Q1 2020 Earnings Call
Okay.
Good morning, and welcome to the Santander Consumer you would take holdings first quarter Twentytwenty earnings Conference call.
At this time, all parties as easily into listen only mode.
Following today's presentation the flow will be open for your question.
Please state your start one to answer the question Q.
It is now my pleasure injuries show it sounds like head of Investor Relations.
The floor is yours.
Thank you.
Good morning to begin I, just wanted to say on behalf of the team.
Thank you to everyone to join the call.
I was on short notice today, given yesterday's event, we appreciate the flexibility and look forward to accumulate yet.
So on the call today, we have mastered that young our CEO and Fannie cut our CFO.
As you know certain statements made it made on today's call may be forward looking and we encourage you to look at our risk factors in FCC filings.
Regarding the statement.
Well also probably reference.
Certain non-GAAP financial measures and we believe those are useful to investors and of course will have a reconciliation.
Of those to U.S. GAAP.
The presentation, we felt the yesterday.
With that I'll turn the call over to match.
Thank you Evan and good morning, everybody once again apologies for the split yesterday.
Thanks for joining us what have you out is also the quota.
Let me start by saying that I talked about those who've been impacted by Cobot 19.
In particular to people, who are sick and the medical professionals responsible for caring for them a sincere appreciation goes out to all those who put themselves in harm's way everyday to deliver food keep essentially establishment is running drive after those those gaps in buses and make sure that topic functioning.
Many of these essentially walk as our customers and we want them. So that's something that is here for them.
And I'd like to tack on call Center colleagues were at the forefront of this crisis and who've made us proud by being there for our customers in a dime of extreme stress listening to them showing empathy and a willingness to find solutions.
[noise] I'd like to draw your attention to slide three to review the critical measures. We've taken in response to this unprecedented crisis.
To support our employees our customers are the 11 communities in which we operate.
Starting with our employees.
More than 95% of why employees are working from home. Thanks to a massive effort by information technology team and our operations leaders thousands of laptops would just deployed in a matter of in them out in a matter of a few weeks in order for us to continue to serve our customers without missing a step.
For a job that require employees to be in the office. We've taken further steps to ensure safety at each of our sites such as social distancing measure that increase protocols to keep the workplace as clean as possible.
We launched a form white emergency badly program, so that our employees could have the time to make necessarily arrangement so their families and childcare services.
Lastly, we have temporarily providing a week piece type into a frontline employees.
Had a big thank you finally to all about 5000 colleagues for their tremendous is it didn't see during this Peter.
Next our customers have you seen from a previous announcements we've implemented a series of actions to assist our customers. During this crisis. These include expanding payment to photos for loans and leases Lake Charles waivers.
The temporary suspension of involuntary repossessions.
We have provided significant financial assistance to our customers through loan extensions since the beginning of the pandemic.
As of April 22nd we have executed more than 350000 loan modifications related specifically to this economic crisis.
For context during 2019 people are providing approximately 25 to 30000 don't extensions by month.
While at a significantly higher level recently due to the crisis loan modifications for our customers are a standard practice, we have a long track record of offering assistance in times of financial hardship, we have the experience and the tools to execute fall betas programs quickly and assist customers through these uncertain times.
The initiatives, we have implemented for our customers due to covert 19 are also in line with our response to large single event natural disaster than the past.
The most recent instance occurred in 2017, when Hopkins impacted Houston that surrounding areas as well as most of the state of flux.
We have a significant percentage of our customers in Texas, and Florida and be executed approximately 8000 extensions and those affected areas.
While the impact from covert 19 up clearly broader than recent natural disasters servicing operations team have a lot of experience providing financial assistance to customers and we're confident that the actions we have taken our customer centric an appropriate for the time period.
A point worth mentioning is that a majority of our customers who have requested assistance. During this pandemic have not availed of any loan forbearance in the past.
And at the time of request most of them or not boss doing their payments.
Based on our experience. We believe these accounts could have a high rate of kilowatts normalcy is restored.
Next well Chrysler dealers and potential Chrysler capital customer.
We have partnered with FC eight to launch new programs, including first payment deferred for 90 days on select FCM autos.
Zero payment Hbr for 84 months in selected 2019, and 20 FCM autos.
And for our floor plan relationships.
Santander Bank has offered 90 days a floor plan interest deferrals curtailment of photos for older new and used vehicles.
The term loan principal and interest of photos the ability to flow Oldham autos used vehicles and to free up cash.
And one off lines of credit in term loans.
The government the Federal reserve the department of Treasury centered from Congress have responded with urgency and launched a historical stimulus package to assist our fellow Americans during this crisis.
Specifically I would like to recognize the support of our regulators as they helped us facilitate rapidly facilitates solutions for our customers.
Finally put our community Santander U.S. will provide 25 million in financing to community development financial institutions. As he has also donated $2 million two organizations serving vulnerable populations in our communities hit hardest by the crisis.
Let's turn to slide four to discuss our Q1 performance.
Early into your our financial performance was headed to an excellent quarter and a continuation of the strong results in 2019 prior to the disruption caused by the virus new vehicle sales were off to a good stock and used car prices a strong in January and February.
Our business began to see the pressure in mid March and our results for the quarter began to reflect some of that pressure as highlighted in the first quarter results.
During the quarter, we booked 452 million in loan loss reserves related to economic factors, primarily driven by covert 19.
Excluding these reserves are they want Cecil estimate was relatively in line with the estimate we provided last quarter and our net income was in line to slightly better than Q1 2019.
We ended the quarter with an allowance to loan ratio of 17.8% up from 9.9% at the end of 2019 and 16.8% on John first 2020 post Cecil implementation.
Family will discuss the underlying assumptions in the reserve for loan losses, but it's worth mentioning that the two significant drivers of our reserve build I inherited portfolio quality determined by the as to our historical performance of accounts.
And the forward economic view over the life of loan on our books.
Our total auto auto originations of $7 billion during the quarter relatively flat versus Q1 2019.
Originations against started the year strong until mid March when Sheldon praise place autos nationwide. We entered this decrease applications in volumes.
Prime loan volume increase driven by the new programs, we launched readings and $1.1 billion in originations through our program at Santander Bank.
Lease volume also be slightly due to due to a strong January and February as our share increased however, nonprime loan volumes decreased.
Family will provide more details to you shortly.
During the quarter, we also announced a multiyear strategic preferred lending relationship with room and innovative end to end E. Commerce platform designed to offer a better way to buy and sell used vehicles, we have been supporting broom since 2018, and this new preferred relationship will make it even easier for broom customers of all credit profiles to obtain financing.
Moving on to credit performance, while you're still about evaluating the impact of the pandemic. Our first quarter performance was stable to better versus Q1 of 2019.
Both the gross and net charge off ratio has improved as well as early stage delinquencies late stage delinquencies increased by 40 basis points and our recovery rate was down year over year.
Most credit metrics were only slightly impacted by the economic downturn this quarter and we expect performance to be more stressed moving forward.
Factors that could impact these credit metrics.
Include loan extensions, which will have the effect in the short term of improving delinquencies and reducing charge offs over the coming months.
Temporarily suspending repossessions will reduce recoveries.
And used vehicle price declines as dealers clear there lots of used cars an auction activity remained slow.
We also expect that once repossession stop there will be an increase downward pressure on used cars until the supply subsides and demand begins to pick backup all these will be important determinants of our credit performance going forward.
During the quarter Santander consumer them demonstrated continued access to liquidity executing two securitizations and accessing additional funding at the end of March.
For the quarter ended we were one of the first ABS issuance to execute a transaction since the beginning of the crisis.
Given the amount of April is almost behind us I would like to provide a brief preview into some of the recent trends we've seen across our bid.
Through April 22nd versus the same time last year, our total application count decreased approximately 26%.
And total originations decreased about 22% due to continued Shelton place orders leadership closures and weaker demand.
Due to auction house closures and repossession suspension, we have also seen lower recoveries in April.
For example, our auction sales have gone down approximately 50% in April versus the same time last year. However, auction house activities seem seem to be picking back up in the last week.
And family will cover some of the other green shoots we are beginning to see across our business shortly.
Okay.
During this crisis, our goal was to keep our employee safe we knew if we could care for our teams and position them for success. They in turn will take care of our customers. Fortunately thats exactly what we've seen play out.
During mid March as we experienced the initial surge of customers calling in for assistance. We saw a post call survey results hit record highs two key points to evidenced our customers feel about us.
First the overall satisfaction from our customers during the last four weeks has been more than 10 percentage points greater than previous levels.
Even with extended hold times and significantly stress customers our service team with their going on when when they when needed the most.
Second than just as impressive as that we've seen the response rate for taking the post call survey doubled in the in the last fall.
In summary, I'm very proud of outperformance on the teamwork displayed by our employees over the last several weeks it has not been easy, but we've handled at well on our business continuity plans work.
As much progress as we've made over the last few weeks, we still have some headwinds ahead.
I'm confident our teams will continue to come together to identify innovative and find effective ways to help our customers and further enhance our brand and reputation.
We enter these challenging times for our position of strength supported by robust capital and liquidity, which gives us confidence that we can absorb this abrupt economic slowdown.
We've been preparing for a potential end of cycle economic downturn for several years over the past three years in particular, we've made enormous progress improving and enhancing our risk management framework, including operational and credit risk.
We've added high quality talent to our risk organization and invested in advanced tools and data sources, which gives us a deeper and better understanding about through the door population.
Our portfolio quality has improved because of better analytics and focus credit actions through 2018 and 19.
We eliminated some segments that perform badly and captured market share and others that are profitable and better risk.
We are still less than two months into the crisis and it's very difficult to estimate it's duration of severity.
We are encouraged by the unprecedented swift actions taken by the government and bank regulators to provide relief to individuals and small businesses.
But the depth of the economic impact in the velocity of recoveries difficult to assess and as yet uncertain.
With that I'll turn the call over the family for a more detailed review of our results.
Okay.
Thanks, Mahesh and good morning, everyone.
Get into the quarter's performance I also wanted to recognize and thank our employees, who are going above and beyond everyday to help our customers and our business address the many challenges presented by the pandemic.
I've been impressed with the dedication to put contingency plans to work solve new issues and the teamwork across all functions to get the job done.
Now turning to slide five for some key economic indicators that influence our performance.
All the metrics on this page started off the year quite strong. However, the macroeconomic environment has changed significantly since we last spoke due to the impacts from Coke 19.
The pandemic has caused continued uncertainty and the outlook for our economy and as a result consumer confidence has recently deteriorated and the labor market has paused for millions of Americans as federal state and local governments, along with businesses assess how best to move forward.
The key factors impacting the economy will be the length and severity of the crisis and the impact of the unprecedented U.S. government support and stimulus programs.
Specifically for our business. The key drivers include unemployment levels, GDP growth or contraction and used car prices.
Along those lines on slide six there are few key factors that influence our loss severity and credit performance.
Annualized new car sales fell significantly in March as many dealerships were close nationwide due to shelter in place orders.
Various industry sources are forecasting new car sales in the U.S. will be down significantly from original expectations.
Current estimates are just above 11 million units for the year.
Used vehicle pricing disease did not report significant deterioration in March however, some industry data providers have previewed April performance, showing a decline of approximately 10% in used vehicle pricing compared to the same period one year ago.
At the start of the pandemic most of the large auction providers were only offering virtual auctions typically auctions are a mix of physical and virtual bidding.
However, as the severity of the pandemic worsened many of the auction auto auctions were shut down entirely.
In recent weeks the virtual channel has reopened and we now have access to over 90% of the auction sites we utilize.
In addition, we along with many other major auto lenders have temporarily suspended repossessing charged off vehicles.
Both of these factors have led to uncertainty in the auction lanes and negatively impacted pricing.
Given this interruption it is difficult to extrapolate future used car prices based on the last couple of weeks of performance. However, we are encouraged by the reopening of the virtual channel as a first step.
Our recovery rate, which includes metal and non metal proceeds bankruptcy inefficiency sales was 50.1% in the quarter.
We will further discuss recovery rate and loss performance shortly.
Turning to slide seven four origination trends.
As Mahesh mentioned this quarter was relatively stable versus Q1 of 2019. However, the story between prime and non prime retail volume was mixed.
Core loan originations decreased 12% compared to the prior year quarter total Chrysler capital loan originations increased 7%.
Chrysler Prime volume increased 29% year over year, driven by Chrysler capital exclusive offers by FCTA.
Chrysler Nonprime volume decreased 11% year over year and lease originations increased 3% versus Q1 last year.
Volumes were negatively impacted by the disruption in the economy and the closures of approximately half of our dealers.
We expect volumes to continue to decrease on a year over year basis in the second quarter, particularly in the Nonprime sector.
Application counts across our Nonprime channels are down more than 50%. This thus far in the month of April however over the last week, we have seen a significant uptick in applications as dealers have begun to reopen and consumers are spending tax refunds and or stimulus checks.
On the Prime side originations are supported by associate incentive programs, which are generally exclusive to Chrysler capital.
As incentivized programs are driving consumer demand, we believe our prime originations and RF CA penetration rates will continue to increase in the second quarter.
Lease volumes have also been significantly impacted over the last six weeks our lease originations are somewhat concentrated in the northeast and Midwest or several key markets have been hit hard by the virus.
Early in April our lease applications were down more than 70% year over year with similar to the Nonprime segment, we have seen an increase over the last week, albeit still well below this time last year.
Volume levels will will depend on the key drivers I mentioned earlier and we'll have an impact on our financials through net interest income and reserve balances.
In addition to the macro backdrop volume will be driven by the level of competition during and coming out of the crisis, our underwriting standards and our pricing approach are built to whether a downturn. We believe our non prime focus will give us a competitive advantage in these times, we will remain disciplined and focused on achieving the right risk adjusted returns on our portfolio.
While continuing to serve our customers and supporting our dealers.
Moving onto page eight you can see the FDA and Chrysler capital results.
You asked auto manufacturers, including FCTA have temporarily shut down their auto plants since mid to late March this along with dealership closures has pressured vehicle sales in March and we have observed continued downward pressure into April.
However, we finished the quarter with a 39% penetration rate as we continue to partner with FCTA to deliver solutions to our customers.
The drivers a pair of the penetration rate increase year over year. Other programs, we launched with the FDA and our Santander Bank originations program.
As mentioned our penetration rate will likely increase as incentivize offers drive consumer demand in the near term.
Turning to slide nine.
We continue to identify ways to leverage our servicing capabilities and drive growth in our service for others plat balances.
During the quarter, we added 1.1 billion in originations to the CFO plot platform via our agreement with Santander Bank.
In addition to our own prime volume, we successfully converted the previously announced Tcf portfolio acquisition in the first quarter, which included approximately 500 million in SFL balances.
The service for others platform generated 19 million in servicing fee income. This quarter. In addition to those servicing fees 6 million of SP in a origination fees are included in fees commissions and other line item.
During the last crisis SC converted more than 35 billion of assets onto our platform. We believe our track record positions us well to capitalize on any new opportunities during and post the crisis to leverage our scale and servicing platform.
Our non prime servicing expertise is a differentiator in times of a recession.
Turning to slide 10 and liquidity.
As of quarter end SC had a total of 50 billion in liquidity.
This call. This liquidity continues to be a source of strength for SC and the foundation for us to continue to originate loans and leases supporting customers. During these times of uncertainty and market volatility.
At the end of the first quarter, we had approximately 45% of unused capacity available on our 12 billion third party revolving warehouse lines.
In the past six weeks Essi has raised or renewed nearly 2.5 billion in wholesale funding demonstrating the resiliency and strength of esses liquidity and balance sheet.
In mid to late March we renewed a 1.25 billion revolving warehouse line and obtained over 1.1 billion in new private bank term credit facilities.
In addition to the strong support from the 13 lenders in our Bank Syndicate. We're also able to access to public ABS market. In April we are one of the first to do so as the markets had been effectively shut down since mid March we closed a 965 million estar transaction and with the strong support of our institutional investor.
As we were able to upsize the transaction and achieve better than expected pricing.
As a result, our forecasted liquidity sources can support our business. In addition to our third party lenders. We also have continued support from Santander there.
At the end of the quarter and today, we have an additional 3 billion of unused capacity through our Santander credit facilities.
Our liquidity capacity, coupled with lower originations in the near term position us well to come out of the crisis in a position of strength ready to capitalize if organic and inorganic opportunities arise.
Moving to slide 11 to review, our financial performance for the quarter versus the prior year quarter.
During the quarter, we added approximately 442 million in reserves related to the economic outlook, primarily driven by covert 19.
Interest on finance receivables on loans increased 2% driven by more than 2 billion, an average loan balance growth.
Net leased vehicle increased income decreased 5% due to slightly higher depreciation expense and limited auction sales at the end of March.
Interest expense decreased 2% driven by lower benchmark rates as the cost of debt benefit outweigh the increase in outstanding debt balances.
Credit loss expense increased to 908 million in the quarter up $357 million driven by the implementation of Cecil and covert 19 related reserves.
Total other income of 51 million in the quarter was in line with last year and included 63 million of held for sale adjustments related to the personal lending portfolio.
Continuing to slide 12.
Most of the metrics on this page improved year over year as a cobot impact had not began to materialize by quarter end.
Versus the prior year quarter early stage delinquencies decreased 10 basis points, while late stage delinquencies increased 40 basis points.
The rig gross charge off ratio of 15.5% decreased 400 basis points from Q1 last year.
The net charge off ratio of 7.7% decreased 90 basis points from Q1 last year as we continued the momentum of positive charge off performance from Q4.
As Mahesh mentioned, we began to offer our customers expanded referral programs in March.
Since March Onest through April 22nd we were executed approximately 350000 extensions and our loan portfolio and more than 30000 in our lease portfolio.
The majority of these extensions were provided to customers have never received an extension in the past and approximately 80% of the extensions have never been in late stage delinquency status prior to the crisis.
The amount of extensions given to customers in the current bucket is over three times a normal month.
As you all are well aware loan modifications of in part of our normal and customer customary servicing practices for quite some time.
And are designed to help consumers, who show the willingness and ability to pay navigate temporary financial distress.
Overtime, we have developed a tools and expertise to execute these extensions successfully for our customers as well as foresi.
We have existing capabilities to track and address terms for these accounts if they show any signs of credit deterioration.
Although the impact of covered our quite uncertain and unlike anything we've experienced in the past we do have several years of performance data that we can leverage for both normal course modifications as well as extensions related to natural disasters.
Going forward these credit metrics will be impacted by extension levels as well as several other factors, including unemployment levels used car prices reinstating repossessions dealer inventory levels and over overall demand at the auctions.
Turning to slide 13 to review the lost figures in dollars and the walk from prior year.
Net charge offs for rigs decreased 22 million versus prior year quarter to 593 million.
Breaking down the change 96 million in losses were primarily due to average higher average loan balances, which were up 2.1 billion from last year and 48 million in losses due to lower recovery rate.
These were more than offset by a lower gross charge off ratio, which decreased by 124 million and other adjustments of 41 million.
Turning our attention to provisions in reserves on slide 14 and 15.
At the end of Q1 2020, the allowance for credit losses totaled 5.5 billion, increasing $2.4 billion from last quarter, which represents an allowance ratio of 17.8% at the end of this quarter.
In regards to the reserve walk the allowance increased $2.1 billion due to the day one seasonal adjustment.
The allowance increased an additional 442 million due to economic factors in the quarter, primarily due to covert 19.
Increases were partially offset by 127 million decreased due to changes in our portfolio such as mix balance paydowns and charge offs.
The difference between the overall ratio of 17.8% versus our estimate of 16.5% from last quarter's call is primarily driven by the macroeconomic outlook.
Economic factors in the walk represent our determination of how key forecast drivers impact our low loan portfolio as constituted at the end of the quarter.
We use a three year reasonable and subordinated forecast period, and several economic scenarios with varying degrees of potential outcomes and stress, including the impact of coven 19.
In addition to the modeled results we recorded a qualitative reserve, which combined resulted in an increase of $442 million for the quarter.
The key economic variables were the largest impacted the reserve include GDP unemployment in the Manheim index.
Our baseline economic scenario was based on the latest forecast we had available at quarter end the assumptions were a steep drop in key variables in Q2, followed by a recovery in the second half of the year, assuming a reopening of the economy and taking into account government stimulus programs.
Going into the second quarter, we will continue to monitor and track these economic variables as well as the impact of the stimulus programs to to consumers and our portfolio.
The overall allowance will depend on the level of originations in asset balance the macro outlook and the mix of Tdrs and non tdrs.
Moving to slide 15 to cover Cecil by loan designation.
Slide 15, we have provided the seasonal impact broken out by TDR versus non TDR balances.
As we just reviewed our seasonal methodology relies on various models and assumptions to force forecast lifetime losses of the portfolio based on an economic forecast and other relevant variables.
The impact of Cecil will be heavily dependent on amongst other factors the mix of our portfolio recent portfolio trends the growth or decline of the balance sheet and our view of the economic outlook at the end of each period.
As we discussed last quarter, our reserve will also depend on the mix of Tdrs versus non tdrs.
Under the seat under Cecil the impact from decreasing TDR 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 balance continue to drop this quarter versus last quarter coming down approximately 300 million.
Most of the Cecil day, one impact comes from the non TDR portfolio, which the allowance increases from approximately 8% to more than 16%.
TDR balance going forward will depend on the level of extensions and continued guidance from our regulators related to covert modifications.
Based on the recent guidance and the delinquency status of consumers receiving extensions thus far the majority of customer assistance deferrals related to covert 19 will not qualify as tdrs.
Turning to slide 16.
The expense ratio for the quarter totaled 1.9% down from 2.1% from the prior year quarter.
Our operating expenses were slightly down versus the prior year quarter, primarily driven by lower repossessions in March.
Finally, turning to slide 17.
Similar to liquidity, our capital remains robust and in excess of our internal targets.
During the quarter, we successfully repurchased 18.4 million shares at a total cost of 466 67 million, including the results from the tender offer that was part of our authorized capital plan.
Further revised federal reserve guidance, we have elected to defer capital related impacts associated with Cecil for two years and begin the phase and process in 2022.
Our cetone ratio for the quarter was 13.8% down from 15.8% in the prior year quarter.
We believe this level of capital is more than adequate to withstand a severely adverse scenario and still remain above post stress limits.
The company has declared a cash dividend of 22 cents per share to be paid on May 18, 2020 to shareholders of record as of the close of business on May eight 2020.
We established our dividend to withstand adverse conditions and given our strong cetone ratio as well as the loss absorbing capacity of our reserves at nearly 18%.
We currently have no plans to reduce or eliminate our dividend.
However, we will continue to exercise a disciplined approach to capital management and monitor the overall macroeconomic backdrop.
For further contacts on our loss absorbing capacity.
Our reserves as of the ended the first quarter represent approximately 115% of the de fast severely adverse scenario from shoe says most recent public results in 2018.
The size of our portfolio has increased since that time. So looking at the 2020 test results. We are approximately 85% reserve for losses under the severely adverse scenario.
We further stressed key macro drivers for our informational purposes, including GDP contracting, 35% unemployment, reaching 14% and remaining elevated throughout 2020 and returning to 10% by 2022.
The Manheim index, dropping 18% and not returning back to pre recession levels.
Under this extremely severe scenario based on our current capital levels, we would be able to make all of our planned capital distributions and still be above post stress minimums.
From a reserve standpoint, our Q1 reserve is approximately 68% of cumulative losses over nine quarters in this extreme scenario.
To conclude notwithstanding the current environment, we're confident that we have the team liquidity capital and resources to achieve our long term goals and support our customers.
We will maintain our discipline disciplined underwriting of loans and leases at an appropriate risk adjusted returns.
We will continue to service them effectively while retaining sources for opportunistic strategic initiatives in the event they arise.
In light of the unprecedented events, we are withdrawing our financial targets for the second quarter and for this year.
We look forward to the economy is improving as states and businesses begin to reopen.
Where we're hopeful that the extraordinary government support has an immediate positive impact on our consumers.
As things stabilize at a severity and length of the crisis becomes more certain we will provide you with updated guidance.
Before we begin Q in a I would like to turn the call back over to Mahesh Ash. Thank you Jamie I'd like to conclude by summarizing the areas of attention for us in the coming months in this time of extreme certainty uncertainty we will remain focused on the essential drivers of our business.
The demand for new and used vehicles are important to restoring topline growth. The auto Oems have been quick to react to the crisis with aggressive at attractive offers which are brought back new vehicle financing applications to almost pre crisis levels in April.
We expect to continue to see promotions in the market as manufacturers manufacturers look to support new car sales.
Our nonprime portfolios are most resilient unprofitable business and we anticipate that it will continue to perform through the next several months while still early we are seeing positive effects of the stimulus package and are encouraged by recent consumer behavior.
Used vehicle auction prices will also impact our recovery rates.
This residual values supply and demand dynamics in play a significant role in these values.
Santander consumer has demonstrated a track record of profitability and resilience through economic cycles, and we are confident we have the capital liquidity and support from our parent to withstand these headwinds in these unique and trying times on rely on the depth of my management team and the amazing stamina and creativity of our frontline support staff.
We together are there to support our customers dealers and our OEM partners and most importantly, our communities.
With that I'll open up the call for questions operator.
Thank you, we'll now open up the call for questions. Please limit yourself to one question and one follow up question. Thank you.
Our first question comes from just missing Todd.
Algae. Please go ahead.
Hi, good morning, everybody hope everybody as well.
Weren't to drill into the March debt.
You know back of the envelope it looks like if I take the loan and lease and she is an average loan amount kind of feels like a 10% maybe 10% to 12% take rate on the March.
Is that right way to think about it and I think you've said in your prepared comments they won't be TDR as well that will acquire another extension beyond the initial 90.
To sort of fit your TDR.
Yes, initially just wanted to get some color and then lastly on the on demand side.
Can you talk to the cadence of the take.
Was it the March payment was the April payment or we Platte totaling now there's 350 blow into something how do you. How do you think about will last.
Sure. Thanks. Thanks for the question. So first let me say that the.
These extensions how are we believe there very effective tool to help customers navigate through these difficult.
The financial distress does mitigate losses, and it hopefully keeps them and they're in their vehicles, a little bit longer I think the percentage that you mentioned is a little bit light.
We're close to about 19% from a unit count standpoint have have had some kind of extension over deferral.
From a balance standpoint is just over 20% of of the owned.
Portfolio.
We did give our customers a lot of different tools to reach us online or over the phone has and is Mahesh mentioned the response has been very positive.
As far as the level of extensions it will it will depend on a lot of the key factors that we mentioned already on the call.
The bottom line is we're going to try to make solid financial decisions for the consumer as well as ourselves and continue to assess their willingness and ability to peg from a from a trending standpoint, we obviously saw a pretty big wave at the end of March and in the beginning of April but the trend has began to slow down the pace of the request.
Over the last week or so has begun to to to level out.
Yes, just one more add to that most of our extensions today, our 60 day extensions. So the PDR treatment will kick in in the second round.
Once they go into a second down to extensions Andy.
And as family said.
Earlier.
The majority of extensions are coming from customers, who either never asked for an extension before.
All right in a non delinquent status. So we expect significant amount of them.
Once the stimulus package kicks in to be.
To be in subscale status.
Yes, so the TDR status will be impacted by how long this.
The crisis last and how it's going to impact the consumers. So the way the guidance first from the federal reserve it really depends on their delinquency status on the onset of our Cobot 19 extension program, which for US was the beginning beginning of March.
So if they were in as we mentioned.
Current or less than 30 days past due.
Our co bid related extensions will not classified as a TDR.
That's great. Thanks. So then follow up how has your credit box.
And over the last six weeks or you may be verifying more employments I know there was a real mix towards program I know usually that means for discount scenario. The captive tend to do well because of the promotional activity, but any any points around.
Underwriting it maybe a point to that didn't change proactively in the last couple of weeks to month.
Sure. So yeah I think in these times I think it's appropriate for us to proceed with with caution and as they approach we're going to take from an underwriting standpoint, we have to appropriately price for the risk that we take on for our balance sheet and we're going to remain very disciplined in our approach.
Make sure that we get the right risk adjusted returns of course, we're going to be there for the dealers to make sure that we support them and it continues for consumers that our credit credit worthy. So we'll continue to do that we think it's prudent to be cautious.
Given all of the uncertainty in the market, but really be there for the rebound and really pick our spots on where we want to play very selective.
And some other things you mentioned around stipulations verifying income.
All of those things that we have as as a tool to.
To try to determine the underlying risk of the deal we're going to we're going to utilize those tools. So for the time being I think caution is probably our best approach and then coming out of the market be very opportunistic as opportunities arise.
Thank you.
Our next question is from Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks, and maybe following up on that is just as you start to see dealers open up.
Maybe could you talk a little bit about the competitive dynamic and goals.
Just a new car and the used car market I would imagine you know given.
What you've seen with Chrysler in a lot of that stuff was put in place for this whole hit and so how you think your your unit market share will fare and then given your that are funding capabilities. It says they're going to be opportunities there and the non prime.
Yeah. Thanks Moshe for the for the question so coming into the year competition I would say it was pretty intense but rational coming of the year January February we actually probably saw heightened competition, especially on our Nonprime segment, you've seen some of that.
Our in our results I think competition going forward you are right, we'd have to separated between prime for us and Nonprime Prime side, we mentioned.
Because of all the incentives that FCS putting in the market that are exclusive to us an exclusive to Chrysler capital, we expect our new FC a vehicle penetration rate to continue to increase we ended the quarter for just at 39%.
Look at.
April so far we're closer to 50% plus so we continue to kind of see that going forward and really for us across a across all of our new vehicle segments, We would expect a captive to drive.
Drive the volume there on the Nonprime side, I mentioned, we're going to be pretty cautious in our approach at least in the near term to position ourselves to come out of this thing.
Good shape.
We do think our scale and platform and our liquidity position. We've worked a lot of years to diversify our funding approach from a liquidity standpoint, and given our scale. We do feel like we do have a competitive advantage in the non prime segment compared to some of our other non bank competitors. So we're going to possess.
Action ourselves for I'm kind of being opportunistic in select segments of our market as we come out of it.
Just to add to that it's a sort of tale of two cities here right now as the way we see we see this captives being very aggressive in the new cost space and we see dealers looking to pare out their existing inventories are used cars. That's a huge opportunity for us we consider subprime and neoprime. Our strength. So we are you know we have advanced scoring models, we have all use.
As an alternative data sources and all of that plays a big role in our enough in how confidently we approach the market and do what family said in response to the earlier question around some of the some of the increased credit checks that we're putting in.
Into place like proof of income and and verification of employment all of that goes in making sure that we're not that we continue to book.
The do continue to book high quality loans through the crisis.
Great Thanks, and as a follow up just with respect to capital I. Appreciate the discussion about the capital strength stress testing in the dividend.
Could you talk a little bit about what what you would need to see too yes.
In in either the financing markets or the.
Economic environment to begin share repurchase again.
Particularly given that the share repurchase has potentially to a point could have some costs capital implications for the parents to.
Discussed that thanks.
Sure. So first of all let me say, we designed our dividend policy are captured capital distribution policy and our plan to be supported through through the cycle and so we think that first of all the dividend as I mentioned.
Is very sustainable as we kind of withstand the crisis.
Capital for US you know has been.
Something that we focused on is been a lot of efforts for us to have a more efficient balance sheet.
Since 2018, we've worked really hard to distribute our excess capital and Luckily for us we're still in an excess capital position.
We feel like we've taken a very thoughtful and disciplined approach, especially from a pricing standpoint very priced.
Nice disciplined in our approach we've been very good stewards of capital.
And going forward, we're going to make the same determination.
Coming off the tender in February we feel good about the execution. There we still have 400 million left from the previously announced 1.1 billion plan.
And we just submitted the submission early April through SHUSA for the car submissions will be able to talk about the go forward more in that in the coming months as we get those results results back but in general we feel really good about our capital position, we feel really good about our liquidity position will continue to try.
Hard to make the best financial decisions on how we deploy our capital going forward. The good news for US as I think all of the of of options that we've talked about in the past, whether it's organic opportunities inorganic opportunities, whether its shareholder distributions through through dividends or through share repurchases or.
If we feel like the right time right now is to preserve capital all of those options are still being considered and go through our thinking.
Great. Thank you.
Our next question is from marketing Great restocking. Please go ahead.
Yes. Thank you was hoping to get a little bit more detail about the economic assumptions.
Bob behind the reserve levels, where you see kind of GDP falling.
Peaking and then or those assumptions kind of consistent with today's consensus and if so you know should we expect kind of a material reserve build in twoq. Thanks.
Thanks for the question I, let me step back and maybe take a just to overall view of our Cecil process. So the process starts with a very detailed and granuflo granular loan level model, which looks at the underlying characteristics of the alone as well as some historical data.
The did lawns themselves, whether its payment history prepayments delinquencies, whether they're TD ours or non tdrs and that model. Then use is a macroeconomic forecast, which has been the key drivers, which I mentioned throughout the prepared remarks.
So we come up with a day, we use a third party, we come up with a baseline economic forecast that's made up of consensus estimates.
We then also use three other forecasts, which have varying degrees of economic output some positive.
Some of his kind of slowed a moderate growth in one has a negative.
Scenario.
In addition to kind of the economic forecast in the model results. I mentioned, we also use qualitative reserves to put in kind of management overlays as appropriate based on either.
Other risk that we see that are not picked up by the model or we want to further enhance what the model a scene.
So our day once you source serves follow that process.
The stay one reserve did have some waiting to a negative scenario in it and a downturn scenario, obviously not to the level of what we've just experienced are going through with the Kobe, but it did have some level of a downturn blended in.
For the quarter end in day to very similar approach that we use same exact approach that we use to a came up with a baseline scenario that assumed a pretty steep drop off in Q2 unemployment about 9% GDP contracting about 18% to 20% and then a recovery beginning in the second.
For the year as the as the economy started to two to reopened.
So we did have that economic scenario baked in and then we also had qualitative reserves on top of that just to protect on some specific.
Downside risks that we saw the ended the quarter.
Going into into Q2, we're going to monitor all of those key economic variables that I mentioned, we're going to update all of all of the forecast, including hopefully having a better understanding of some of the stimulus programs and the impact on that on the consumer.
We've been very encouraged by some of the early signed over the last few days last week or so on some of the impacts on just applications payments on accounts and things like that so we have to assess all those things I think it's very early to give any kind of sense into Q2, we're going to learn a lot between now and the end of end of June.
Okay.
Helpful and then.
Do you.
We expect that you would be able to complete a drive securitization. This market you know if not kind of what are your thoughts about no the ability to terms announce a nonprime assets.
Yeah, the short answer or having to your question is yes, we do have confidence that we'll be able to execute drive securitization just based on the results. So we just had with that start I think our our track record in the ABS markets speaks for itself the ability for us to hit the market.
Right right at the beginning of April.
It is very positive.
For us so as started our benchmark platform builds off of that the successful execution. We just had a couple of weeks ago and we'll go from there, but yes, we have confidence that we'll be able to execute a drive.
Okay, great. Thank you.
Our next question is from David Scharf JMP Securities. Please go ahead.
Hi, good morning, and thanks for taking my questions.
Just wondering if I could maybe just follow up on the.
The previous question regarding obviously, all the all the inputs and certainly unknowns at this point on underlying the reserving assumptions, but but in particular can you provide a little more color on.
What the expectations are for not just near term, but but how how youre thinking about the ultimate trajectory.
We used car pricing.
Ultimately drives recovery rates it such here.
Important input into into the reserving.
Sure.
So as I mentioned, it's very hard to take of you have were used car prices are going over the next month to month three months based on the last month of activity with all the disruption between repossession and auction houses dealers also I'm not being open or not being able to.
But to the option to buy cars. So it's very hard to extrapolate used car prices going forward.
However, there are several factors that we're looking at the kind of help influence where where it's going and some are positive and some are well put downward pressure on used car prices on the on the positive side new vehicles with the plant closures recently there could be.
More demand for used as new vehicle volume may not be there affordability has always been something that drove used car demand outside of the incentives the Oems put into the market there could be and affordability. There that drives used used car demand I think for used car pricing.
Generally to the biggest impact is going to be where Oems do our Oems do with their incentive packages. If there continue to be very aggressive I had put out very attractive offers to to customers that typically impacts.
Used vehicles, and specifically vehicles and Thats kind of two to five year range and that's the majority of vehicles that we take to auction. So I think if youve watch those couple of data points and watch where Oems do over the next couple of months from an incentive standpoint, that's ultimately going to drive the used car price market.
Yes, they love it.
Yeah.
Sorry, guys.
Okay.
I was curious I mean, there was some inflection point in the last financial crisis were.
Yes, if currencies stay number of months of depressed new vehicle sales, which obviously translates into fewer a trade ins that it at some point there was sort of a shortage of supply of used vehicles, which which dramatically increase their values.
Is that is it but is that type of dynamic built into a sort of the forecasted at any point in time it in.
Viewing the impact on recoveries or is that too aggressive in assumption.
No I think all of that plays plays into it you know there's a lot of press recently about consumer behavior kind of post post normalization, if you will and little things like our you know how many people are going to be using public transportation going forward versus wanting to to have their own vehicle that may be.
Something there that increases the demand.
Mash mentioned dealer inventory dealers right now not going to the auctions I'd be able to replenish their actually selling the vehicles and have may have to go back to the options to replenish their inventory levels. So I think it all comes into play, but a lot of factors that can drive at one way or the other.
Well, we do knows that we're going to be tracking and monitoring it and adjusting to whatever those all tower.
Yes, the news coming out of the auction houses isn't all negative I mean, these a virtual auctions most most of the auction houses through which we operated our open but opened virtually and the the sales rate is been pretty high and the percentage of sales to the manheim market.
Reported also been pretty high so why do we have seen a decline and be kind of expected to decline, we think that a lot depends on how the pent up inventory of used vehicles gets released into the system and that's supported a lot by what the what the Oems do as far as new vehicle manufacturing, which right now we're seeing is kind of sort of.
In one particular area Oh Veeco category. So in the broad spectrum of used vehicles that are out there.
We do expect the demand will eventually pick back up and picked back up pretty sharply.
Got it yeah. It maybe a quick follow up just on yield I mean, obviously, we appreciate why.
Guidance spend and I realize yields going to be impacted by what could be it certainly a bigger mixes.
Prime but.
Given the.
Waiver of Lee is there any rule of thumb, we could we should think about maybe for Q2 in terms of just given the waiver of late fees and extensions sort of with maybe a temporary.
You know depression and basis points on yield might be just for.
The next 90 days.
Yeah, no have a rule of thumb necessarily but I think what you've seen in Q1 from a yield standpoint is a lot of the where you saw towards the end of 2019 and a continuation of some of the things you mentioned, whether it's still lease portfolio growing at a faster pace than our loan balances whether it's more the.
More of the.
More of the prime volume being a bigger mix.
Well, we expect that going forward as well, especially with the incentives in the market thats driving consumers to us but outside of yield if I, just maybe mentioned the NIM.
From a NIM standpoint, this low rate environment as credit spreads continue to normalize and stabilize you will start seeing a benefit of that in our PNM overtime.
So as things improve throughout the month of April you're going to start seeing that benefit come through our RPM now and the interest expense line item hopefully for the rest of the year.
Great. Thank you.
Our next question is from bank secrecy with Morgan Stanley. Please go ahead.
Hey, guys, it's actually just adelson entre Betsy how are you.
I was wondering wondering if you guys could actually give us an update on Texas I know that's a significant size your portfolio. Obviously, there's been some pretty sharp declines in oil prices there in an impact on the jobs market. There. In addition to everything else that's been going on I'm, just just help us understand the impacts of backward.
Folio, maybe from both of those factors.
So good question. The you know states that we look at we look at things from an origination standpoint, we do try to factor in different sectors. Once those assets are booked onto our balance sheet. It's tough to go back and try to record reconcile by sector. So we have to use it by.
State, we have to do it by state and by ZIP code. So if we look at kind of the oil patch States. If you will you know whether its Texas, Oklahoma, Louisiana, Mississippi All of those states kind of combined is about 15% of our of our portfolio.
So I think the energy sector, along with the you know the entertainment travel hotel sector of all I'm equally Ben.
Distressed and I don't think Texas is necessarily any different.
But we are starting to see signs that we mentioned of recovery I know here here in Dallas and in Texas, We are planning to reopen and over the next few weeks and I think that will help across the board, but that's a very valid question because we have to take out in the context of the effect of the stimulus package and will how that is affecting new cost.
Sales as well as repayments and what is a long term impact of what's going on in the oil patch predictability as far as oil prices are down to slump in.
In Houston and the neighborhood area.
Okay. Thanks, and then just following up on the appreciate all the other commentary on your assumptions and and so on and so forth, but in terms of the qualitative overlay you were talking about at the end of the quarter.
Is there a way to think about how much of an oven additional macro related out was relative to your you're kind of 9% unemployment at the ended the quarter.
No I mean, I don't think I guess they go into that.
Sorry did I was just about anywhere and go into those the size of the qualitative really versus the versus the overall.
Impact we have to take it all together right we have to look at the at the results and then ultimately look at the reasonableness of the reserve compared to our balance and we fell at the at quarter end and now that 17.8 are approaching 18% reserve and I mentioned a few other.
Percentages there from a severe stress standpoint, we feel very well reserved for the time being yes, I'm going into seasonality into the seasonal build in the first quarter on the first of January we had acquired it component already in the C. So number and then there was an additional AD and in the first quarter and his family says that is a large part of what.
Our view as of the macroeconomic Ah.
Forecast.
Okay got it thank you.
This concludes the time allocated for questions today, I will now turn to call over to my fish and DTF for closing remarks.
So thank everyone for joining the call today and for your interest in Santander consumer I Investor Relations team will be available for follow up questions and we look forward to speaking to you again.
Excellent.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a thousand gold.
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