been robust. And the consumer are maybe a little lower FICO advantage for us, are very focused on bargain hunting and nondiscretionary spend. And that's what we've seen, but they are spending as well. we've seen spend in different categories. sporting goods has been strong. exploding goods has been strong. Home improvement has been strong. .

Beauty continues to be strong. So we're seeing good spend across the board. But like I said, the spend is intentional, thoughtful and some are bargain hunting at this point Yes.

Perry Beberman

Yes. And so to tag on to what Ralph said, and I think when you ask about the direction of travel for next year on credit, 1 thing is going to be contingent as always is the macroeconomic backdrop. And so if all the good things Ralph said there, we're still pretty cautious and appropriately about what things might look like. So while the consumer has been very resilient up to this point, there are things out there that give you some of that pause and something that could influence their behavior in the coming quarters, right?

So persistently weak consumer confidence, and that could -- it hasn't yet, but it could translate into softer spending, borrowing or payment trends -- there is a cumulative impact of having higher interest rates. So if interest rates continue to go higher throughout next year, what might that do to create, I will say, tighter financial conditions on a particular household on their budgets. -- obviously, the geopolitical and energy stuff going on. That could put further upward pressure on inflation and limit some of their discretionary spend -- and then you have just the overall political environment and what might shift with policy -- so all these things are going to have impacts into next year.

So I'd say we're very encouraged by what we've seen with the consumer so far. -- and we haven't seen any meaningful signs of deterioration because they're navigating and managing those -- their personal budgets. But that will influence our view of what next year might be. So you talk about credit, I think that the path to travel will be a lower loss rate into next year, probably will not improve at the same degree of basis points as we observed this year.

Now we've got some tailwinds in that you can see that you've got really good delinquency bucket performance right now. We see continued improving product mix that is if a changing product mix that influences the loss rate. And so we're going to continue to see good growth, probably stable to what we saw this year. So everything is trending in a positive direction and payments are holding up really well.

Sanjay Sakhrani

Okay. That's great. And then maybe just, Perry, on the NIM-- as we think about just the path for next year with the rate environment and such, how should we think about the movement of the NIM -- and maybe just like the associated impact on efficiency ratio because you guys have obviously seen efficiency gains as NIM has done well. Maybe you could just talk about that a little bit and that's it.

Perry Beberman

Well, as we think about NIM going forward, what I would tell you is, as we'll talk about lots of moving parts, I expect fourth quarter to be lower than third quarter seasonally. And that's typical, right? You have the rise in the transactor balances. And so the moving parts that have influenced this year's NIM and will probably even more so influence next year. And I'll just put this out there. I expect NIM for next year.

I'd say this year, we probably peaked in full year net interest margin. Next year, I would expect net interest margin to be flat to slightly down, in part because you have a continued improving credit environment that you're going to have less billed late fees. We continue to see a shift in our new account product mix more to co-brand, proprietary card and installment loans. And those come with less risk but also means lower assigned APRs and fewer bill late fees with the type of credit they are.

So I expect that to be -- we'll still see some improvement of gross losses, which means you have less reversal of interest and fees. So that's a net good guide. But that's the direction I'd say in that. So the product mix is going to shift. But also with that, you do get bit betterment in loss rate. So if you look at your risk-adjusted net interest margin, we feel pretty confident that's going to look pretty good for next year.

As you think about efficiency ratio, I mean net interest margin is kind of in the, I'll say, in the soup with everything else. But the scale is where we're seeing benefit by delivering positive operating leverage year in, year out, that's going to continue to help us improve efficiency ratios. And I'd say some years, you're going to see a better improvement in efficiency rate than other years. And so -- because we're continuing to make the right types of investments in the company. and everything for technology, service, AI investment.

So we're managing it tight through our operational access program for very good about being able to continue to drive the efficiency ratio lower over the coming years. And that's 1 of the key elements, along with improved credit that will help us hit those ROTCE targets.

Operator

Our next question in queue coming from the line of Moshe Arenas with PDC.

Moshe Orenbuch

Great. Maybe just to focus a little bit on the RSA. Could you talk a little bit -- I know you talked about what it should be looking like in -- but any sort of -- how we should think about that in the context of kind of a relatively higher level of growth that you're seeing, the recent renewals as to whether that has any impact over time? And any other factors we should think about that on a longer-term basis?

Perry Beberman

Yes. So longer term, more and more of our programs are having more of a profit share component in there, which we like because it definitely aligns interest in the program. The way we continue to speak to it is that expect -- if you look at the RSA as a percent of credit sales, that's the way to look at it, and I would expect that, that percent will rise somewhat over the course of time in years.

And that's a good thing as again, the profit margins expand. And we will share more of that with the partners over time. But again, that's aligned interest, and all of that is built into our expectations as we're going to drive towards those mid-20 ROTCEs.

Moshe Orenbuch

Maybe at a high level, you've had very good success, extending, renewing and new partners as well. And I think if you look at the private label and partner industry broadly, there are definitely pockets where there are players who are going back or not emphasizing as much. As you kind of look out at the landscape, what do you see as the biggest areas of opportunities for you for potential new -- either new programs or acquisitions?

Ralph Andretta

Yes. Mac, I think a couple of things. One is we are really pleased with the renewal of Signet and Sephora, they are our long-term partners. And they renewed early because we have this trust and his confidence in the leadership team, and we feel really good about that. mutual view on that we can grow profitability for both of them and us and our continued investment in technology and using AI as we move forward.

So feel really good about those renewals. And as we look at the broader pipeline, it's really across the board. -- so we see a lot of de novos out there where there's opportunities to with start-ups like we have with a couple of ours, where we can build programs together, we really like those. But they're really quite across the board, to be honest. There's no 1 industry that stands out at this point.

Operator

Our next question in queue coming from the line of Terry Ma with Barclays.

Terry Ma

Can you maybe just help us think about the building blocks for loan growth into 2027? How much should come from existing partners versus recently signed renewed programs? And then like when should those newer programs become more meaningful contributors?

Perry Beberman

Thanks, Terry. Look, obviously, we're experiencing very nice growth in 2026 because of the foundations that have been built in '25 and before that. So some of the things which you just spoke about is the building blocks. So 1 is we're going to continue to see gross loss improvement. That means more of the new vintages that we put on are going to be able to contribute to growth versus, say, going out the back door through gross losses. So that's a nice bit of tailwind that will continue into next year.

The programs that we signed say, late last year, early this year, we'll continue to roll through. But because of the significant growth they provided to us this year, you kind of lap some of that, and you'll see that in the fourth quarter, the growth will not continue to accelerate versus what you saw in the third quarter as a result of those programs that started last year, you think about the furniture vertical, some new signings that will come on will help contribute as well as the existing partners that we have that are reinvesting in their programs, revising their value propositions when we get partners who understand and truly value that loyalty program and reinvent that, we see really nice growth in those.

And what I'll tell you, we look at Academy Sports is a good example of that, where they now offer all of our products, whether it's an installment loan product, the private label product or a retail co-brand. So that's an example of somebody who really took that. And when a partners do that, they can see some nice growth. So those are existing partners. And then installment loans are the other piece that you're seeing some nice growth with us, and I think that will continue into next year.

Terry Ma

Got it. And can you give some color on what conversations are like with ton of merchant partners for renewals or any kind of de novo programs? Like what are retailers kind of focused on in this environment? Is it just economics, value prop, usage of AI? Any more color around that?

Ralph Andretta

Yes. Really, all of the above, you mentioned 3, but I think 1 of them is the trust and experience of the team we're putting in front of the partners. And when we go to a partner, it's not just a sales call. It's a call about our capabilities, our customer service capabilities, our technology capabilities, our data and analytic capabilities.

When we talk about all those with the partners and demonstrate to the partners that, hey, we can help you grow your business as we move forward, and here are the opportunities. So those -- it's really that conversation across the board. The history of our success, how we built -- we've gone from some of our partners that started with us de novo now with some of our biggest partners in our top 10. So our history, our legacy is really is really very important to us. And we get -- and we use our top 10 partners feedback as part of the selling point. So -- we go in with -- and a full product set as well. So those are all important as we move forward.

Operator

Our next question coming from the line of Mihir Bathia with Bank of America.

Mihir Bhatia

I wanted to start with just the returns on the incremental programs. Maybe you could talk a little bit about just the risk-adjusted return hurdle that new programs much clear. How are recent -- how do recent programs compare to the existing book to the prior relationship or the existing portfolio, just given you are in some of these programs are changing.

You talked about RSAs going up, maybe moving to a little bit more of a profit share model. Are the new programs as profitable as the old ones? Or are you having to give up a little bit of the economics as the programs perform well?

Perry Beberman

Yes. Maher, it's a really good question. Thank you for that. Every program has different economics. And you can think about it. Every program has a different degree of volatility in different economic conditions, which require, I'll say, maybe they provide better returns in benign situations and the returns get a little more compressed in times of higher unemployment and other situations where other programs perform more steady. So it depends on the -- if you're looking at a private label program, typically, those will have some higher margins, whereas if you're looking at say, some of the programs out there that even ones that we pass on to be very thin margins, but have much lower losses, very high rewards.

So everything has different returns, but the programs that we're putting on, we make sure that they hurdle our internal return requirements all of which has to drive us towards those mid-20s ROTCEs that we've committed to.

Mihir Bhatia

Got it. And then maybe just turning to capital deployment. After 4Q, obviously, you said you expect minimal buybacks in 4Q absent the preferred issue. So maybe a 2-part question here. Just once the seasonal loan growth reverses what CET1 level are you managing towards -- and what should we be looking for in terms of timing and pace of repurchases in 2027? And to the extent you can comment on any of the preferred issuance economics that you would be looking to achieve? Like just how do you evaluate the preferred dividend versus the accretion from the buyback and the CET1 benefit?

Perry Beberman

Yes. So Yes, lots of unpacking there. So we have said and we haven't, I don't think, deviated from that, that our goal is to provide a CET1 ratio of about 12% to 13% is our target. And so you could think about that, and that's optimized. So once we are fully optimized, which would mean issuing I'll say, a full amount of about 1.5% of our RWA in the form of preferreds, which means we have about another $100 billion or so to go. -- before we're right in that sweet spot of the CET1 target.

And then as it relates to preferred it will be market dependent in terms of when -- and if we can do that and an open window begins, I want to say next Monday, -- but again, who knows what the markets will look like. In terms of the opportunity, -- we believe it's -- our shares are still a good value and by optimizing our capital stack, it provides the opportunity to put excess capital to use. And obviously, the first thing we do is fund that profitable growth, and you're going to see the use of that capital in the fourth quarter. That's why we say expect very minimal buybacks in the fourth quarter, sort of preferred issuance because we're deploying capital to fund the loan growth.

And then seasonally in the first quarter, that frees up as the customer starts to pay down balances. But overall, our capital priorities have remained really unchanged. We're going to support profitable growth, fund innovation, maintain our capital ratios and we'll return to shareholders, what's left over.

Operator

Our next question coming from the line of John Bunker with Evercore.

Girard Sweeney

This is Georg wine on for John. Just going back to the NIM trajectory and deposit cost comments. Can you just contrast maybe the rising deposit cost pressure versus the funding cost authorization? And with consumer deposits that 53% of funding, are you expecting any further benefit to the funding mix as well, especially post plant conversion.

Perry Beberman

Yes. I think I heard the question. It was around deposit funding. -- and the upward price upward pressure to put. So if we are -- when you think about net interest margin, we are as close to neutral as you can get. So if we had a rising rate environment. I expect to have a little bit of benefit from it, but it's a temporary benefit.

Now that said, you can see a situation where spreads start to widen a little bit ahead of an actual Fed funds rate increase. So that could affect things. And you think about the turnover of CDs, and we are a growing business. So as you have your loan growth, you're going to fund it with more deposits, those deposits are going to come in at current market rates. So overall, I would expect that the cost of deposits will rise over time, particularly if you're turning into a rising rate environment here. but our net interest margin should not be getting compressed as a result of the deposit pricing. And I expect that we'll continue to grow deposits as it -- we like this form of funding. -- merging the 2 banks together into 1 larger scale bank allows us to continue to grow that as a percent of our overall funding over time. We'll do it responsibly, but we're very comfortable with where we are, I'll say, in the league table on competitive pricing.

Girard Sweeney

Great. And then going back to overall deposit mix, is there some sort of target level or where you expect to cap out in terms of deposit mix, consumer deposits as a percent of total from the 53% in this quarter.

Perry Beberman

Yes. So again, we're around 53% or so of total funding from -- we're up from 47% a year ago. I expect that the long-term target will match pure funding in that 60% to 70%, but that will take a number of years to get there. .

Operator

Our next question coming from the line of Dan and with Wells Fargo.

Donald Fandetti

I was wondering if you could just talk a little bit as we head towards the midterm. Is there anything in the regulatory front that you're keeping an eye on? Or do you see sort of like a steady-state situation?

Ralph Andretta

We're always watching Washington, but right now, we see a steady state. We'll see what the midterms bring. And like I always say, whatever the administration is in power, we work with the administration we need to work with that doesn't say how we run our business. .

Donald Fandetti

Got it. And on expenses, the growth has been pretty kept in track. How are you thinking as you go into next year with tech and AI spend obviously, you think you can have continued operating leverage, but do you feel like expense growth can continue to be pretty modest.

Perry Beberman

Yes. I mean on expenses, look, we'll go into the fourth quarter with higher expenses will be higher sequentially, driven by seasonal volume-related growth and continued investment in our capabilities that also then drives further efficiencies going forward. We do remain really focused on operational excellence.

And that -- I know it may sound like a tag line of some sort, but it really is a culture and mindset of our company. We're driving continuous improvement. Those savings kick off tens of millions of dollars in efficiencies per year that we're able to deploy back into the business to fund different initiatives for technology, service and collections, marketing and also drive further revenue opportunities and optimization.

So -- all of this has also enabled us to invest more into AI. Now as we look into next year, we are committed to delivering positive operating leverage. The investments in things like AI are accelerating and important from a competitive standpoint, but that's going to unlock even greater opportunities in the future. So it could be a thin year in a positive operating leverage next year because this year is coming in pretty strong.

But every year will be a little different. But our commitment does not change in what we're going to do invest in the business to make sure we're supporting our brand partners and our customers like with the best tools and capabilities possible.

Operator

Our next question coming from the line of Jeff Adelson with Morgan Stanley.

Jeffrey Adelson

Ralph and Perry. I know you just talked a bit about the deposit, but if I could just follow up there. I appreciate the color and commentary. You're continuing to kind of emphasize growth there. You think you can continue to grow that above the prior target of 50% in terms of your direct-to-consumer deposit mix.

But -- if I can make an observation, it does seem like your savings rate, you have kept that a little bit higher relative to what rates have done over the past few years. So and as you kind of continue to remix into these deposit costs away from wholesale going forward, is there maybe some room for your overall deposit cost to maybe performed a little better this time around.

I know you sort of widened the deposit beta range out last quarter to 60% to 80%. But -- it just seems like there's potential opportunity there for your deposit costs to rise a little bit more slowly this time around. Is that an appropriate way to be thinking about it from here? Or just any sort of thoughts there?

Perry Beberman

Yes. So Jeff, there's a couple of things. I appreciate the question. Look, I think -- in time, we will be able to pull levers a little differently on pricing as we continue to have scale and more brand recognition, you get more stickiness and you maybe be able to shave a few basis points. But for now, what I'd say is it is competitive out there. We are -- with our I'll say our loan growth needs to get funded, and we want to increase the percent of our funding being direct-to-consumer deposits means our deposit growth has to outpace the loan growth.

So we need to continue to grow at a decent pace. -- and we are very pleased with our competitive position, our price optimization will continue to happen, and we look at the mix of where we want that to be. But it is something that we very actively manage. And I think it's a fair point and something that in time of course, from mice, I would love to see some basis points of benefit coming through that. But right now, this is where we're at.

Jeffrey Adelson

Okay. Great. And again, I appreciate all the color on the interchange and RSA line. I guess, as we think about the go forward in our models, your interchange as a percent of credit sales was up 30 basis points year-over-year. It looks like it will be similar next quarter. Is that the right trajectory to be thinking about in our models?

Or -- is this a little bit more accelerated these 2 quarters given the renewals and it will depend on the pace of renewals going forward more than just kind of a consistent upward trajectory?

Perry Beberman

I would say that perhaps it's a little faster because of renewals linked quarter and going into 4Q. But as you bring on different partners and your growing business and there's different partners come on with different value propositions. I would expect that it will continue to steadily ramp up in the future. .

Operator

Our next question coming from the line of Dominic Gabrial with Lupe Capital.

Dominick Gabriele

Great. Thanks so much -- good results. So I'm just wondering, guys, in the fourth quarter, you're calling for average loans to be up approximately 4% for the year. And I'm just curious if that means that you expect spending to decelerate from the third quarter's level or if your assumption is that paydowns actually step up year-over-year, even though it seems like the paydowns in the third quarter were actually a little bit less of a headwind from my calculation -- so I'm just curious if you guys could unpack those 2 factors.

Perry Beberman

Yes. And thanks, Amit. So the -- what I talked about earlier with the year-over-year growth becomes a harder comp in the fourth quarter because the fourth quarter of last year, we launched some of those new furniture vertical brands, like Ray MornPlaning and Furniture first that put on some nice growth in the fourth quarter of last year.

I think it those deliver more steady growth. So this year, it's already -- in the fourth quarter, it's already in the comp from 2025 that where it was not in the comp for the third quarter. because they haven't launched yet. That's why that math's a little different there. And then the holiday spend will obviously be the wildcard in terms of what the fourth quarter really turns out to be.

Dominick Gabriele

Yes. Great. And just a little bit more on the consolidation of the banks. People have asked for that for I have no idea 10 years or something along that line, and you guys got it done, I guess. What synergies from a cost perspective as well or any items that you couldn't do before that you can do now, now that the banks are combined, if you can talk through that, that would be great.

Ralph Andretta

Yes. Listen, it's Ralph. We're really proud of the bank consolidation. And we did it from a position of strength. We have a professional team. We're focused on it, and there were no conditions in this bank consolidation. That was critical to us as we move forward. So we can fund more assets with direct-to-consumer deposits, as we've just talked about.

We gain capital efficiencies by creating a single bank with large-scale and stronger, more diversified combined balance sheets. And I think it's just a reflection of our enhanced capital position, our enhanced strong balance sheet and really our enterprise risk management, and we're able to do it now with no conditions or a position of strength with a first-rate team in place.

Operator

Our next question in queue coming from the line of .

John Hecht

You guys talked about, I think, some of the proprietary products, proprietary cards, installment loans, it sounds like there's an increased portion of the overall mix tied to those products and services. I'm wondering, are these cross-sell? Or maybe can you talk about the channel of customer acquisition in those products? .

And then how do we -- you mentioned higher credit quality, higher spend overall with that group. How do we think about that mix over time and how that impacts, call it, the metrics of the business like margins and so forth?

Perry Beberman

Yes. John, thank you for the question. It's something that as a finance team might get to enjoy trying to reforecast that every quarter based on or every month based on the new signings, customer behavior, where new accounts are coming from -- and really, what you've seen us talk about is an evolving portfolio.

I mean if you think about back -- before Ralph joined, it was a lot more private label card soft goods concentration. And then over time, we've introduced more co-brand including retail co-brand, which is effectively supporting the partner that maybe only had private label before. Now they've got a retail co-brand card, bringing more top of wallet type of co-brands like NFL, AAA types of programs and then some more of those bigger ticket, the furniture vertical, and now you're seeing some good growth in installment lending.

All of which, to your point, have very different metrics whether from the top line loan yields to risk-adjusted margins because they have different types of losses, different expense costs associated with them. So all of that fits together. So over time, that's why I commented earlier on the I'll say, the path of travel for both net interest margin and then pair that with credit losses, net interest margin is going to be a little pressure from that changing product mix, but credit should benefit from that.

So everything fits together and some of these things that have larger loan size also benefits your efficiency ratio. -- because the cost of servicing a account with a larger balance is going to cost you that much more. So all these things are fitting together. And -- but at the end of the day, we will be able to get to those return targets that we set. And then in terms of the channel question, every partner has different strengths of their channels. Some are stronger in online digital channels. I'd say everybody has that. And some of them are much more in store. So it really depends on the brand partner.

John Hecht

Okay. That's super helpful. .

Operator

And there are no further questions in the Q&A queue at this time. I will now pass the call back to Mr. Ravindran for any closing comments.

Ralph Andretta

Thank you, and thank you all for joining our call today and for your continued interest in Brit Financial, and we look forward to speaking to you next quarter. Everyone, have a terrific day, and thank you again. .

Operator

Ladies and gentlemen, that does contour conference for today. Thank you for your participation, and you may now disconnect.