Q4 2020 Santander Consumer USA Holdings Inc Earnings Call
And we need to.
[music].
Good morning, and welcome to the Santander consumer USA holdings fourth quarter, and full year, 'twenty and 'twenty earnings Conference call.
This time for all parties have been placed and so listen only mode.
Following today's presentation for will be opened for your questions.
Please dial star one to enter the Q&A queue.
Today's conference is being recorded and stuff.
And my pleasure to introduce your host Evan and Black head of Investor Relations Evan the floor is yours.
Thanks Tracy.
Morning, everyone and thanks for joining the call today.
On the call, we have our CTO, Mahesh, Joe and our CFO and he got them.
During the call we will make some forward looking statements.
Please refer to our SEC filings and risk factors regarding those statements.
We will also reference non-GAAP financial measures and a reconciliation of those measures for U S. GAAP.
And the earnings materials issued earlier this morning.
With that I will turn the call over to our CEO. Thank you Evan and good morning, everyone. Thank you for joining us to review, our fourth quarter and 20 current year, though.
2020, with each other and stick with so many of US given the devastation caused by the pandemic and international rig awakening, because social and index and systemic racism.
We begin 2021 full of pulp and confident that we are citizens and our institutions and come together to pull us out and it's very unique and for their practices.
And we will emerge stronger and you're not going to the country and proud of the way our company and our employees adjusted and responded to help each other and our communities to serve our dealers and our customers demonstrating resilience and determination to do the right thing and to say challenging time.
Thank you to our team at <unk> for your dedication feedback and contribution to our efforts to help our customers through this crisis.
Yes.
We also launched several new programs this year to address in the quality and the workplace.
And to contribute to our communities and a meaningful way I Havent covered these in my closing remarks.
Turning to slide three I'd like to discuss some of the highlights.
We earned $529 million and net income for the fourth quarter of clinically.
The fourth quarter GAAP capped off a strong year of financial results at it and thought by fiscal stimulus, but also a product of our efforts over the past couple of years to improve credit quality, and hence our risk and compliance framework and refine our pricing deficient Bob for analytics.
Net income for full year of $911 million was $2 87 per day.
<unk> common share.
$183 million.
And last year, primarily premises and from provision expenses.
Despite the headwinds for the past year.
And if we can improve the quality of our bookings both in terms of borrower credit and deal structure, while maintaining strong volume.
Total auto originations of 31 billion.
We're down only 2% for 2019, which was a record volume year for the company.
And $5 4 billion was originated for Santander bank, mostly and the formal credit subprime loans.
Our next tier penetration rate was down versus the fourth quarter of 2019.
But stable for the full year of 2020, when compared to 2019.
Overall, we're extremely pleased with our results demonstrating an ability for growing responsibly and navigating political crisis.
We also stayed stayed true to our mission and taking care of our employees and focusing on our customers. We adapted quickly to execute and work from home strategy for thousands of colleagues.
While providing additional compensation for frontline employees to offset those additional expenses.
And we provided relief to nearly 700000 customer and by loan deposits during that time of need and achieved all time high customer satisfaction scores.
We continue to support tier price led by collaborating on their incentive programs and provided relief to dealer floor plan clients through our affiliate Santander Bank.
Also supported our communities through the SEC Foundation, which committed over $3 million to organizations supporting people hardest hit by the crisis.
Earlier, this month FCA and boudreaux completed their merger, creating the fourth largest automobile manufacturing and award for <unk>.
It remains business as usual and the margin is not affected to effect and I expect it to affect our relationship with FCA.
And we continue to support our sales efforts and provide quality service for their dealer network and we look forward to our partnership with still anticipating forward.
Moving to credit.
But again late stage delinquency ratio has improved significantly year over year due to the release, we provided our customers our disciplined approach for renewable gains and the effect of government stimulus and payment rates.
And no delinquency levels combined with record used car prices led to an all time low net charge off rate and four 4% for the year.
And from March through December, we granted $1 1 million loan deferrals.
Nearly 700000 unique customer accounts.
And loan loss reserve decreased by $42 million and the quota and coverage rate at 18, 5% was flat for Q3.
The resilience of consumer balance sheets, and cautious consumer behavior, coupled with the record amount of fiscal stimulus manifested itself and higher than normal payment and pay off rates and the second half for 'twenty and 'twenty.
But we continue to believe that there is a high level of uncertainty and the timing and breadth of the economic recovery.
These factors and former loan loss reserve methodology.
And obviously, if delinquencies remained below historical averages and payments rates stay high.
Hi in the months ahead, then that will increase confidence that there is less and mentioned likelihood of default, which we then play out to our non losses our balance.
Used car prices remained strong, which show and a recovery and as new vehicle inventories have reduced and the pandemic, we have seen robust growth and used car financing and our subprime business.
During the quarter SC demonstrated strong access to liquidity and executing two successful ABS transactions off of Rs, Dod and net op platform.
Both transactions also achieved the lowest cost of funds and the platform and company history.
We remain well capitalized ending the quarter NDA with <unk> at 14, 6%, we have a strong balance sheet, which will allow us to manage two upcoming challenges during.
During the quarter, the federal reserve provided and divest for the second stress tests to a better and company shoe. So she was ranked in the top quartile among participating banks for stress capital ratios. However, the federal reserve extended the interim guidelines for another quarter and limiting capital distributions, which would prohibit us from paying a dividend and the first quarter.
She says aggressive step and exceptions to enter and policy. However, the timing and outcome of the request is uncertain.
Pending approval of synthetic except from the crest, we cannot pay a dividend this quarter.
In addition, during the fourth quarter, we entered into a consent order with the CFPB and related investigation into Etsy as compliance with the fair credit reporting Act dating back to August 2017.
We fully cooperated with the investigation and are pleased to resolve this legacy matter as fee was reserved for this and no additional charges will be taken in connection with the settlement and season responsible lender and a highly regulated environment and we operate on the large financial institution standards, which include.
Risk compliance controls and on lending and loan servicing.
Over the past several years, we've strengthened our risk management across the board and improving our policies and procedures, including Bureau reporting.
In summary, we are proud of how Santander consumer navigated 2020.
Looking into 'twenty and 'twenty, one we believe that this and the significant amount of uncertainty around us, but we are confident and our ability to adapt and execute and any scenario we have.
And the liquidity and capital to absorb elevated credit losses investment long term strategic initiatives and as the regulatory and current plan and permits continue to return capital to our shareholders.
With that I'd like to turn the call over to <unk> for a more detailed review of our results.
And.
Thanks for Nash and good morning, everyone turning to slide for for some key economic indicators that influence our performance.
Although most economic indicators have recently improved U S economy continues to face pressure due to the ongoing pandemic unemployment has improved from peak levels, but remained elevated versus prior years.
Over quarter change and GDP growth has come off the spike seen last quarter and is beginning to normalize.
The outlook for our economy remains uncertain and despite the early stages of the vaccine rollout COVID-19 cases continue to rise and some states have indicated the potential for further restrict economic activity.
On the other end of the spectrum momentum is growing for another round of government stimulus.
Other of these events could have a significant impact to our business and our customers.
On slide five there are few key auto factors that influence our origination volume and credit performance.
New and used vehicle sales continued to improve and normalize in 2020 new.
New vehicle sales leveled off above $16 million well over the trough of 11 million units earlier in the year and in line with the fourth quarter of 2019.
New car supply still below historical norms and may influence the number of new units sold and 2021.
Used vehicle demand remained strong and has been consistent over the past couple of quarters used vehicle pricing is off and it's off.
August peak and trended in line with historical seasonal trends and the fourth quarter for.
For fourth quarter was up more than 10% year over year, and we saw that trend continue in January and.
Several factors are influencing used car prices, including among others consumer demand for more affordable used cars shortage of new vehicle supply industry, low delinquency and losses limiting wholesale inventory at auctions and the increased number of consumers choosing and purchase a vehicle versus public transfer from transportation or.
Ride sharing services.
We expect used car prices to continue to moderate and the long term with continued elevated levels over the next couple of quarters and trending below 2020, and the second half of the year prior.
Prices in 2020 were volatile with the large drop off at the onset of the pandemic followed by spiked to record levels and August 2021 has started strong above 2020 prices. We believe prices should follow typical seasonal patterns with spring depreciation and followed by a dip in the fall.
Turning to slide six for origination trends.
During 2000 20-F fee originated nearly $31 billion of auto loans and leases down slightly versus the record volume and year 2019.
Although volume decreased only 2% year over year, the credit mix of volume was much different demonstrating <unk> unique ability to adapt to market dynamics as we supported our dealers and FCA to provide comprehensive solutions across the full credit spectrum and.
We ended the year down and our core Chrysler non prime and leased channels, while increasing our prime originations by 31%.
As we move into 2021, and we believe the mix will normalize and we will benefit from the gains and market share across all of our channels.
For the fourth quarter 2020 core loan originations increased 2% year over year total Chrysler capital loan originations decreased 8% Chrysler Prime volume decreased 4% Chrysler non prime volume decreased 13% and lease originations increased 8%.
Our core loan originations have been strong since the onset of the pandemic and we expect the fourth quarter increase and volume to continue into 2021 Chrysler.
Chrysler non prime continued to be under pressure as new vehicle sales slowed and non prime consumer preferences shifted to more affordable used vehicles.
We are very pleased with the level of originations and our non prime channels, as we remain disciplined and and the higher risk credit segments.
Prime loan originations decreased year over year as manufacturer incentives, including incentives from FCA exclusive to Chrysler capital decrease from peak levels earlier in the year.
And these volumes began to normalize during the third quarter and continued to improve and the fourth quarter driven by lease as a percentage of sales increased since the spring, although still below fca's pre COVID-19 levels.
These offers are more attractive to customers and the fourth quarter as extended term retail loan incentives decrease towards year end.
And our market share of leases improved and the quarter as we enhance our offers and the market.
Our lease market share and the second half of the quarter was strong and that momentum has continued into 2021 as we continuously assess our competitive position and to work with our partner the FCA to provide dealers and consumers attractive terms.
Overall, our strong originations are a reflection of our team's execution and sales pricing and risk. We believe the credit quality and margin profile of each channel of our 2020 vintage and positions us well for future profitability.
Our focus is to remain disciplined and our approach and originate loans and leases with appropriate risk adjusted returns, while continuing to serve our customers and our dealers.
On to slide seven we break down the 2020 monthly originations versus 2019.
Core loan originations were stable to slightly up and the fourth quarter versus levels from a year ago. This.
And this channel has continued to perform well as we have increased share and added margin while at the same time tightening our underwriting standards.
Capital non prime loans were down versus 2019 for most of the year we.
And we call. This channel has a higher mix of new vehicles versus our core dealer network as consumers made affordability and priority. This year used vehicle vehicles, where and high demand versus new vehicles, leading to lower volume and this channel.
Chrysler capital Prime loans decrease and the fourth quarter versus 2019, due to lower FCA incentives exclusive to Chrysler capital and the second half of the quarter.
As we've commented on previously Fca's incentives change monthly impacting our prime volume. These fluctuations are typical and we believe prime volume will return to pre COVID-19 levels in 2021.
Chrysler leases continue to improve throughout the second half of 2020 and increased materially in November and December as we responded to competitive pressures in October.
And we're very competitive product for us and we are focused on retaining share and continuing the momentum into 2021.
Moving to page eight and our FCA partnership.
U S auto sales, including FCA sales were lower year over year due to the pandemic for sales have significantly improved and the second half of the year.
Our quarterly penetration rate of 28% was down versus the prior year quarter due to lower FCA incentive exclusive to Chrysler capital.
Our full year penetration of 34% was flat versus the prior year and January offers exclusive to Chrysler capital or back end market and we saw an uptick and penetration will continue to collaborate with FCA on 2021 incentive programs.
Turning to slide nine.
We continue to identify ways to leverage our servicing capabilities and drive growth and our service for others platform.
During the quarter, we added $1 5 billion and originations to the SFO platform via our agreement with Santander Bank.
During the year, we successfully converted one external portfolio onto our platform and added a new <unk> partner.
The serviced for others balance remained relatively flat for most of the year, but this avenue remains core to our strategy and coming out of the pandemic. We plan to grow this fee generating part of our business.
This platform generated $17 million and servicing fee income this quarter and $74 million for the year.
Moving to slide 10.
As of quarter and Sce's total liquidity at both funded and Unutilized lines was approximately 53 billion liquidity continues to be fundamental for St's success and remains critical and our efforts and support our dealers and customers during times of uncertainty.
At the end of the fourth quarter, we had approximately 65% of unused capacity available on our $12 billion of third party revolving warehouse lines and.
In addition to our third party lenders. We also have continued support from our parent including $3 billion of unused capacity through our use of facilities.
During the quarter, we also closed $2 7 billion and <unk> and Src transaction, both achieved the lowest cost of funds and the company's history.
We continue to seek opportunities to optimize the balance sheet after quarter and we successfully executed our first off balance sheet securitization of the year through our S card platform the transactions of approximately $700 million of mostly prime loans.
Moving to slide 11, and to review, our financial performance for the quarter versus the prior year quarter.
Net income for the quarter of $521 million or $1 70 per share of EPS more than doubled versus the prior year quarter.
Interest on finance receivables and loans increased 4% due to higher average loan balances during the quarter.
Net leased vehicle income increased 37% due to favorable auction rates this quarter and increased leased dispositions versus the fourth quarter of 2019.
The call last quarter lease income increased significantly quarter over quarter due to increased lease dispositions and more favorable prices at auction and the fourth quarter compared to the third quarter of 2020, we saw a decrease and dispositions and customers and dealers purchasing a higher percentage of maturing units due to favorable residual values.
This resulted in less units going to auction and lower gains on sale.
The net impact of these trends and an increase of 17% and net lease income quarter over quarter.
Interest expense decreased 17% driven by lower benchmark rates and robust market conditions cost of debt decreased 80 basis points versus last year to two 7% and the quarter.
Credit loss expense decreased to $254 million and the quarter down $291 million due to lower charge offs as customer deferrals higher auction recovery rates improved credit quality of the portfolio and government stimulus led to lower losses.
Profit sharing increased $55 million driven by portfolio performance and our held for sale personal loan portfolio, which has benefited from strong payment rates throughout the pandemic and increased lease residual gains, which we share with FCA.
Investment losses were $48 million better year over year, driven by improved performance and lower balances on the held for sale personal lending portfolio.
Operating expenses were up 3% and due to increases in salaries and benefits expense related to our ramp up and collection staff and onetime expenses related to opening of our new site and Tampa Bay.
Our quarterly expense ratio was down 10 basis points year over year.
Next we will turn to slide 12 for full year results.
Net income for the year was $911 million down 8% versus the prior year driven by increased provision expense.
Interest on finance receivables and loans increased 2% driven by higher average loan balances, which grew approximately 10% and the year.
Net leased vehicle income decreased 3% due to increased depreciation expense earlier and the year net.
Net yield on leased vehicles decreased approximately 50 basis points to 5%.
Interest expense decreased 10%, primarily due to lower benchmark rates, partially offset by an increase in derivatives and expense.
Cost of debt improved 60 basis points on the year.
Credit loss expense increased to $2 4 billion and 2020 of $271 million driven by reserve build associated with the adoption of diesel and related to the macroeconomic conditions.
Net charge offs for approximately $900 million lower offset by an increase in reserves of approximately $1 2 billion.
Profit sharing more than doubled driven by our held for sale personal loan portfolio and increased lease residual gains, which we share with FCA as well as an increase and prime loan volume.
Operating expenses decreased 7% driven by lower repossession expenses due to COVID-19, partially offset by an increase and compensation expenses and employee head count.
Moving to slide 13, which covers our deferral trend since the beginning of the pandemic.
And total since the beginning of the pandemic, we granted approximately $1 1 million loan deferrals for 697000 unique accounts or $12 2 billion on our balance sheet.
During the fourth quarter, we saw a slight increase and the pace of forbearance requests as a percentage of active accounts asking for deferrals and ended the quarter at five 7% of total accounts, that's down from a peak of 27%, but up from from four 5% at the end of the third quarter.
We believe the uptick and extensions and due to government stimulus ending in August typical seasonal patterns and continued elevated unemployment.
Of the 697000 unique accounts that received COVID-19, deferrals approximately 8% of those accounts remained and active deferral for approximately $1 1 billion, 92% and the account that receive referrals have had those deferrals expire 71% of these accounts remained less than 30 days delinquent, 15% have expire.
And more than 30 days delinquent, 8% paid off their balance and 6% charged off.
For for accounts with a COVID-19 deferral and a payment due in December 47% made a payment 14% were extended again and 39% remained active.
Net payment trend has come down from level levels experienced in the third quarter with more accounts remaining inactive. We believe this trend is due to certain stimulus benefits expiring and normal seasonality and.
And the end of December and and into January with the aid of the new stimulus package and extension of the cares Act, we have seen an uptick and payment rates for both extended and non extended accounts.
Accounts that have not received and modifications since the pandemic continue to perform well as.
Consumers continue to behave rationally controlling spending and increasing savings.
And as we mentioned last quarter, we expect some of the active deferral status account for Worldview delinquency and ultimately charge offs.
Based on the information we have today, we believe that losses will increase and the second half of 2021 and remain elevated into 2022.
If another larger stimulus package passes there may be further delay and delinquency and the timing of losses ultimately the pace of the economic recovery and unemployment levels and will determine the overall level of losses.
Continuing to slide 14 to cover delinquency and loss.
Similar to last quarter, we saw quarter over quarter uptick and delinquency and that trend has continued and the fourth quarter as expected.
And it also increased quarter over quarter, but remained well below 2019 levels.
Versus the prior year quarter early stage delinquencies decreased 370 basis points and late stage delinquencies decreased 200 basis points.
The risk gross charge off ratio of nine 9% decreased more than 700 basis points from the fourth quarter last year.
Our recovery rate as a percentage of gross losses was 64% and the quarter up year over year, but down versus the last quarter as charge offs and recovery values begin to normalize and.
Net charge off ratio of three 5% decreased 400 basis points from last year.
Turning to slide 15, we detailed monthly loss and recovery rates versus 2019.
While our fourth quarter charge off ratio and recovery rates are better year over year as anticipated. These metrics continued to worsen in the second half of 2020, we expect both gross losses and recovery rates to continue to trend.
More and more normal levels as we move through 2021.
And regards to used car prices, the Manheim index and a record above 160 and August up 16% year over year.
<unk> continued to seasonally trend down and the fourth quarter and the year over year increase stabilized and the 10% range.
And our own portfolio, we experienced a 15% increase and auction prices and the quarter versus the fourth quarter 2019.
Rates were strong across vehicle ages, and vehicle types and specially in trucks, and Suvs, which represent approximately 18% and 35% of our auction sales respectively.
Moving to slide 16 to review the loss figures and dollars and the walk from prior year.
Net charge offs for risk were down significantly year over year losses increased to $131 million due to higher average loan balances, but were more than offset by $337 million and fewer gross losses and $116 million due to improvement and recoveries.
Turning to slide 17, and new paid and we added this quarter and the show reserve activity through the year.
We ended 2020 was $6 1 billion and reserves approximately double the amount of reserves, we carried at the end of 2019.
This represents an allowance ratio of 18, 5% up from approximately.
And then 10% last year.
Our total reserves increased approximately 20% from our seasonal day, one balance and just over 100% from the end of 2019.
Our growth since day, one is in line with other consumer and auto centric peers, but the overall year over year increases well below peers due to our <unk> portfolio.
Coming into 2020 pre seasonal <unk> represented about 13% of our total loan balance and those loans were already reserved for on a lifetime basis. Overall, we believe our reserve level is appropriate given the level of uncertainty remaining and the economy and the elevated unemployment and the country.
Moving to slide 18.
At the end of the fourth quarter, the allowance for credit losses increased $42 million from last quarter, driven by an increase of $83 million and reserves and the portfolio mix offset by improved macro factors and a decrease and balances the decrease and reserves. This quarter represents the release of approximately 4% of the reserves, we built since our day one seasonal build.
Our reserves have increased materially this year due to the adoption of diesel and significant changes and uncertainty and the macro outlook, especially during the first and second quarter.
Although macro factors have improved the pace of economic improvement has slowed over the last few months and initial jobless claims remain elevated.
Also the uptick in demand for consumer deferrals since the initial stimulus benefits expired is indicative that the economy remains in a recession and the losses expected from the pandemic have yet to be real losses.
As mentioned the macro scenario, we use this quarter over quarter improved but the scenario is still assumed elevated unemployment and a prolonged recovery our baseline macro scenario assumed and uptick in unemployment and the next couple of months remaining flat to slightly down throughout 2021, ending the year just under 7%.
Our scenario does not include the latest proposed roundup governmental stimulus or another wave of shelter and place orders if either of those materialize and will have an impact on our portfolio and we will have to incorporate those circumstances into our modeling as appropriate.
Moving to slide 19 to cover seasonal buy assets designation.
The PDR coverage ratio increased 50 basis points versus last quarter to 33, 3% driven by seasonally higher delinquency and performance deterioration and.
The percentage of this population receiving and deferral has grown by five percentage points compared to the third quarter further supporting an increase and the coverage ratio.
CVR balances increased approximately 4% this quarter. This balance will likely continue to grow in 2021 net <unk> accounting guidance continues to be refined for COVID-19 and our deferral levels continue to be elevated going into 2021, we.
We believe we are well reserved for a riskier DDR portfolio with a ratio with a coverage ratio of 33%.
The non DVR coverage ratio of 16, 5% with stable versus last quarter due to continued strong payment rates and stable levels of customer relief compared to the third quarter.
Also impacting the coverage rate was the move of approximately $700 million of prime loans from held for investment to held for sale at the end of the quarter. We're moving these assets from the seasonal reserve. If these assets remained and the reserve the overall allowance ratio would've been approximately 18, 1%.
Turning to slide 18.
The expense ratio for the quarter totaled 2% down from two 1% from the prior year quarter, our operating expenses were up versus the prior year, primarily driven by an increase and head count as we look to ramp up our collection efforts in 2021.
Finally, turning to slide 19.
Our CET one ratio over the quarter was 14, 6% down 20 basis points versus the fourth quarter of 2019 disc.
Despite not being able to pay a dividend and the fourth quarter <unk> returned nearly $1 billion of capital to its shareholders and 2020.
During the year, we repurchased approximately $775 million of shares inclusive of the tender offer and the first quarter and a block trade and the third quarter.
Even with these distributions we ended the year relatively flat and our capital levels, which position positions us well to withstand further stress and the portfolio and to continue to return capital to shareholders when appropriate.
We believe this level of capital is more than adequate to withstand a severely adverse scenario and still remain above post stress minimums.
As Mahesh mentioned based on the federal Reserve's extension of the interim policy and shoes as expected average trailing four quarters of net income SCE is prohibited from paying a dividend and the first quarter of 2021.
Though our standalone trailing income is sufficient to distribute capital and the first quarter as seniors consolidated and tissues with capital plan and therefore subject to interim policy that utilize the <unk> average trailing income to determine capital distribution restrictions.
She also has requested certain exceptions to the interim policy. However, the timing and outcome of that request is uncertain.
As the economic backdrop and capital distribution policy and revert back to normal we are focused on maintaining the momentum we have established over the last couple of years and returning capital to shareholders. Our strong capital and liquidity ratios are indicative of our balance sheet strength, which will serve us well moving forward.
You can include the fourth quarter was a very strong quarter for SC. The portfolio has performed well and demand for vehicles remains high our balance sheet capital and liquidity remains strong and we will approach 2021 with caution and we will.
We remain disciplined and our underwriting and expense management, but also committed to reinvesting in the business for future growth the.
And the uncertainty is still there, but we see signs for optimism and have confidence and our team's ability to execute and deliver value to our shareholders.
Before we begin Q&A I'd like to turn the call back over to Mahesh Mahesh.
Thanks and.
And as I mentioned at the beginning of the call. We've made several site to build a foundation for growth and the organization and pleased to announce our newly appointed Chief Diversity Officer, Dr <unk> and India Henrik <unk>.
And then it here was $7 <unk> senior executive and this role leading and cease cultural change with a focus on comprehensive and results driven outcomes and her new role. She will oversee sc's office of diversity equity and inclusion, helping and build sustainable eni capabilities, and an inclusive culture and established and proven methods.
She will also provide constant and 14% <unk> leaders and employees as they work to build inclusive teams and processes throughout the organization.
We're also pleased to have announced earlier this week, our partnership with operators and hope to offer hope and site and a Walgreens financial wellness program as a benefit to all <unk> employees.
<unk> provides financial workshops and one on one personal coaching designed to educate and transform thinking when it comes to making decisions about money building wealth and welcome to <unk> financial independence.
As we explore what it means truly needs to be and include the company, we know that when people unable to save and invest or don't understand the final points of financial drivers net credit lending and interest rates. They have a harder time translating and come into revenue.
Our goal is to make sure all of fee employees have access to financial literacy and the knowledge and tools needed to build generation and less and a successful future.
We expect with respect to our business strategy, we continue to focus on positioning the company for long term and sustainable.
Sustainable success and dealer experience and our dealer relationships remain a strategic priority for US. We are very pleased with our competitive position with dealers as we continue to grow market share. We are dedicated to providing our dealers and speed of service part of that commitment is enhancing processes and our internal and external facing technology to make our people more efficient and make it easier for our dealers and customers.
And interact with us.
Customer sales experience and could.
Become more virtual and the future increasing their reliance on digital solutions, leveraging our position and the sector. We are investing in innovative solutions to seamlessly integrate with Ddos and stuff for next year.
We plan to invest significantly in this area and 2021 and solidify our leadership position for the long term.
I will and our remarks.
And our prepared remarks again by thanking all our employees for.
And stepping up and 2020 and delivering these great results.
And I'll open the call for credit Crazy.
Hello, We will now open the call for questions. Please limit yourself to one question and one follow up question. Thank you.
Our first question comes from Matt <unk> at Barclays.
Yes. Thank you.
Can you just discuss assuming the fed lift some of these interim restrictions on capital returns and how we should think about the cadence of that going forward balancing.
Both the eventual phase and have the seasonal impacts and also kind of your hopes and expectations for for growing the balance sheet.
Sure I'll start with the first part I guess of the questions from our expansion. Thanks for the question.
Question on capital for capital has been a really good story for us something that we're really focused on a lot of efforts to have a more efficient balance sheet and that that journey started back in 2028 2018.
As we worked really hard to distribute excess capital. So we're still in and excess capital position and feel like we've been very thoughtful and disciplined and our approach up to up to this point.
We have decided to lower our internal target from 12, 5% to 11, 5% and.
And we plan to kind of work our way down to that level over time and.
And lowering the target for 11, 5%, we feel still gives us.
Room to operate and execute our strategic plan it.
It gives us the opportunity to grow as well as absorb any stress in the portfolio.
Now us to phase and fee so starting next year and the flexibility to distribute capital when the Time's right and were allowed to do so so we think we've been good stewards of capital and we have a track record as I mentioned since 2018 of doing that.
And we returned $1 billion of capital in 2020.
And when the Time's right more of a pool for the DSO will sit down with our board and make the best decision for for the company and and all of our shareholders.
Okay.
Just a related follow up and.
I think the.
The seasonal impact is roughly 360 basis points for CET one.
Is it right to think that.
If we assume a little balance sheet growth.
That would kind of enable you to.
To me.
And then you have about 100% payout ratio and get you on a glide path to that new target.
Is that the right way to think about it.
Yes, I think so obviously, we are creating capital every every quarter and we accreted and a lot of capital this year.
The big buyback.
And so we feel like we're in a really good capital position to absorb it over the next four years from fee from a seasonal standpoint, as I mentioned and execute on our plan and appropriately distributed capital and the form of dividends and share buybacks, but also being able to do anything on the strategic from whether it's organic and inorganic opportunities.
Okay, great. Thank you.
We will now take our next question from Moshe Orenbuch Credit Suisse.
Great.
Thank you.
The main question I wanted to ask for as you saw and the strong originations this quarter, but kind of.
And different sorts of things, we think came back.
Well and I think mentioned that continued into 2021 sub punishment and weaker and some other subprime players have been talking about both supply and pricing.
You talk about how you think black.
Manifests itself during the.
And during the next several quarters ago for 2021.
Yes.
You pointed out most of it which is net you have to look at our originations by channel from you have to look at it and separated between core and Chrysler non prime Chrysler Prime and lease and they all have different.
Different.
<unk> trends to them on a core side and general and Thats, obviously, our non prime used channel, we feel really good about where we stand from both a.
Market share position credit quality position and a share position and you've really been able to fee that if you look at page seven of our earnings and that's really since the onset of the pin down and if we've been able to increase it slightly.
Slightly year over year, and we expect that to continue into 2021.
On the Chrysler side I mentioned in our prepared remarks that it is really driven around incentives that they put into the market.
On a monthly basis earlier on and a year that were very heavy on the APR and vented incentives and other usually exclusive to Chrysler capital and we got later in the year. Some of those APR incentives returned 18 and employee pricing programs and things like that which are less exclusive to Chrysler capital.
And so there we have to just be consistent with our platform and therefore, our dealers, but it's going to ebb and flow based on Fca's incentives leased we've talked about over the last couple of quarters very competitive there's only two other national players that that do Chrysler leases and the country and so that one is something that we have to defend our share and.
Grow it and we've been able to do that over the last couple of months and hopefully do it.
And the first quarter of 2021, as well and we are coming off of.
And the general sort of.
Lower percentage of total sales for Chrysler income growth.
And Oh.
Over the last three and so the fact that thats been a good overall industry volume.
And that's something deemphasizing leased although market share is increasing.
And our success really over the last 12 months.
Got it thanks and welcome everyone.
Thank you for all the new information.
And basis, but that's just.
Just a quick follow up on the previous question non capital return could you talk a little bit about the potential for you kind of.
Alluded to at the end of your answer for organic and inorganic opportunities are there things that you see out there.
And if you just talk about that and that portion and then maybe if you would.
Think about how much of.
Your capital base, you would be kind of allocating and that direction.
Yeah, I'm not sure we don't have a certain allocation per se.
I think we've been opportunistic on the inorganic side and right now there's nothing to announce there, but we'll be opportunistic and buying portfolios as they become available I think the pandemic slowed some of that discussion down as people were not sure exactly how the recovery would shake out and really Couldnt meet green.
And on how the loss forecasting would be so I think that part of it has slowed down but we'll be opportunistic going forward on the organic side, you've seen some of that strategy play out and our and our volume and I mentioned and our core channel as well as our Chrysler channel. We've spent a lot of time with with FCA and with the partnership with the bank and putting programs during the pandemic that.
Really helped our dealer network as well as our as well as our customers. So not a specific percentage of allocation, we're going to be opportunistic on the inorganic side and network.
Organic side, you've seen the benefit of some of the initiatives, we started and we still have some from room together.
Thanks very much.
Our next question comes from Rick Shane at Jpmorgan.
Hey, guys, thanks, and good morning.
Thank you for taking my questions and good morning.
I'm looking at fee.
Loan deferral migration and one of the things that jumped out to me and it looks like about.
30 plus percent of the.
Greater than 30 days delinquent and expired last quarter.
Roll to charge this quarter is that a good way to look at it and about a third of those loans are going to migrate to charge offs going forward.
And third of the portfolio and I don't know if thats the right way of looking at it just from a standpoint, and it's very unique depending on the account the level of extension and that we're giving and case by case. So I don't know if thats necessarily a good way of doing it but we're generally thinking on loan deferrals. We do think it is.
Positive for the consumers to give them relief at this time the trends that we're seeing and and we mentioned that the and activity in December was probably a combination of of stimulus checks and doing as well as kind of a normal seasonal dip that we see in the fourth quarter.
For us it really depends on stimulus and we've seen a big jump from January just from the the new checks that were coming out in December and January.
And so it's something that we obviously monitor very heavily and fill up a reserve for the level of extensions that we have currently for hard to say, that's a trend to see quarter over quarter and.
And try to extrapolate that going forward.
Got it and I'm, specifically talking that last quarter. There were 84000 units that were.
Greater than 30 days delinquent and the forbearance bucket and the.
<unk> of chart the cumulated.
The change and the cumulative charge offs was 26000.
And that's where I'm getting that number that that's what I'm really wondering about the roll off.
Yes, I'm going to recognize I think that tier, but again I think it's just a matter of quarter over quarter, it's going to be case by case.
The activity going forward also Rick the point here is that the day.
Deferred portfolio does flow to charge off faster than the normal portfolio thats not been difficult and so if you. So the broad math woodwork that about a third of those that were delinquent and did not pay would flow to charge off but that's only specific to the portfolio under deferral.
Got it okay. Thank you.
And does it.
So the the gains to charging off for a little bit shorter for that portfolio and payroll through 30 day bucket.
Right because each day.
They've got out of deferrals, because they've come up against the maximum and our policies.
As an option.
Sure.
But for paid alone and if the current paid alone and then they go to charge off.
So.
So for.
For the defining constraints of this or we don't AD infinitum keep giving deferrals, we have a cap on the number of different a number of months have been deferred loan. So if you come up against that.
And then.
There is no.
There is no alternative but to charge off.
Got it okay. Thank you very much Scott.
Our next question comes from John Hecht of Jefferies.
Thanks, very much guys. Most of my questions have been asked I guess a couple one is.
The lease portfolio, obviously, <unk> margins were pretty strong youre getting from residual gains and the backend.
And where where is your depreciation curve that now and how do we think about your expectations for the lease margin given that and your outlook for used car pricing.
Good morning, John Thanks for question and so yes lease has been pretty volatile from a lease yield standpoint.
A year if you remember go back to Q2, we saw very limited maturities and very limited sales and auction, which really basically drove down and eliminated all of our gain on sales. So we saw very low trough in Q2, and and we've seen a big spike up.
Since then so in Q3, we saw a lot of dispositions and record used car prices and Q4, we had less disposition.
Still elevated prices, but the big benefit was depreciation and the way I think about the depreciation expense and as the residual forecasts have improved throughout the year, the depreciation expense that youre seeing and the fourth quarter kind of makes up for the heavy depreciation expense in Q2. So for the year, we ended <unk> say about 5%.
Overall net yield that's about 50 basis points below where we ended in 2018 and 2019, so going forward.
Still expect to have elevated used car prices.
The depreciation expense will be lower than normal, but will not be at the level. We saw in Q4, six eight or 6.9% yield net yield is something that and do not think is sustainable but overall for the year I do think it will be above the 5% net yield for the year.
Okay and.
Separate question I mean can you just remind us the unsecured loan portfolio I believe spend whether it's formally or informally and the market for a few years and then there is also a contract I can't remember I think it may be coming up this year and next year can you just give us the update on that maybe talk about your strategic.
<unk> strategic plans around that and what what you might do if you do decide to keep it or do you decide to sell it with the capital.
So nothing to update for John as far as our activity on selling the portfolio.
We're still still part of our plan to exit that business and <unk>.
And we were able to do that the contract does expire in April of 2022, and it does have a 12 month tail on it and how that portfolio has been performing extremely well as you can see by the profit sharing increasingly saw and both the fourth quarter and for for the.
For the year, so nothing to announce at this point.
But.
And we'll let the market know assume what we do.
And then just one residual question and that is.
Can you tell us how much capital you have got.
In that portfolio or any way to think about what kind of capital would be.
Unlocked.
When you do are able to move.
Move on from that.
So that and the.
A detailed in the appendix and the in the presentation I'll, let you look through the details there and and figure out, but it's about a $1 4 billion portfolio at the end of the year and we have net mark to fair value.
Okay I appreciate that thank you very much.
Our next question comes from Betsy <unk> of Morgan Stanley.
Thanks, Terry and good morning <unk>.
Okay.
Good morning.
Hi.
Just wanted to dig in a little bit to how to think about NIM going forward I know you highlighted and mix shifts.
Expected this year between the non prime and Prime normalizing, but then and I'm also wondering about how youre thinking about the cost of funds in particular.
And is there room to bring that down further from here, So maybe give us some color on that.
Sure.
So NIM from a dollar standpoint, obviously up year over year and quarter over quarter because of the balances are up and loan side, we're up about 10% and on the lease side, we were up.
And 6%.
But I'm going to separate and again between loan.
And lease and so on the loan side given all of the prime that we retained on the balance sheet and 2020, we've talked a lot about the incentives and the market exclusive to us and we've seen a run up and are prime volume.
When we look at the balance sheet, we had about $3 billion of prime loans on the balance sheet at year end and it typically runs somewhere around the volume So we've got volume.
Extra time loans, and thats going to bring down our loan yield the strategy there, but he is to do what we did in January and then try to optimize that balance sheet and periodically execute off balance sheet, securitizations or new whole loan trades to sell off those prime assets and if we're successful in doing that and youll see and up.
<unk> and our loan yields towards the end of the year.
And on the lease side I just went through what we think current lease I think it's obviously very sensitive to.
Residual forecasting and used car prices and I feel good about both on the lease side.
And then as far as cost of debt, we were 60 basis points better for the year 80 basis points better for the quarter and about 10 basis points better from the third quarter and how do you think that trend will continue as we reprice, our securitization and reprice our private deals.
The low rate environment, there is definitely a tailwind for us.
And so we should see some nice up tick and then from here, even if auto used car prices pulls back a little that I realize that's a bit.
Flax and it's hard to forecast but.
Scott will.
And definitely be higher.
Yes, so what's the flex and as well as our ability to off balance sheet. Some of the time that we retain over 2020.
And now the big drivers, Okay, and now on deferrals.
We're getting some questions and on that I guess.
Net debt is their requests increased in December.
And you had the benefit of that stimulus and August running out so that Chuck basically like for months.
At this stage, we have the checks hitting people's pockets and for.
For the recent slog of.
Stimulus that was put out there.
So can you give us a little more color on what youre seeing with regard to the payment rate since the recent checks have hit People's pockets, and then give us a sense as to what you think the benefit will be from this one nine trillion net.
The government looks like it's going to be passing and the next few weeks.
Yes, so I'll start and internationally and you can add and that gap.
Definitely saw a change and the payment rates and January compared to December.
In December I would say, there's a little bit better than November.
I think part of it was the first round of stimulus ending kind of in late summer. We definitely saw people start asking for extensions again and deferrals again, but in January and it has slowed down and the payment rates are back to where they were call. It the.
August September timeframe, so the news very sensitive.
And folio and other consumer base is very sensitive to that to that stimulus, but given the level of unemployment and the mark.
So we're still going to be there for our customers, we're talking to them and making the right decision for for them and and our decision for us, but we do expect to have elevated <unk>.
For all levels are leased for the next couple of months or so and they've got one nine trillion does pass as proposed and that's obviously going to be a big influx of cash for that and that should kick in.
Continued improvement, we've seen and payment rates.
We are seeing assets.
They are looking for instantaneous reaction between the passing of a stimulus package and the way our payment and <unk> and.
And with that.
A slowdown and good.
For the extension so the extension requests and January Epicentral <unk>, We've also seen outstanding finance Spike and demonstrates.
What we are going to increasingly see if all reallocation sort of fee.
And hierarchy.
<unk>.
Payment rates and payoff base I wanted to continue to increase as new stimulus package. If it's passed if it goes through then both Damien.
From a secular increase and payment dates and.
And pay off assets and continue to increase into and through 2021.
Which which could result in a couple of things one is lower delinquencies and therefore lower charge offs and we've also seen some stickiness and the way balances are holding across vintages, so of vintage and given that does affect 2020 vintage at the end of the year has a higher balance as a percentage of what was originally originated buses.
And what happened in 2019.
<unk>.
And what's happening over here in terms of the center.
Reallocation.
The availability of <unk>, but the important thing here is going to be.
This stimulus package gets passed and it's a selling day against the phase Iia study.
Call. It a finish line, which is what happens when normalcy returns and it won't be enough to take the economy through until Tuesday volume there.
Jobs start coming back and people start being able to pay out there on the other.
The other important thing countervailing force for us.
<unk> for <unk>.
Headwind and bumped the molecule that expire on rents and mortgages losses.
And it happened to the payment policy at that point does it doesn't allocate backlogs being.
And being down.
And then from mortgages and I'll do.
And so those are all the factors and then.
And do you think about all and you take the following day.
Do you have any visibility on that topic and your portfolio for example, when people are <unk>.
Calling in and asking for a delay do you are you able to collect fee information at that point as to whether or not theyre paying rent or mortgage.
So that's a great question, so far being day life Thats, what follows handling both calls up and fund because we understand that and Nashville.
Disaster, and we don't want.
Cross examined the customer too much but there is some analysis that we've done at the back on how our portfolio and distributes across industry categories and about a third of our portfolios and what we call high risk industries, which have had a significant job.
Change sort of shift and.
And unemployment and take deterioration and employment rate pre pandemic losses post.
So we do understand that there is about a third of our customers who are for.
Going through a job event for those.
Prices for the fee and they are probably the one for all.
The biggest beneficiaries and stimulus and da Vinci, demonstrating this kind of thing behavior.
Okay. Thank you.
Our last question comes from Stephen and walk Us K B W.
Hey, good morning, Thanks for taking my question I think credit just one quick follow up around peak dimensions for the fed.
Both capital and the plan was in terms of and Novartis dividends or did include buybacks as well.
Steve and we're not going to comment on what was asked and the exception and request but.
As we said we will announce it whenever we hear back hopefully.
We get some good news consistent with what we did and the third quarter of last year.
Great got it thanks for taking my questions.
There are no further questions at this time I will now turn the conference Mahesh Aditya for final comments.
Thank you.
Thanks, everyone for joining the call today and for your interest and SC Investor Relations team will be available for follow up questions and we look forward to speaking with you again and.
And next quarter, Thank you and have a great day.
Thanks.
This concludes today's call. Thank you for your participation you may now disconnect.
And.