Q4 2019 Earnings Call
Good morning, and welcome to the sometime their consumer U.S. Holdings fourth quarter 2019 earnings conference call. At this time all parties have been placed in listen only mode.
During today's presentation. The floor will be opened for your questions. Please dial star one entered acuity Q. It is now my pleasure to introduce your host of in Black head of Investor Relations oven. The floor is yours.
Thanks Nicole.
Good morning, and thank you for during the call everyone on the call today, we have.
President and Chief Executive Officer.
Oh Gee.
Certain statements made today maybe forward looking.
We refer to our public isn't the Bible minerals doctors.
Respectively.
We announced a reference certain non-GAAP financial measures that we bought them.
A reconciliation of those.
Got it.
Okay.
During her time 2020.
With that.
Yep.
[noise], Thank you and good morning, everybody.
I want to Scott, that's saying how long time.
Going to because [noise].
<unk>.
Hi drugs on their growing 17.
I think of the Chief operating officer, and most recently as the Chief risk Officer, that's out there the U.S.
In each of these rules.
Board members I got that consumer significantly balls in the strategic direction or the company's operation strategy I'm, just trying to get programs.
[noise] I'd definitely excited the opportunity to be able to couldn't hear the great work. That's been done. These past few years, [laughter] guide or something that I.
I got various exactly the girls with Citibank very skeptical on.
I'd like to thank Scott, though for his leadership and dedication over the last few years.
As he successfully navigated second because he has got done there youre sort of Diamond Green tree.
And that's about the 20 years on behalf of all of that since I've been there.
We wish him the best in Israel.
For a couple default.
A couple of the fourth quarter and 20 might be highlights.
I would see remarks are getting out Kimball office.
You have seen by now we've announced what do you expect to commence for $1 billion dental office.
Yes, that's true.
We cannot expand much better than the press release issued last evening as a reminder, getting the current captive distribution cycle. It's these authorized to repurchase important $1 billion.
As a big quarterly dividends paid concerns for sure.
The tender offer their fault lines with these people must be outside capital actions, we should use of access capital.
We are constantly evaluating capital deployment opportunities as we walk towards a more efficient capital.
The tender offer.
But both of your acquisition from get Big ones amending our recent examples of actually creating shareholder value.
[laughter].
Let's turn to slide fleet, that's got some of off of your highlight.
There are several key leadership appointments getting 29 <unk> all the between good and so.
So to speak to the death of the leadership humidity.
I'm excited to walk the Chinese Sean and I recently appointed he does Indian Tiebacks when people 20, Twond give you could push up is the sport.
So many originations perspective, because yet another record breaking your.
Total orders nation for more than $31 billion.
That said this is 2080.
All time highs the type of their consumer.
You had a particularly strong increase in credit problems. This year, which was driven by far the collaboration that popped out this year, Chrysler and by the fact that bags injections program.
Swiss be an AB originated $7 billion of auto loans with football tell relationship didn't see a demonstrates the value of collaboration across south of that your franchise.
Another key highlight from 39 P. was a mutually beneficial agreement can be reached its fiat's Chrysler.
In countries like India achieved the highest ever I do penetration rate since inception of the contract.
We were able to accomplish this by aligning acquisitive fee is focusing on meters.
Also during funding I do you see on an all time high back over $94 million and that kind of 2.2% or driver methods.
Critical form it's improved across the board with improvements in <unk> confuse charge offs comfortably.
Late stage delinquencies decreased 90 basis points it would be under 2018.
The full year net charge off ratio was 7.8 to 10 to 20, Nike down 70 basis points for the prior year I'd been north NCL rate last four years.
<unk> continue to be strong enough supported by strong macroeconomic environment industry backdrop.
All the recovery rate, which include metal on metal do they do the company's told her more than 52% in quarter four people IP, reflecting a 490 basis points from the targets.
TDR balance is also decreased 1.5.
Due to better credit performance and they'll modification.
During 2000 might be.
He was the number one.
Sure in the market executing $11.9 billion and maybe it.
Demonstrating the strength and investment demand.
<unk>.
Yes exactly.
We also logs were blessed to have an undrawn revolving all along.
This will allow us to be good Bob did the garbage walk rigs over the five out of all the girl.
These results a better cost of funds, increasing increased liquidity and increased access to investors and that's correct.
Basket.
That I'd like to go on the call over the Friday for more detailed review [noise].
[noise], Thanks, guys and good morning [noise].
Turning to slide four for some key economic indicators the influence our originations and credit performance.
Building on what my has said the macroeconomic environment remains supportive of our business.
Consumer confidence remains at high levels. The labor market is strong and household balance sheet continue to improve.
Environment continues to support a resilient and competitive consumer lending environment.
Regarding the new vehicle sales 2019 marked the fifth consecutive year of at least 17 million units sold in 2020 industry experts are forecasting a moderate decrease slightly lower than the 17 million sold last year.
The used vehicle market continues to be stable as demand from consumers remain strong.
On slide five there are few key factors that influence our loss severity and credit performance.
Our recovery rate, which includes metal and non metal proceeds bankruptcies appears to be sales was 52.2% in the quarter. The softening and used vehicle prices. We mentioned in October last year moderated in the final two months of the quarter and led to better recoveries year over year.
Overall trend in Q4 is in line with typical seasonal patterns experience in the past.
Additionally, select nonprime industry securitization data points or improved net loss and delinquency trends compared to last year consistent with our portfolio.
Turning to slide six for origination trends.
During 2019, I see originated more than 31 billion of auto originations up 9% from 2018 and a record for the company.
For the fourth quarter core loan originations increased 9% in the quarter compared to the prior year quarter.
Across the capital loan originations increased 29%.
Similar to prior quarters. This year the increase is coming from a greater than 645, <unk> segment, which is driven by Chrysler capital exclusive offers and the origination program with Santander Bank.
Lease originations decreased 15% versus Q4 last year due to competition and last year lease space as well as elevated lease volumes in Q4 2018.
The fourth quarter was really a continuation of the trends in the first nine months of any or.
Although down year over year remained the largest lease originator for after he has more than eight and a half billion leases in 2019.
The growth in volumes due to our continued progress with the FDA our dealers in our origination processes, we remain disciplined with respect to the risk return profile of our nonprime originations, while maintaining our competitive position, we expect to continue to support Sta prime loans, while continuing to maintain our strong market share.
In weeks.
Turning to page seven and Dfc a results.
Remember during 2019, we reached a mutually beneficial agreement with the FDA, which established <unk> operating framework for the rest of our contracts, but we believe has positioned both S&P and FCX to succeed as evidenced by our results.
We achieved our highest ever penetration rate with Sta since inception of the contract in 2013 with 34% penetration for the full year 29.
The key differentiator. This year is a consistency and stability of the programs, we collectively offered to our dealers and our customers.
Turning to slide eight.
We continue to identify ways to leverage our servicing capabilities and drive growth in our service for others balances.
During the quarter, we added 1.9 billion in originations to the U.S. AFFO platform, the our agreement with Santander Bank.
In December 2019, we also announced the transaction with Gateway one lending Tcfs subsidiary I'll cover a little bit later, but included a 500 million service for others portfolio that portfolio is not part of the as AFFO balance as of yearend.
The service for others platform generated 21 million in servicing fee income this quarter.
In addition to those servicing fees 6 million of SDMA origination fees or in our fees and commissions and other line item.
Moving to slide nine to review, our financial performance for the quarter versus the prior year quarter.
Net income for the quarter over 146 million up 40% versus the prior year quarter.
Interest on finance receivables and loans increased 2% driven by higher average loan balances.
Net leased vehicle income increased 5% due to continued growth in lease balances offset by lower lease gain on sales compared to prior year quarter.
Interest expense increased 7% due to higher levels of outstanding debt relatively in line with the increase in our loan and lease receivables balance in a lower contribution from our derivatives portfolio.
Provision for credit losses decreased to 545 million in the quarter down a 145 million driven by strong credit performance and lower GTR balances.
Total other income recorded a loss of 64 million in the quarter and included $170 million as held for sale adjustments related to the personal lending portfolio.
Next we will turn to slide 10 through your full year results.
Net income for the year with 994 million up 9% versus the prior year in a company record excluding the onetime benefits of the corporate tax reform in 2017.
Interest on finance receivables and love increased 4% driven by higher average loan balances net leased vehicle income increased 25% also due to continued growth in balance.
Interest expense increased 20% due to higher levels of debt outstanding with our higher asset balance and additional leverage from our capital distributions.
Provision for credit losses decreased to 2.1 billion into year down 112 million driven by continued strong credit performance and lower TDR balance.
Income tax expense in the year was elevated and 2019 due to higher income updated statutory rates and a few onetime unfavorable adjustments to prior year filings our tax rate remained slightly higher than the statutory corporate tax rate.
I will cover our tax rate outlook a bit later, when we go through guidance.
Earnings per share for the year of $2.86 increase in the prior year due to a combination of higher income driven by increased balances and improved provision expense. In addition to a lower share count as a result of our open market share repurchases.
Continuing on to slide 11 versus the prior year quarter early stage delinquencies decreased 130 basis points, while late stage delinquencies increased 90 basis points.
As we have reference in the past lower loan modifications have an impact on delinquencies charge offs and lower inflows into tdrs overtime as modification levels have normalized delinquencies have improved and the lower loss portfolio remains.
Regarding losses, the rig gross charge off ratio of 17.3% decreased 290 basis points from Q4 last year.
The net charge off ratio of 8.3% between 230 basis points from Q4 last year, driven by lower gross charge offs as well as strong recovery rates.
Our credit metrics continued to improve the route 2019 as a result of all the work we've done to improve the dealer experience on the front end and the servicing strategies, we've implemented on the back end.
Turning to slide 12 through the last figures in dollars.
Charge offs for rigs decreased to 137 million versus prior year quarter to 618 million.
Breaking down the change of 51 million and losses were primarily due to higher average loan balances, which were up 1.6 billion from last year.
These were more than offset by lower gross charge off ratio decreased losses, but how does 14 million and a better recovery rate, which increased losses by 74 million.
Turning our attention to provisions in reserves on slide 13.
End of Q4 2019, the allowance for credit losses totaled 3 billion decreasing 74 million from last quarter, which represents an allowance ratio of 9.9% at the end of this quarter.
In regards to the reserve walk the allowance increased 193 million due to new originations in the quarter. These increases were more than offset by 103 million decreased due to favorable performance adjustments and 164 million increase due to pay offs and charge offs.
Overall ratio continues to decrease as TV ours as a percentage of total outstanding balance increases and overall charge offs on the portfolio improve.
Now, let's turn to slide 14 to discuss Tdrs.
The AR balances decreased 362 million versus the prior quarter.
Junior either downward trends into lower TBR inflows, given the strength of the consumer and lower modification levels.
As we mentioned in the past the slower generation of TV ours could allow TDR reserve balances to try and low.
Moving to slide 15 to cover Cecil.
On the slide we have outlined that they want impact on Cecil broken out by TDR versus non TDR balances, we adopted fees on January 1st of this year and expect to recognize approximately 2 billion increase in the allowance and a decrease in retained earnings of approximately 1.5 billion after taxes.
The impact represents an increase of approximately 69% to the allowance compared to the fourth quarter 2019, which it towards the upper end of the rate, we previewed last quarter.
The decrease through retained earnings represents an estimated 80 to 90 basis points decreasing C.G. one for the first quarter 2020 based on a four year phase in for regulatory capital ratios.
A couple of thoughts on the day to impact our Cecil methodology relies on various models and assumptions the forecast lifetime losses of the portfolio based on an economic forecast and other relevant variables the impact of Cecil heavily depend on several factors, including the mix of our portfolio, we simple folio trends.
The growth of the balance sheet and our view of the economic outlook at the end of each period.
The other consideration is our mix of TDR as versus non studios.
Under Cecil the impact from decreasing GDR balances will still be a benefit but to a lesser degree than we have experienced in the past.
As you can see from the slide the TDR coverage ratio is very similar to prior periods as tdrs are already reserved for lifetime losses.
Most of the FIFO impact comes from non TDR portfolio, which the allowance increases from approximately 8% to just over 15%.
Our expectation for 2020 that the TDR balance will continue to drop but at a slower pace than we experienced in 2019.
As such the benefit in 2020 from the reduction of TDR balances will be significantly reduced from 29 gene levels.
As we mentioned on the last call, we do not expect sequel to change our underwriting practices or how we approach the market on a day to day basis reserve timing does not impact the underlying risk or profitability of our assets.
Turning to slide 16.
The expense ratio for the quarter for the quarter totaled 2.1% up from 1.9% for the prior year quarter on a full year basis. The expense ratio was flat compared to last year.
Turning to slide 17.
We continue to maintain strong and deep access to liquidity in the securitization in wholesale funding markets and being 20 lighting was there number one issuer of overall auto ABS in the market a first ever milestone for our company.
In addition to our consistent execution of our Estars drive and start to platforms. This past year, a few brought to the market. The first ever non prime auto revolving ABS transaction as rough, allowing us to lock in five year funding at attractive rates.
For the quarter, we execute a 2.2 billion and Securitizations and we ended the year with a total committed funding a 51 billion, which included 19 billion in private financing and lender commitments.
Subsequent to quarter end SD completed its first public drives subprime Bbs securitization of the year offer a 1.1 billion in securities, which were well received by investors and price with the lowest weighted average cost of funds in the history of the drive platform.
Finally, turning to slide 18, RCT, one ratio for the quarter was 14.8% down from 15.8% versus prior year quarter.
As it has mentioned we are very excited to continue our efforts to return capital to our shareholders with a plan to commence a 1 billion while or tender offer.
We remain focused on.
Looking toward a more efficient capital base and a tender offers further progress towards that goal.
As we go into the capital planning cycle for 2020 will assess the outcome of the tender offer cecil's phased in impact and further actions to deploy any excess capital whether it's through open market repurchases dividends or additional portfolio acquisitions like at Tcf transaction.
Before I get the guidance I did want to briefly comment on the transaction, we announced in December with Tcf. The deal has two parts a 1.1 billion indirect auto loan portfolio that we acquired and a $500 million servicing conversion.
The portfolio should be fully converted onto our servicing platform by the end of Q1 2020 and will be included in our social balance going forward.
We are excited about this transaction is aligned with two of our key priorities to be opportunistic on portfolio acquisitions and to leverage our servicing platform to drive fee income.
This is the second conversion that we have executed in the past two years and demonstrates our ability to partner with other financial institutions and mutually beneficial ways.
Few becoming the servicer of choice and has a strong direct track record of converting assets efficiently and improving portfolio performance post conversion for our estimate for customers.
Moving to our guidance for the first quarter.
Remember the first quarter is usually a strong performing quarter due to consumer benefits from tax refunds. My comments will be relative to Q4, unless otherwise noted and will include the impact of personal lending.
We expect net finance and other interest income to be relatively flat inline with last year's quarter on quarter trend.
Division expense is expected to be flat to 50 million better smaller seasonal benefit than in prior years. As Q4 2019 net charge off ratio was more than 200 basis points lower versus the prior year quarter, driven again by improved gross loss and recovery performance.
We expect total other income to be 80 to 100 million better driven by normal seasonality of the bluestone held for sale portfolio.
We expect operating expenses to be flat plus or minus 10 million.
I will now cover our full year outlook for 2020.
For the full year 2020, we expect net financing and other interest income to be up low single digits.
The net charge off ratio to be around 8%.
Stable expense ratio around 2.1% and on taxes. We currently expect the tax rate to be slightly lower than 2019 around 25% for the year.
Before we begin to you in a I would like to turn the call back over to Mahesh Nash.
Thank you Tony and somebody 29, keen with a very strong yields of something that consumer.
While there's been some recent market uncertainty we continue to visit easy watch all about where the performance indicator that did not see anything alarming to us consumer and job creation remains strong on as long as continues to remain at historic levels.
Probably the most of the auto market. It's healthy so we remain generally positive headed into 2020.
I want to also must be made significant strides in 2019 with the slump on their consumer USA foundation across the communities and would be operate Dallas, Texas near size on 'em, Denver, Colorado, you, a waterfall them 2.2 million bottles and wants to nations and sponsorships.
Additional associates completed more than 24000 also saw this to help make a positive impact in our communities.
In closing a few points to detail off any 19 vessels.
Oh slump, although things a little made significant progress on many fronts over the last few years fine tuning, our pricing and be more competitive in the market improving dealer experience and making sure. All this modest lump them all patients are running smoothly.
Plenty 19, Devops leveled the changes we made a leading to bumps in the loss.
Second we remain disciplined on expenses, while increasing volume imbalances.
Well, we spent a lot of by building a deepening our management team.
And I believe that that is a good example of that I'll speak to the broader point that FC today is one by management team to the strong Biopharma banking, but continues to post accompanied the world's operating and major financial institution standards.
Hi, NFC, we continue to work very hard to spot awful.
All these nations performance reflects the strength of our partnership and you could do to work together to find new which create mutual volume.
That I'll open the call for questions operator.
Thank you we will now open up the call for questions. Once again press star one to enter into Q. Please limit yourself to one question and one follow up question.
Our first question comes from.
With credit Suisse.
Oh.
Sure maybe.
On the comments that you made about.
Volumes overall with respect to Chrysler, but you know kind of being seem a little more competition on leasing, hoping you could flesh that out a little bit discussed.
How that's likely to you know who is kind of stepping in and taking that that.
You know that higher level of competition and you know kind of whats your plan or your discussions with if she age like are there things that they're going to do to help you.
I will better position.
Yeah. Thanks for the thanks for the question so the lease leases did drop year over year.
As we mentioned we did originated 1.8 billion for the for the quarter.
You know part of it is from a dollar standpoint slightly lower levels of leases from as Betsy a generally.
You mentioned competition on on on lease I think most people know that the competition. All leases is relatively small there's only a couple other national players who do FC a leases we have seen some pressure from credit unions in certain regions of the country that have also stepped in until these.
But given that limited competition and lease any aggressive price movements, one, whereas the other can really significantly take take share.
As a reminder, I don't think I mentioned that we are still we still have a larger share sta leases by far.
The competition doesn't come and go month to month vehicle [noise] school, but we have to maintain a consistent program for our partner and we do that and we've seen some of the volume come back in January as we've put in more programs to start out the year.
Okay.
Just to say a as a follow up question as it relates to either choose to tender offer.
Assuming that's execute if you talk about how you think about capital position to the company post the Cecil and the tender.
And you know going into it you know going into next to next cycle.
Yeah, you know the planning for the next cycle, it's kind of in its early early stages. This year.
Well, obviously you have the benefit of seeing how the tender plays itself out and how the execution goes before we submit the 2020 plan, but just like every year going into the capital planning cycle will evaluate our strategic plan for the business. We'll we'll look at how much we want to reinvest in the.
It would be a in the business.
As well as make sure that we can absorb the c. so phased in impact as well as any losses that may come up the used car prices or other factor in the macro environment.
After we do that if we do have excess capital going forward. Then we'll have to determine the best use of that capital, whether it's through share repurchases dividends or leaving some dry powder for portfolio acquisitions like we did.
This quarter.
So as a reminder, when we when we announced the 1.1 billion share repurchase authorization, we knew Cecil was around the corner, we did a plan for absorbing that that Cecil change.
And felt we can still execute the strategic plan still do things like portfolio acquisitions, and still have excess capital returned to our shareholders.
So going forward, we'll have to assess it over the next coming weeks and the next couple of months says we submit our capital plan for 2024 approval.
Thank you.
And we'll move on Friday next question from John touched with Jefferies.
Hi, Thanks for taking my question, Yeah, just kind of focused on margins you show on the yield side.
We've seen a year the average yeah. The average price come down year over year, I'm wondering how much of that would be tied to [noise].
Rates versus mix versus competition.
Yeah, It's John it's really all of the above.
Little bit of copper virtually anyone with a little bit of mix [noise].
The little bit of us trying to get a little bit more competitive.
Certain segments that we feel our lower risk.
Better credit quality and you can see from.
[noise]. So if I look at net interest income in general when you look at our them down.
Year over year part of it is there a continuation of the store until last quarter, which is lease growing as a percentage of the total outstanding balance leads or the prime product and therefore has a lower yields in our nonprime assets.
We're also plays into our cost of debt cost of debt has ticked down throughout the year I believe it's 30 basis points better than it was in Q1.
But we have a lag and interest rate environment, playing through the portfolio. So we still haven't seen the full benefit of the drop in interest rates and we expect to see more bids and 20 and 2020.
So in addition to like leases being a bigger part of the balance sheet. You know the retail assets also a tick down in yields for a couple of reasons.
You mentioned one of them, which is mix.
So as our Sta penetration continues to increase most of that is coming in the prime segment.
Although s. DNA has been a great partnership for US, we do not take 100% of the prime volume some of it does spillover.
Into what we into what we retain on the balance sheet.
The other part of it is I've mentioned in our in our prepared remarks is the lease gain on sale.
And that has come down a little bit over really the course of 2019, and we expect that trend to continue and 2020. We had planned for this as you know leased and a lease income in sales on on lease and is a factor really two things one is there and marketing efforts and how much we do it for the vehicle and it's turned back.
Again, as well as where we set the contract with it at the time of origination and as used car prices have fluctuated over the last few years, we've gotten better and better at predicting what that leased and value is and as such we recorded smaller gains on lease towards the end of 29.
18.
Still again, but just the lesser degree than we experienced from prior years.
So it's a combination of all those things.
Thinking about that you did your commentary on your guidance for net interest income 20, Twond any commentary there on pricing and opportunities during the cost of capital you'd expect.
I mean part of its look at our forecast I mean, it feels like the net interest margin should be kind of Egypt settling in a ban now where should we think of any migration there given the moving parts over the course a year.
Yeah, I think is increasingly becoming a bigger bigger part of the portfolio as that balance grows I think you'll see a slight tick down I think that's what we've guided to in our full year outlook. So.
Top winding up with low single digits.
The other thing to think about when you look at just the ratio for the fourth quarter is the Tcf portfolio for that portfolio is kind of near Prime Prime weighted average Ficos I'm 715, and has about 70% yields. So is that portfolio that are doing a little over a billion dollar portfolio at lower yields you will see the top line.
<unk> contract just a bit.
Okay I really appreciate that thanks very much.
Next question comes from Steve Clark with KBW.
Hi, Thanks for taking my question just the first one around the at the tender offer given where the stock prices right. Now is there the ability to raise that range that you are buying back and also can pockets onto their participate in the buyback as well.
Yes to answer your first question.
Just like every other tendered and do you have the option to amend and extend that's not the plan going into it but it's an option or we have available to us if we choose.
To use it.
The short answer on Bunko, something there and she says they can participate.
It's a better question for them, but we do not anticipate participating in the the tender offer.
Well I can't say much around the the tender offer itself.
Other than the other investors who choose to participate in the offer.
We receive the upper end of the range about a 12% premium to what we closed yesterday.
And for those investors, who choose not to participate there will receive the benefit of the earnings accretion going forward.
So we think it's a positive transaction for the shareholders and it's a positive step for the company to the point that excess capital.
Hi, Thanks, and then that's just has a follow up around like how much of us to see sold they to impact can you incorporated first quarter.
Relative to at flat to 50 million better guidance.
Yeah. So it's in the guidance that we gave for the first quarter.
The guidance that we've given a round provision expense in total.
You know doesn't we don't break up net charge offs first to provision expense, but what I will say is that the seasonal impact in Q1.
It's pretty much or the provision expense related to Cecil is pretty much in line with Q1, we saw last year. The smaller guidance that we've given Q1 versus Q1 is really a function of were charge offs came in in Q4. So the starting point in Q4, I'm, just a little over 8% compared that to where we were.
Q4 of 2018 at just over 10% so that drop from Q4 to Q1 will not experiencing this year like we did last year.
Great. Thanks for taking my questions.
And we'll take our next question.
Such a city.
Thanks, just looking your TDR commentary I'm, just looks like this to come down them and that should be a benefit I guess looking at.
Let's see so let's call it 25% monsters versus around 15%.
What's the pace of your TDR I know you said it should be less than last year.
When do you think that starts to kind of normal out.
Over the next couple of years.
Yeah, I think we've.
We've discussed the PDR trends in the past, we stopped giving a an estimate on exactly when are we thinking will be stable.
Flatten out we do expect it to drop.
Quarter over quarter throughout 2020.
And then some points in 2021, it should start to flat out assuming everything else environments days they see it.
Yeah, I mean, BBB have you have a $4 billion PT out inventory, which is going to probably go through some sort of.
Up and I'm. The CEO did a three elements to PD. One is the ads, which is you know new accounts going into PD out and in the other is payoffs and the thought as Josh. So you know be expected to be about you know a code it though this year and.
They have there'll be some decline in the overall if you do you have to than 2020, but as time. He says it's a.
Little bit go to quantify the exact impact right now because the big unknown data, obviously payoffs charge offs and you know than you did you entry.
Okay.
And then Mahesh <unk>, maybe you could stop little bit about taking over the range. The CEO , Jim do you change the chance you'll make any changes to strategy you know.
A little bit odd running under a parent company that after the buyback looks like alone about 83%. You know there is there any way that you intend to run the company differently than in any of your predecessors.
Yes.
I've been involved into running of the company pretty closely both as a board members I was hoping Scott did a bunch of stuff over here for the past two years I think our big priority. This is going to come here to be a you know to maintain our our bookings and you know to keep the Chrysler relationship as you know the primary focus of what we do this there.
That includes being a public service provider for Chrysler being both in the prime spaces other than to be space.
Close and be able to be operated best which as you know the neoprime sometime here so far.
That would be a fundamental strategy going into 2020, keeping a close eye on some of the other economic indicators, which obviously you know we have to be careful about like used car prices et cetera, I think we've kind of sort of hit our sweet spot in terms of Islam you are saying in terms of predicting where some of these are the deal values are going to end up. So these preferred the they've got that kind of sort of under <unk>.
<unk> figure that out but.
But I think fundamentally the answer to your question is there will be no change in the strategy Chrysler continues to be a primary.
Focus that important area of importance and the other obviously is.
Making sure that we have the bank program running and service for others, which 70 also highlighted as they key area of focus for us this year.
Thank you.
And we'll move on to John Rowan from Janney.
Where are you guys.
Let me just quick question I noticed in the problem Jack that you took out the chart that shows the different screen auction in auction plus I was wondering if there was a deficiency shell in the quarter and if so what's the timing on that was thank you.
Yeah as we format in the presentation, we didn't end up losing that that line item on the auction home, but to answer your question directly we did not have a deficiency sale in Q4.
20, I can so that benefit that you are seeing quarter over quarter on a fair comparison.
Okay, and just a follow up the higher lease vehicle expense you report in the quarter is that just a function of.
The weakness early in the quarter on remarketing trends.
I would point to it as more of what I mentioned around lease gain on sales more than it was what we noticed in the softness in the into recovery.
And then used car market.
The lease gain on sale flows through that lease expense and that's when we'll see me come to.
Okay all right. Thank you.
And our next question comes from Jeff Olson with Morgan Stanley .
Yes.
Morning, guys. Most of my questions have already been asked and I guess I just wanted to dig a little bit more into the day to impact.
I guess, it's you know obviously the NCR Guy is 8% looking better but should we be thinking about the reserving going forward as you know to be stand back TDR stabilize running that reserve ratio closer to that 16%.
Reserve ratio wants to your stabilize I'm just thinking do 2020, it seems like your provisions still need increasing on the 20% ranges and just wondering if there's any kind of insight you see given to the quantifying that about get you may impact.
Yeah, I think we simply didn't give guidance for the year around provision expense <unk> expense, but we'll be attempted to do is give enough data points for for people to get enough transparency into.
How it's going to impact the numbers, it's going to impact the numbers really in two ways. One I mentioned the TDR a drop.
And so the benefit we used to get going from 25% to 8% is not going to 25% or something closer to 15%. So if you just take the TDR drop that we experienced in 2019 sphere and that it happened again and 2020.
Calculate the difference in the benefit in 2021st 2019.
The other component is around balance growth, a we're coming off.
We don't specifically give guidance around originations, but if you think about the growth that we've experienced in originations over the last two years we.
We had 43% increase.
18, or 17, and everything on top of that 9% growth and 2019 as well given the intensity in the competition that we mentioned, it's hard to stick to that we're going to get to sustain that unless something changes in the competitive environment.
But if you just take the balance growth that we experienced in 2019, assuming origination flattish to slightly up you can take that balanced growth and assume a 16% coverage ratio versus 10% coverage ratio that we had 20 and 2019.
So if you add those two together you're kinda give the debate to impact.
Got it that's helpful. And then just a quick follow up I don't think I heard any kind of commentary on that for used car prices. I was just wondering if you might be able to give us an update on what you're looking for in 2020 relative to the 2019 trends.
Yeah, so and used car prices.
We did though we did a little bit of an analysis on what constitutes a our recovery rate and what's the underlying credit of this club. So there's a couple of things going on one as we are beginning to notice a mix shift between sedans and if you either theories that's a positive for us because the recovery that higher these CVC movies are holding value.
But most of them to come to the saddam's coming to use profit that's coming into them off and so a shrinking the volume.
So that created a good trade for us because you moving more to a segment, that's giving us high recoveries.
Second thing is that because of our prime exposure and because we are buying more new cars and be the financing on new caused by the me we've got a bit of a mix shift going on in terms of the age of vehicles that are going into charge off and then shifting more into a view of vehicles and therefore, we get higher support as far as the company. We took into so I'm pretty up all of this being considered.
And the constitution of our although the company gates and walk you know what goes into it I'm pretty confident that 2020, you're going to continue to see.
Reasonable degree of support as far as a recovery rates and it was got prices.
Got it thank you.
Our next question comes from Kevin Barker with Piper Sandler.
Yeah, I was hoping you could just discuss.
How you view you know your targets one ratio and seasonal world you know fully phased in basis, you're going to had nearly 400 basis points a decline in 71 days, we'll see she tooling ratio. So would you expect that bar.
He said and then if you had any conversations.
With.
For easy.
Regarding potential targets worse.
You have given that there is a good question I think if something ourselves in really good industry. In general is trying to figure out when that Cecil are going forward. It's just it's just another factor we have to consider as we progress through the year in and so getting used to the near normal of life would see school.
Peter radically we're happy we could reduce it for for the Cecil impact the we haven't received that that guidance yet.
The company as loss absorbing capacity under stress is really the same biggest moving from one line item to the other one item.
However, we're still in the early part of the process of doing our stress testing and our capital planning cycle and as I mentioned before we'll be determining that over the next couple of weeks.
And a combination with our strategic plan.
Assess whether we are changing our capital targets or keeping the same.
Okay and then.
You know you have in your shifts towards higher credit quality.
The most recent.
The most recent quarters.
Especially around the above 640 FICA score.
Is there.
Distinct competitive change that makes it better opportunity for you on the balance sheet.
Or are you seeing any.
Lose primarily because the impact of Cecil to decrease the impact of provision expense.
I'm just getting there.
Credit appetite.
Yeah, it's a it's not cecil related for us, where we continue to price our assets on a lifetime economic basis and see so it really doesn't come into.
Into the equation.
I would say the increase in credit quality is really twofold, I think we can achieve our risk adjusted margin by being better competitively priced in driving positive selection or at the dealers. So thats one component of it the other component of it is just our continued progress and our continued increasing penetration rates with.
With that FDA.
Work exclusive offers we can get with FC aid them more new volume comes our way and those tend to be higher FICO assets.
Okay. Thanks.
<unk>.
And we'll take a question from Vincent.
Yes.
Hey, Thanks, good morning, guys.
Question about capital usage.
She parks.
Oh, great to see the $1 billion tender offer.
Just kind of when you think about going forward you still generate a lot of.
Free cash flow every year.
With the $1 billion.
So after the tender offer business this line.
Since acquiring the rest.
Outstanding public smokes bad.
Currently.
More auto portfolio still might look at <unk>.
Hi, there.
Yeah.
Thanks.
I think it's.
Premature to really comment about kind of post tender we haven't officially launched the tender tender yet so we'll we'll see how executes and we'll go from there for the rest of the year as far as our capital actions or capital actions or go.
Sorry can you repeat your second part of your question.
Sure just on anymore auto portfolios that might look interesting can you just how's the pipeline.
Central acquisitions similar to what you did with gateway.
Sure. So we do get a lot of looks a at portfolio come our way.
We do feel like we have a differentiated solution for other financial institutions to be able to either acquire the portfolio or convert the assets onto our servicing platform and just servicing for them I think we've been able to demonstrate our capabilities over the last couple of years and the more track record we have around doing.
That more and more our people are reaching out to us.
Going back to your question around the question around Cecil in May drive other people to think about at auto as an asset class and whether they want to reserve upfront to lifetime lifetime losses, and if that's the case, maybe more portfolios will will come our direction, but from Osborne.
<unk>.
The whether it be opportunistic when those portfolios come our way and make sure we have enough dry powder to execute.
Okay, Great and just one quick follow up on.
First discussion so.
Would it be share to 62.2%.
And very strong so just keeping got slot.
That would be a fair assumption just wants.
Yeah, the recovery rate you know.
As mentioned in and around the used car prices.
Outlook, most people will tell you it should be down 3% to 5%. This year, but we were saying that this time last year and it was really up across the board.
Cash mentioned, it's really across the board for us whether its vehicle tied to New York, new and used or by channel or vehicle age.
It's been a positive story.
Rob here going forward again people are expecting 3% to 5% drop.
We do not think it's going to be that big of a drop this year. We do expect it's a moderate versus where we were at.
Well, we're at today, I think JD power and energy a put out a forecasted expected to be down 40, or 50 basis points.
I think in that range, just you know to 1% down is a reasonable estimate.
Great. Thank you.
And we'll take a question from all the while talk with autonomous research.
Morning, guys just on the Gateway one deal were there any characteristics of that pretty acquisition that stood out as particularly attractive to you.
Can you give us a sense for how competitive.
So I suppose there.
Yeah, I wouldn't say, there's anything specific about the portfolio that made it a attractive.
To us I think he was a near prime prime portfolio that we could buy at an attractive level.
We were able to get comfortable with the originations there one thing I guess that did.
Did benefit the transaction I would say that just the seasoning of the portfolio. So they did exit the auto business towards the end of 2017, so it'd be more seasoned portfolio allowed us to really honing in on loss expectations are going going forward.
And I think also then being a a bank partner I was also attractive to us they're going again I mentioned, our comprehensive solution for that so but the two two specific to the portfolio itself indirect auto something we know very well.
Got it and then just on the recovery.
You talked about the impact.
<unk>, how much the improvement in recoveries can be attributed to things you've changed your process <unk> improved internally.
Dependent as used car prices.
<unk> internally that can support the recovery going forward.
Yeah.
So as a a yeah I mean, we've talked about this a little bit earlier one of this obviously as I said was you know is attribute is attributable to the mix shift and the other is you know thought about find strategy involves bringing more nucor's enough of the age of vehicles to be repossessing.
Are you know, it's shifting towards New York, you a vehicle although them back there have been some minor tweaks in terms of how we sort of operate and you know the operating efficiency, but that's nothing out of the ordinary it's something we're constantly looking on all the time trying to.
Make sure that via the fish agreed possessing that you're doing it for the like reasons that we've got good forbearance and extensions of modification programs for our borrowers so nothing right and it really significant to the ball on the prophesied other than the fact that we're constantly looking gloves, making these processes more efficient.
Okay. Thank you.
Thank you.
And there are no further questions at this time I will now turn the call over to my Gosh I did you have for final comments.
So thank you very much everybody for joining the call and for your interest in sometime there can zimmer our investor relations deemed to be available for follow up questions and we look forward to speaking view again next quarter. Thanks a lot.
Once again, ladies and gentleman that concludes today's conference. We appreciate your participation today.
[noise] [noise].
Uh huh.