Q1 2021 Santander Consumer USA Holdings Inc Earnings Call
Please standby.
Good morning, and welcome to the Santander Consumer USA Holdings first quarter 2021 earnings call. At this time all parties have been placed in a listen only mode.
During today's presentation. The floor will be opened for your questions. Please press star one to enter the Q&A queue. It is now my pleasure to introduce your host Evan Black head of Investor Relations Evan the floor is yours.
Yeah.
Thank you Lisa and good morning, everyone.
Thanks for joining our call today.
We have on the call are CEO, Mahesh Aditya, and our CFO Bonnie cut them.
Certain statements made on today's call will be forward looking.
Please refer to our public SEC filings and the risk factors with respect to these statements.
We'll also reference of non-GAAP financial measures that we believe all the useful to our investors and a reconciliation of those measures to GAAP net loss included in the 8-K that we issued earlier this morning.
And with that I'll turn it over to our CEO Mahesh.
Thank you Evan and good morning, everyone. Thanks for joining US review of first quarter 2021 results before describing our results for the quarter. It's important to highlight the number of corporate milestones we achieved in 2021.
First of this quarter, we reached a significant milestone by closing the last of all of it and agreements with the Federal Reserve. The 2017 written agreement required us to strengthen our risk management framework and the recent termination shows the significant strides made to strengthen our business across the board.
Our employees have worked tirelessly to build a culture of where the compliance mindset with the highest operating standards. These enhancements of fully embedded in Santander consumer operations net.
First we executed the sale of our personal loan portfolio, allowing us to focus on our core competencies and opportunities in auto finance.
In March we paid our Q1 2021 ordinary dividend as well as the special dividend for a total dividend of 44 cents per share.
Also during the quarter the deconsolidation of two 5 billion non prime auto loans optimizing the balance sheet, while growing the service for the other portfolio.
Finally, I'm pleased to welcome Bruce Jackson of.
Newly appointed head of Chrysler capital in order of relationships Bruce joined Santander from Jpmorgan Chase's auto business in his new role Russo manage the origination sales and funding for all channels. While also building of best in class dealer experience. We believe there is tremendous potential to transform and grow our auto originations and I'm confident of Bruce will make us stronger back of our business.
Having another tried and tested seasoned executive on our team will position the C to accelerate our growth plans enhancing dealer experience and digital advancement in the years ahead.
During the quarter, we earned $742 million of net income record earnings quarter for the company.
We continue to grow originations following the momentum built in the second half of 2020.
Originations were up across all channels for the total of $8 6 billion in volume an increase of 24% versus the prior year.
The growth in originations this quarter is driven in part by strong industry sales across new and used vehicles as well as an increase in demand from consumers. Following another arm of the fiscal stimulus.
Yeah.
Our robust economic recovery seems underway, we've seen the unemployment rate continue to fall as job creation has picked up the consumer spending has risen above pre pandemic levels in the country has begun to open up in varying degrees.
Still the risks and uncertainties remain and while many Americans have recovered many still have not which is why this latest round of stimulus was so important.
The level of government support is what likely kept this pandemic from translating into a credit event up until now and with the support now extending through September it's unlikely, we'll see any material deterioration in credit losses. This year.
As we learned during the prior rounds of stimulus beyond just supplying for the day to day of many Americans, we're able to use the money to build up of additional savings, which help them bridge the uncertain months of that followed between the programs.
Given the pickup in the consumer spending following the surround its likely we are seeing the benefits of more Americans being employed in stimulus money being spent more freely but still for many of this assistance is what's keeping them of flow.
One important difference with this round of stimulus when compared to those prior is that most of US are financial services companies have stopped the broad based payment assistance programs enacted in the heart of the pandemic, which showed affected customers, which allowed affected customers to defer payments.
These programs slowed the ryzen delinquencies following following the end of the price stimulus programs. So it's possible that we will see a more pronounced increase in delinquencies towards the end of the year, if the economic recovery Hasnt hit full stride.
Within our portfolio of delinquencies and loss rates of well below historic norms due to the due to the government support our disciplined underwriting and direct sales.
The direct and our direct support of our customers.
But below the surface. The signs are also encouraging as we see payment rates holding strong and steady end of the percentage of our customers on the payment deferrals has returned to historical norms.
These encouraging trends can also be seen in the originations over the recent months as new customers in average of carrying less debt have better payment history in bringing more cash to the deal.
Our business has been further aided by an incredibly by the incredibly strong used car values, which continued reach all time highs and of course as an offset to any default.
Expectations of our used car market stays strong for the foreseeable future given the much talked about supply chain issues affecting new car inventories.
Consumer demand is obviously high for new for new vehicles as well given the March S. A R of $17 7 million $17 7 million new vehicle inventories have now fall into the 10 year lows in manufacturing maybe affected throughout the second quarter for a multitude of factors.
Including the global semiconductor shortage, Texas weather events, and even the temporary closure of the Suez Canal.
Given the supply demand dynamics used vehicle prices are likely to be elevated in the near term.
Family will cover the details of our Q1 performance, but I'd like to talk specifically about the loan loss reserve and some trends we are observing on Tds.
Our reserve coverage this quarter is higher than Q4 due to the sale of prime loans, which were replaced by new originations coming in coming on at a higher rate the coverage rate of 18, 9% translates to an annualized loss rate of eight 2%, which is in line with our historical loans, which is in line with the historical losses in about 100 basis points higher in loss rate than our.
Original C. So reserve under the.
On day one.
Implicit in this coverage number is the assumption that there will be a reversion to mean of delinquencies and losses, while the system of this programs expire as we progress through the third through the year and emerge out of the current economic environment. We will have a clear line of sight on where credit losses of the setup and how much reserve coverage will be needed. We do believe we are holding a prudent level.
Levels of loan loss reserve, considering all the different factors.
Hang on the economy and our portfolio.
<unk>, we saw the population grow by $400 million this quarter and about 900 million since the start of the pandemic over the quarter. We saw flows into DDR increase as classification of COVID-19 related extensions reverted back to pre pandemic practices offset by exits due to charge offs of Paydowns, which were flat to slightly higher the last quarter. The.
The number of accounts of the forbearance of reverted back to pre pandemic levels and we expect flows into the DDR to remain constrained contained through the next few quarters as forbearance activity continues to decline in payment rates remained elevated.
While it appears weighted on the part two of strong recovery. We also plan for more negative outcomes that could result from additional waves of strains of the virus and the resulting impact of labor markets.
The resilience to the downside scenarios remains the focus at our.
Origination policies.
In our lending business stronger profitable growth, coupled with historically low losses and continued focus on expense management is the recipe for outsized financial performance and you can certainly see that this quarter.
The focus and commitment we have made towards supporting our OEM partners of the Atlantis and to our dealer community is bearing fruit and we expect that trend to continue as we move forward with ambitious plans with these partners.
With the benefit of strong financial performance, we have been able to step up investment in our on our in our internal and external facing technology to make it easier for our dealers and customers to interact with us and provide us the platform from which we can scale into the future.
We view investing in these capabilities of the strategic imperative and believe what we are building in this space will further solidify our leadership position for the long term.
At Santander consumer we are keenly aware of the hardships of consumer the offensive facing particularly those in underserved communities. We believe it's our responsibility to be of part of the solution to help people achieve better financial will be and that begins with us over the next several months, we are placing greater emphasis on ensuring that our policies and practices and every interaction demonstrates our commitment to.
Two customers and communities.
We have an obligation of the lender in our industry to pave the path of change our investments and financial education and apartment community partnerships and supporting minority and women owned businesses are only the beginning of what we would be will contribute the becoming a more fair and equitable society.
With that I'm going to turn the call over the family for a more detailed review of all of it is us.
Thanks, Mahesh and good morning, everyone.
Turning to slide four for some key economic indicators of influence our performance as Mahesh mentioned, most economic indicators have improved on the back of the vaccine rollout federal aid and measured reopening of the cross many states unemployment has improved but the pace of improvement has slowed since the fall of 2020 and several millions of Americans.
Continue to file for unemployment benefits well above pre COVID-19 levels.
Although the economic recovery has begun we remain cautiously optimistic in our approach the impacts of the pandemic and the health of the consumer Aster stimulus benefits expire remain uncertain ultimately are.
Our performance will depend on the speed of the recovery and whether the stimulus benefits last long enough to allow sustained employment to return across the economy.
On slide five there are few key auto factors that influence of our origination volume and credit performance.
New and used vehicle sales continue to improve as consumer demand remains high.
New vehicle Saar at the end of March reached $17 7 million the highest level of seen for several years. Despite the new vehicle supply shortage Oems and dealers have adjusted their sales cycles to meet the demand.
Used vehicle demand remains strong and grew in the quarter used vehicle pricing has continued to rise setting new records in March and April.
Manheim index increased 11% in March compared to December and 26% year over year.
Mid April the index grew another six 5% for March and more than 50% year over year.
Several factors are influencing used car prices, including shortage of new vehicle supply industry wide low delinquency and losses limiting wholesale inventory at auctions and the increased number of consumers choosing to purchase of vehicle as the economy reopens.
The third round of stimulus checks plus savings accumulated last year are also supporting consumer demand.
We expect used car prices to continue to moderate in the long term. However, we believe they will be elevated for the remainder of the year the.
Supply and demand dynamics are likely to persist as inventory levels are low for both new and used cars. We still believe prices will dip in the fall following seasonal patterns, but on average we expect 2020 prices will likely be up 10% with upside potential compared to 2020.
Turning to slide six per origination trends.
During the first quarter, we originated $8 $6 billion of auto loans and leases originations were up in every channel versus the prior year, leading to 24% growth in total volume driven by continued strength of new and used vehicle sales.
The reviewing our originations by channel by channel for the first quarter.
Core alone of originations increased 21% year over year total Chrysler capital loan originations increased 40% Chrysler Prime volume increased 64% Chrysler non prime volume increased 11% and lease originations increased 7%.
Our core loan originations have been strong since the onset of the pandemic and we expect that trend to continue into the second quarter. Although competition has returned and is more intense in some respects in pre COVID-19 times, our market share with our core dealers has increased year over year.
Chrysler non prime volumes returned to more normal levels and experienced year over year and quarter over quarter growth. We are very pleased with the level and credit quality of originations in our non prime channels as we remain disciplined in our approach from a risk perspective, while maintaining strong margins and heightened competition.
Prime loan originations continued their performance from 2020 into the first quarter, although the OEM incentives for new vehicles have come down from historic levels. Its the largest programs exclusive of Chrysler capital generated almost $2 5 billion of prime volume an increase of 64% from last year.
Our prime volume for the remainder of the year will depend on new vehicle supply the.
The largest incentives exclusive to us and the continued strength of our partnership with Santander Bank.
Lease volumes continued to improve in the quarter as the launch of sales increased year over year as well as our growth and our market share.
Overall, our strong originations are reflection of our team's execution and our relationships with our dealers and our OEM partner, we believe the credit quality and margin profile of each channel positions us well for future profitability.
Our focus is on remaining disciplined in our approach and originating loans and leases with the appropriate risk adjusted returns, while continuing to serve our customers and our dealers.
On to slide seven we break down our 2021 monthly originations versus the past two years.
Our core loan originations began 2021 relatively in line with prior years, but increased significantly in March in line with the industry sales increases <unk>.
The volume was impacted by severe weather in Texas and a few other high volume states as well as the delay in tax refunds.
March more than made up for the delay and represents the largest single month of originations in our company's history.
Turning to Chrysler capital non prime recall that Chrysler capital non prime loans were lower throughout most of 2020 versus 2019 this quarter, our Chrysler non prime channel followed a similar pattern as our core channel ending the quarter up versus both of the prior year levels.
It's the largest incentives and continued to influence our Chrysler capital Prime loans as we mentioned in February versus the end of 2020 incentives that were exclusive to see cap increase in the first quarter, leading to an increase in prime loans versus both of the prior years, our partnership with Santander Bank also continues to benefit our primary originations.
Lease volumes were under pressure throughout 2020, but the sales and market share are near historic levels, We expect lease volume to stabilize near 2019 levels for the remainder of the year.
Moving to page eight and are still onto his partnership.
The industry auto sales, including the launch of sales of continued their momentum from the second half of 2020, our penetration rate increased versus the fourth quarter, but remains below peak levels experienced in 2020 at the height of the pandemic, what our penetration rate was higher due to significant levels of incentives in the market.
Turning to slide nine.
Our service for others balances increased to $14 2 billion at quarter end of 23% versus the prior quarter driven by 2 billion in originations via our agreement with Santander Bank and $2 4 billion in off balance sheet Prime loan sales at.
At the end of 2020, we held approximately 3 billion of prime loans on our balance sheet, primarily due to the significant growth in incentives during the pandemic. The loan sales this quarter allow us the deconsolidation of these lower yielding assets from the balance sheet, while continuing to earn servicing fees through our serviced for others platform. This.
Of this platform generated $18 million of servicing fee income this quarter.
Moving to slide 10 for an overview of our liquidity.
As of quarter end SC committed funding, including Unutilized lines of was approximately 57 billion.
At the end of the first quarter, we had approximately 80% of unused capacity available on our $11 8 billion of third party revolving warehouse lines. We also have $3 billion of unused capacity from our parent Santander.
Our asset backed security platforms continue to demonstrate strong investor support during the quarter, we executed approximately $3 5 billion across two ABS transactions, both of which achieved the lowest cost of funds and the largest deal size and platform history.
During the quarter. We also executed $3 7 billion of asset sales, which included $2 4 billion of Prime auto loans and $1 3 billion of unsecured personal loans as we discussed last quarter and consistent with our strategy to continue to optimize our balance sheet. The prime asset sales allow SCE to increase capital earn servicing fees going forward.
Lord and capitalize on the investor demand for consumer assets.
In 2020, we experienced the significant increase in prime volume as we supported the launches and our dealers through the pandemic in the first quarter of 2021 on the back of the economic recovery and strong liquidity in the capital markets and at third party banks, we were able to sell the majority of the excess prime loans retained in 2020 at a gain on sale.
We are very pleased to execute the sale of our personal lending portfolio to funds managed by cast the Lakehead L P and.
In addition to the portfolio sale, we have entered into a forward flow agreement with the cast of leg to sell future receivables through the remainder of the contract we remain committed to fulfilling our contractual commitments under our agreement until it matures.
Later in the call I will touch on the impacts of the sale and the forward flow agreement on our financials.
Moving to slide 11 to review, our financial performance for the quarter versus the prior year quarter.
Net income of $742 million of $2 42 per share of EPS for the quarter was a company record.
Interest on finance receivables of loans increased 2% due to higher average loan balances during the quarter up 6% year over year or nearly $2 billion.
Net leased vehicle income increased 63% and continues to benefit from record used vehicle prices.
Improved residual values led to lower depreciation expense and increased gain on sale during the quarter net.
Net yield on leased vehicles increase of seven 3% of approximately 300 basis points year over year, and 50 basis points over the fourth quarter 2020.
Recall last year at the onset of the pandemic, we experienced the delay in off lease vehicle dispositions and a sharp increase in our depreciation expense as the residual outlook of the portfolio decreased.
The first quarter 2021 continues the momentum we experienced in the second half of 2020 as the residual forecast has stabilized lease dispositions increased and we achieved record prices at auction.
We do not expect lease yields near 7% long term, but we do anticipate strong used car prices for the remainder of 2021 and lease yields to be elevated compared to historic levels.
Interest expense decreased 23% driven by lower benchmark rates and lower average debt balances cost of debt decreased 80 basis points versus last year, and 20 basis points from the fourth quarter of 2022, 5%.
Credit loss expense decreased to $136 million in the quarter down significantly due to the improved credit quality of the portfolio lower charge offs higher a higher auction recovery rates at $106 million reserve release compared to a $314 million reserve build at the beginning of the pandemic in the prior year quarter.
Profit sharing expense increased $53 million driven by residual gain sharing with the lantis and strong performance from the personal loan portfolio, which we sold in the quarter.
Moving forward. This line will only include expenses related to the sharing payments with the launches.
The investment launch investment losses were $49 million better year over year as a result of improved performance and lower balances on the held for sale portfolio and gains associated with asset sales this quarter.
Operating expenses increased 4% due to salary and benefits expense, including severance costs related to the closure of our Colorado facility, partially offset by lower repossession expense, our quarterly expense ratio was down 10 basis points year over year to one 8%.
Continuing to slide 12, the cover of delinquency and loss.
Credit performance improved across the board in the quarter with lower levels of delinquency and loss both quarter over quarter and versus the prior year.
The prior year quarter early stage delinquencies decreased 390 basis points and late stage delinquencies decreased 240 basis points.
As a result of our customer relief efforts during the pandemic and strong payment rates supported by government stimulus delinquencies are at an all time low for the company.
Since the beginning of the pandemic, we have granted approximately $1 2 million loan deferrals to 720000 unique accounts or $12 2 billion on our balance sheet.
In the first quarter, we granted 84000 deferrals down 50% from the fourth quarter last year and down significantly from the peak of the pandemic.
Excluding deferred accounts that paid off were charged off 2% remained under active deferral, representing approximately of 180 million of imbalances. The accounts with expired deferrals of approximately $9 7 billion, 85% or less than 30 days past due and 13% are more than 30 days past due.
Quest for relief continue to drop as we revert back to normal servicing practices April of 2021 was the first month since the pandemic started with lower levels of modifications in our average pre COVID-19.
In addition to reduce the relief requests payment activity continues to outperform historical norms as consumers utilize increased savings and new stimulus benefits the pay down their loan balances.
The Ric gross charge off ratio of nine 7% decreased 580 basis points from the first quarter last year.
Our recovery rate as a percentage of gross losses was nearly 70% in the quarter up quarter over quarter and versus the prior year recovery rates continue to benefit from low losses and high used car prices. The net charge off ratio of 3% decreased 470 basis points from last year.
Based on the latest round of stimulus our current levels of delinquency and our experience last year with the impacts on our portfolio from stimulus benefits. We believe losses from the pandemic will be pushed into 2022, we will likely see an uptick in delinquencies in the latter part of the year of stimulus benefits expire coupled with typical seasonal patterns.
Turning to slide 13, we detailed monthly loss and recovery rates versus 2020 and 2019.
The gross charge offs trended lower from January to March as consumers began receiving their third stimulus checks and tax refunds began to the issued.
We expect this trend to continue in the second and third quarter before increasing at the end of the year, depending on the economic recovery.
The recovery rates as a percentage of gross losses in the month continued to remain elevated as the ratio of benefits from low losses and record used car prices as I mentioned earlier in the call. We expect this trend in used car prices to remain elevated for the remainder of the year.
In our own portfolio looking at auction prices on a vehicle basis, we experienced a 17% increase in the quarter versus the prior year first quarter, 22% higher than 2019 and of 5% increase from the fourth quarter 2020 rates.
Rates were strong across all vehicle ages and vehicle types.
Moving to slide 14 to review the loss figures in dollars in the walk from prior year.
Net charge offs per rigs were down significantly year over year losses increased $97 million due to higher average loan balances, but were more than offset by $279 million in fewer gross losses and $167 million due to improvement in recoveries.
Turning to slide 15, and the seasonal reserve.
At the end of the first quarter of the allowance for credit losses decreased $106 million from last quarter, driven by an increase of $75 million due to the portfolio mix, which was more than offset by a decrease of $100 million due to improved macroeconomic factors and a decrease of $81 million due to lower asset balances.
Despite signs of improvement in the macroeconomic factors, the overall risks and uncertainty and the portfolio remain some parts of the U S and the rest of the world have reported an increase in COVID-19 cases, as well as concern over the vaccine effectiveness against the variance.
The pace of employment growth is slow and disproportionately impacting certain industries and we believe non prime consumers.
Although we are optimistic about our portfolios performance, we are not through the pandemic. There are approximately $8 5 million fewer jobs in the country than March of 2020, and the timing of returning to those jobs is uncertain.
As mentioned the macro scenario, we use quarter over quarter improved but the scenario is still assumes elevated unemployment and a prolonged recovery.
Our baseline macro scenario assumes unemployment will remain flat to slightly down throughout 2021, ending the year just under 6%.
Moving to slide 16 to cover seasonal by asset designate designation.
The PDR coverage ratio decreased 260 basis points versus last quarter to just under 31% driven by lower delinquency and improve performance.
The percentage of this population that received the deferral has grown five percentage points compared to the fourth quarter and now represents approximately 85% of the <unk> balance.
As expected <unk> balances increased approximately $400 million this quarter as we reverted to our regular GDR classification practices at the beginning January one of this year.
We believe we are well reserved for a riskier DDR portfolio with the coverage rate of near 31%.
The non TD, our coverage ratio increased to 17% due to credit mix in the portfolio as our asset sales. This quarter came from our prime assets, which carry a lower coverage ratio.
Overall, we feel our reserve is appropriate given the non prime nature of our portfolio trends, we've experienced when stimulus expired last year and the remaining uncertainty in the economic recovery.
Turning to slide 17.
The expense ratio for the quarter totaled one 8% down from one 9% from the prior year quarter.
Our operating expenses were up versus the prior year quarter, primarily driven by salary and benefits expenses as we ramped up head count of collectors and also includes severance and other expenses related to the closure of our Colorado facility.
Turning to capital on Slide 18.
Our CET one ratio for the quarter was 16, 5% of nearly 200 basis points versus the end of 2020.
Our capital levels were supported by record income in the quarter and a reduction of assets of approximately $2 5 billion from asset sales.
During the quarter, we declared and paid a dividend equal to <unk> 44 per share comprised of our ordinary dividend of 22 cents in the special dividend of <unk> 22.
Yesterday, our parent company Santander Holdings USA received an exception to the Federal Reserve Board extended interim policy as a result, the SCE board of directors will consider declaring a dividend during the second quarter of 2021.
As the economic backdrop and capital distribution policy policies revert back to normal we are committed to returning capital to shareholders our strong.
The capital and liquidity ratios are indicative of our balance sheet strength, which will serve us well moving forward.
We believe this level of capital is more than adequate to withstand the severely adverse scenario if it materializes provide us the ability to reinvest in the business organically and Inorganically, if the opportunity arises phase in seasonal over the next few years and return capital to our shareholders.
Finally, I would like to provide a few trends and expectations for the next quarter compared to the first quarter.
We expect the net interest margin ratio to be flat to slightly down to the due to the sale of the personal lending portfolio. However, we do expect the yield on rigs to improve due to a higher non prime portfolio mix and also lease yields to remain elevated.
Other income to be lower by $30 million to $50 million due to the sale of the personal lending portfolio and lower gain on sales from asset sales.
We expect net charge offs to be lower than 3% on an annualized basis next quarter due to low delinquencies and strong used car prices.
And finally, the expense ratio to be relatively flat, depending on the level of repossessions.
To conclude the first 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 would and we will continue to take a cautious approach as we manage through the uncertainty in the market.
We will remain disciplined in our underwriting and expense management, but also committed to reinvesting in the business for future growth. We believe we have positioned the company well to capitalize on the current auto industry tailwind and have confidence in our team's ability to execute and deliver value to our shareholders.
Before we begin Q&A I would like to the turn the call back over to Mahesh Mahesh.
Thanks, Amy and summary of family said, our first quarter performance has exceeded our expectations. After many positive trends. He highlighted I would point to our robust sales growth of improving quality of through the build of bookings and the rapid cure rate of a full blown accounts is particularly important and positive over the long term and the future of whole stimulus work.
The high payment rates, low delinquencies and charge offs and to a lesser degree of the higher recovery rates or trends that are likely to dissipate once benefits run out in September.
In a post stimulus world, we would expect to see government assistance replaced by salaries, new car production and inventories back to normal levels and used car demand and prices normalize in the Meanwhile, we will endeavor to sell of our employees dealers customers instead of Lantus and the best way possible through this uncertain period as we emerge from the pandemic kind of it's terrible toll on our country.
And the lives and livelihoods of fellow Americans and the.
Very proud of the way our colleagues have stepped up to support of our.
Our customers the communities in each other over the past year. This has been a very trying year and has dramatically changed the way in which we book and made us take a step back to evaluate how we engage with each other.
We've made great strides in putting in place the foundation to make our organization more inclusive.
We have a long way to go to ensure sustainable change I'm proud of the way we've embraced these initiatives and the knowledge that we will be a better place for it.
With that I'll open up the call for questions operator.
Thank you.
Alright, we will now open up the call for questions. Please limit yourself to one question and one follow up question.
We will take our first question from Moshe Orenbuch with credit Suisse.
Great. Thanks.
I am struck three months ago, you did lower your kind of expected required capital down to 11, five percentage relative to that number given the improved capital efficiency steps you've taken this quarter, you've got a full $2 5 billion.
On the books right now I know that you can buy back stock right now because there is the program in place.
Was hoping you could give us just a little more definition since that number kind of exceeds I guess the.
The flow sitting out there should talk about once that's allowed.
Year like how does that how will that process work.
Thanks, Good morning.
Yeah capital, where obviously, we're in a really good spot in the ending the quarter of 16, 5% as you mentioned, it's five percentage points higher than what we announced last quarter of our target of 11, 5% of.
Obviously very pleased with the news last night that the regulators gave us approval to pay the dividend this quarter and we will get with our board over the next couple of days to to figure out next steps as far as looking forward, we're still under this interim policy.
Through user and their capital plan was submitted in early April we will get feedback on that by the end of June just like everyone. Everyone else, we're hoping that the regulators moved back to the stress capital buffer of framework in the third quarter and if that's the case, we'll have a lot more flexibility on our capital distributions.
But until then.
We're going to wait and see what the regulators give us and then we'll reassess with the board with everything that we have in front of us, but as I mentioned in our prepared remarks, I think it is going to be a combination of of one of dividends to reinvesting in the business potentially doing.
<unk> on M&A, if the right opportunity arises, but then a big part of it will also be returning capital to shareholders.
Great Thanks, and maybe just.
For the kind.
The kind of at a very high level, you mentioned a bunch of these issues the buckle.
At the moment consumers are actually putting in more cash so theoretically fixture of less risky, but the potential for the environment to get more competitive.
Could you expand a little bit as to what steps you either are taking of will be taking on the coming in the coming quarters.
Yeah, I think we're going to be very thoughtful and disciplined in our underwriting approach.
Typically underwrite through us through a cycle. So we're not baking in these high recovery rates in these record used car prices into our underwriting practices.
So we definitely take a longer term view when we underwrite these loans as far as competition goes.
It's been pretty intense intense pre COVID-19, we had of window there at the onset of the pandemic where.
There was a couple of lenders one as being one of them debt tightened up but didn't pull all the way back and we benefited from that by increasing our market share and obviously, we have kept that market share going into into the end of 2020 and into the first part of 2021 and so we're very pleased with the level of originations.
Nations the credit quality of those originations and the margin margin profile, obviously as.
As our cost of debt has come down our yield has also come down and we've also at the react to some of those competitive pressures, but overall, we feel good about the margin profile of the originations, yes, just to add to that most of you. This is my ash the whole idea that we have basically two two.
Two sort of countervailing issues going on one is obviously the business model.
Government stimulus, which is which is the.
Which is which is having a significant impact on people's cash flows to the positive.
And that as Fahmi said that is suppressing the loss rates and making everything look much much.
Lower and much better performing than that of perhaps would be once the once the economies.
Is it sort of set on its own and the other is one of the fundamentals in our portfolio and in the underwriting practices and what does the <unk> below the surface and our book, that's giving us some cause for optimism that coming out of the crisis and coming out of the stimulus regime that the economy is going to be self supporting and rates.
Not going to blow up in terms of bad losses of whatever so we are pretty confident that right now just given the underwriting quality and the semi says we're not price into the lower loss rates.
And all of the other.
Aspects of it.
Debt that things.
The things will be pretty stable once the stimulus comes off.
We will take our next question from Betsy <unk> with Morgan Stanley.
Hi, good morning.
Good morning.
Hi.
I know you mentioned the comment around capital and you'll see what happens et cetera post you know the.
The CCAR submission.
But I'm just kind of wondering when you think about the amount of capital that you're generating to die.
Uh huh.
How do you think about on a longer term basis.
What the distribution strategy is going to be like because you know there is some optionality here and buybacks obviously, it's limited.
Is there any discussion about you know maybe we should buy the whole thing and maybe could you give us some color on that.
And if you could give us a sense as to what kind of.
The acquisitions could really utilize this level of excess capital you have would be helpful. Thanks.
Sure.
Thanks for the sooner.
The mine the capital levels, we're definitely supported by our asset sales this quarter.
That decreased our Wi by a couple of billion dollars in the quarter. So that increased our CET went up to 16 five.
The percentage, but as far as our priorities go on how we think about it.
The priority one is to always maintain that the ordinary dividend of <unk> 22 cents per share.
And then as I mentioned, we're going to reinvest in the business. Some of the technology efforts that Mahesh mentioned in the prepared remarks to position ourselves for the future and really make it easier for our dealers and our customers to interact with us that's going to be.
Other top priority for us as far as the M&A goes.
Valuation levels right now in the market are pretty elevated.
Haven't done true M&A for for a very long time, we've done portfolio acquisitions from from time to time and I think we will take a take a look at those things.
If there is a technology out there that advances some of the things. We just talked about I think that would be interesting to us and then we are.
Turning.
Capital to shareholders is going to be.
A large component of us getting down to 11, 5% of getting down to 11, 5% I would say as a medium term goal, it's not something we're going to do overnight.
But it is something that over the next couple of quarters, we'll be discussing as the management team and with our board on the best use of that debt capital for all of our shareholders.
Medium in terms of like two years or kind of like that or is it like the one year time frame.
Yeah that the I'm not going to go into the specifics on time I think part of it also is that we have to see out of the economic recovery plays out over the next several several months and we obviously feel really good about where we are from a reserve standpoint, we feel good about where we are from a capital standpoint, but until we see how this really plays out over the next few.
Quarters, we're not going to rush into releasing either either capital or reserves.
And on the Digitization front, when you're talking about improving your digitization efforts is that.
Can you just help us understand that so with an eye to the dealer community that you are working with primarily or is it with an eye towards going direct to consumer.
Or enhancing all of it yes. This is the.
Yes. Thanks for the question. So this is actually both Betsy you've got you've got.
Increasing number of dealers at the high end, particularly who are going digital and making the sales of <unk>.
<unk> of the sales experience of becoming more remote and lenders need to step up and be able to have some sort of plugging into the dealers.
Digital experience.
Without making it too clunky, so I think we need to we need to invest we are in the process of investing in that and making that interface between us and the dealer.
As seamless and as you know.
As smooth as possible.
The direct to consumer front, we obviously that all obviously structural resistance is to being able to fully consummated and fulfill alone directly with the consumer.
So we need to bring in the dealers into that as well, but there is there is a strong.
The strong belief in our company that we should have.
A fastest smoothed a better way of attracting customers.
Who want to get who have a relationship with us who want to get an auto loan with us and for us to be able to fulfill that need and yet maintain our dealer loyalty and be able to have the half the deal completely compensated at the dealer of choice. So.
It's a bit of both but it's essentially moving with the weight of the rest of the market is moving which is towards a more remote.
The digital experience.
Thank you.
Our next question comes from Rick Shane with J P. Morgan.
Hey, guys. Thanks for taking my question look I'm not big on congratulations, but I think I've, probably asked about the personal lending business 10 times over the past five years, so congratulations on getting that done.
I do want to talk a little bit you guys have spoken about the impact of.
All of higher used car prices on credit.
But I'm curious if you are adjusting ltvs to reflect that inflation as well.
Adjusting ltvs no I don't think we're adjusting our underwriting too.
To again see what we are from a used car price this year compared to years. Prior as I mentioned, we kind of stick to the underwriting practices. We've had obviously ltvs of come in better as people are putting in more cash on the deals and when we talk about that we feel like the credit quality of our new originations have improved.
That's going to be part of it.
And what are the adjustment and the LTV happens happens bye bye bye consumer segment of based on the behavior of the of that particular segment is not related to the fact that we believe that the value of the vehicle is necessarily inflated I think thats, what youre getting at Lake right Rick.
That's the that's exactly it.
It's a fair point.
It looks to me like oftentimes, we hear about companies, taking barbell strategy as it feels and looking at the distribution of your FICO scores that you are actually doing the opposite that youre really going to your core business that $5 40 to $6 39 <unk>.
<unk>.
Of the of the market is.
Is that where you think there is the best competitive opportunity or do you think you have the best underwriting there.
Well, it's the combination of both right out of it we feel more secure in the less than 340 segment, which is where I think we've over the years sort of taken the training wheels off and we really understand the subprime lending business I think it's also where competition side of things out, but our experience has been that if we can keep the the loss.
Given default under control, which is all dependent on the loan value in and how we assess the borrower.
We feel more confident right now that debt that's the space to be in because for all of the reasons you mentioned.
Yes.
Okay, great. Thanks very much.
Non.
I'm, just kind of say Rick to add onto that I mean, obviously, that's the less than 640 of the space that we've had the most history with but it also shows that the strength of the partnership with Santander Bank and their ability to take on the prime and near Prime assets and then also for us to sell the prime assets that we do retain and so what youre seeing in the <unk>.
Portfolio is that kind of right in our sweet spot from a FICO standpoint.
Got it okay. Thank you guys.
Okay.
Our next question comes from David Scharf with JMP Securities.
Yes. Good morning, Thanks for taking my questions.
A couple of things one just just mechanical.
To start out on the personal loan sales.
I just wanted to clarify the flow of arrangement or are you going to be retaining any loans in the future.
You're just basically providing sort of of warehouse line to the.
Buyer of debt portfolio going forward.
So we will not if everything works as planned we will not be retaining any any loans, we will basically act like a pass through entity, we buy the assets.
From Bluestem, and then sell them to cassoulet going to on a daily basis.
Got it thank you.
And just as a follow up I wanted to just.
The follow up on the on the previous question.
On the competitive.
Kind of environment right now and you acknowledged that remains.
Hence by your description.
Are you seeing.
In sort of net core 640 and under segment.
Are you seeing the bulk of the competition from non bank competitors.
Im curious if youre seeing any large.
Banks re engage in some of the FICO bands.
Prevalent.
And as we think about really kind of the next six to 12 months trying to get a sense for who may still be if not on the sidelines still pretty restrained in may actually.
Reenter later in the year.
I would say most people David have reentered the market.
Anytime you have really strong capital markets and robust access to liquidity youre going to have heightened competition. So I think.
Obviously, everyone has their different spots of the banks tend not to dip down below 600, but.
But I would say everyone.
Back in play and they go with the capital markets. If liquidity is available there's going to be heightened competition, specifically in the non prime space. It's mostly as you said the non bank people, but there are a couple of banks that are out there who.
And then name them I'm sure you know sure and day.
They go in and out and as Fahmi said it all depends on when they have a strong liquidity position with many of them do right now some of them.
They've gotten some of them are more comfortable with subprime than others, and we sort of see them come in and out of that segment.
Okay. So in aggregate it sounds like we shouldn't.
I would be thinking of this as an environment, where the where there's still a couple of sizable players that haven't really re engaged in it could in the future.
Everybody's Kristina got it thank you very much.
We will take our next question from Steven Kwok with <unk>.
Alright, great quarter, Thanks for taking my questions first the.
First one I had was just a clarification around the capital side I know you guys are also looking at.
The thing in the seats of trial.
As soon as well and so if we look at it is the right way to think about it today that you have roughly about $1 billion of excess capital when you accounts of the seasonal season.
So Stephen Yeah. So we have call it 500 basis points of room.
From our target of 11, 5%.
So if you take the full load of the seasonal impact it's going to be close to 375 basis points.
So you'll have that remaining left but of course, that's going to be phased in over four years and will accrete capital over those four years as well.
Got it got it and then just on the debt.
Cost of funds I noticed that's continuing to tick down nicely is there more room for that to go are there any impending maturities that can help on the cost of fund side.
Yes, the cost of funds has been a definitely a tailwind for US 80 basis point better over the year and 20 basis points better from the fourth quarter I do think there's probably a little bit more room to improve that as the deals as the year progresses, and we've seen that with the strong execution, we've had on our ABS securitization. So.
I do think that will continue to be of positive for us throughout the year.
Got it thanks for taking my questions.
Thanks.
Alright, we will take our next question from Mark Devries with Barclays.
Yes. Thanks, just a question about the reserve levels.
It sounds like Youre kind of net more concerned about the potential impacts of of fading.
Stimulus benefits than kind of the ongoing benefits on recovery rates and an improving macro.
And I think Tom you alluded to you know part of that I think is trends that you experienced.
The last time stimulus transpire could you talk a little bit more about that.
Kind of how youre thinking about all of these different forces both of the you know the.
The positive and the negative impacting your loss expectations.
Sure I mean, there are definitely positive signs in the portfolio when we talked about a lot of them.
This morning, but also there's there's things of that give us a little pause and theres a lot of uncertainty out there. He mentioned you know eight to 10 million jobs fewer than we had a year ago several million people, who are underemployed or not looking.
For jobs, but as you said the reliance on the stimulus is real and we saw that last year, we saw about a 16% drop in the payment rates of.
Between August and November of last year, when the first round of stimulus drops and then we saw about a 40% increase in payment rates from the end of the year to March once people started to get there. The third checks so very sensitive and reliant on the benefits of the stimulus and having cash so that gives us pause on what happens.
After.
Of the stimulus expires the.
Hopefully the recovery continues and it picks up and there is enough to kind of bridge bridge the gap, but the question I think we're all trying to answer is whereas unemployment at the end of the year.
And for now we just don't think it's very prudent to release reserves in a meaningful way anyway until we see that play out.
Just to talk of just to sort of Peel that back a little bit further we look at we look at sort of early signs of the specific to our portfolio of system you said the.
The two things going on over here one is what happened when the losses in the July stimulus came off and then it was reinstated.
The 906 billion, which was announced in December so in that period. The July the November December period.
So an uptick in delinquencies in the first payment default et cetera.
Then the second stimulus came back and then as Tammy said off of that payment rates went up delinquencies side of it.
Started trending down et cetera. So that's one data point, we have that when the stimulus is lifted unless the full employment of close to full employment of you're likely to see some uptick in delinquencies right.
Which will be offset obviously by the origination quality of the 2020 book and the other countervailing factors that you've now got vintages that are aging and more customers of being and therefore, they bought more skin in the game as far as collateral is concerned so that could also be in sort of improving.
<unk> the portfolio of quality so to speak the second thing is stimulus is not is not employment Inc.
<unk> has to come back and what we look at his employment by industry category employment by ZIP code employment in the areas, where we are concentrated and the encouraging sign for us in the last.
Employment of the data release was that it seems to be coming back into the services sector, which is where we have some exposure. So its services of hospitality retail et cetera start coming back quicker than some of the other areas. Then it's likely that we'll get some lift from that so those are all we got a bunch of indicators that we look at the so called Canary in the coal mine looking for.
Some early signs of what the portfolio of likely to how it'll shift once.
Once the stimulus runs off.
Okay got it that's very helpful color.
And then this may be a very short response, but.
Is there any impact whether near term of long term sort of the Chrysler capital agreement from the the merger of <unk>.
The crude still onto us.
Yeah.
For the short term no it's business as usual we have a really good relationship obviously here in North America Santander globally as a really good relationship with Peugeot.
So we're focusing on what we can do to maximize our relationship day to day.
Okay got it thank you.
Yes.
Thanks.
Our next question comes from Kevin Barker with Piper Sandler.
Thank you good morning could.
Could you just clarify.
What we expect in June something similar to the CCAR, where you just get a press release on your capital plans is that how we should expect that the play out.
Hum.
I'm not going to commit to a press release in June.
We're a little bit of an unchartered waters here for.
For this quarter, we will see what the fed comes back with in line will go from there, but but.
Obviously, if there is something material then we will announce it.
Okay.
And then going back to some of the disclosure you had on the personal loan portfolio and breaking it out back in the appendix.
You have significant investment gains in the first quarter, but it was relatively flat in previous years.
And in that.
Had a lot of noise just given the the bluestem relationship.
Could you help us understand like what the run rate is going to look like from an investment gains and loss of standpoint, and then also.
Would you look to be more proactive in selling portfolios just given the market environment today.
It seemed like you were much more proactive in the first quarter and it seems like that that seems attractive.
Given the current market.
Environment.
Yeah, we've seen a lot of investor demand for consumer assets and.
We were able to take advantage of it going into 2020, and we said it on the call. We had a real run out of Prime volume as we stepped up for our dealers in the first of launches through the pandemic.
And we took advantage of in the first quarter of of.
Interest in the consumer assets, and we're able to sell those assets off into the market and generate a servicing fee. So we're always going to look to do that it's been consistently our strategy.
Over.
Over the years with prime loans, and we will continue to do that as far as the investment gains and losses go.
Going forward there that's the.
Really going to be around asset sales only.
And the historically you've had as you said a little noise there with the personal lending portfolio. So so that will stop going forward and it will just be related to any activity. We have on the asset sales side.
So if you continued with the the asset sales that would probably cause capital to buildup of you're comfortable with the capital buildup from that or would you just be more proactive in utilizing the capital like how do you give and take that think about it.
Yes, we're comfortable with it if the economics make sense for us to sell the assets in the typically we're going to retain most of the non prime slash bottom end of the near Prime.
Because we think we can service and generate a nice margin.
To the extent, we do originate.
Higher end of Prime Super Prime paper, and we can sell it off of it at a reasonable price and earn the servicing fee, we're always going to look to do that.
Okay.
Thank you for taking my questions.
Thanks.
Our next question comes from Vincent <unk> with Stephens. Please go ahead.
Hey, Thanks. Good morning, Thanks for taking my question just one.
So wanted to talk about the vehicles supply issues and.
So we've been talking about this it seems like there is.
Theres going to be a struggle for a while in terms of of.
<unk> supply but.
Just wondering how you think thats going to affect your business going forward.
Impressed with this quarter's originations in your Chrysler originations were up 40% year over year. So that's really impressive.
Just wondering do you have the expectations for that to affect your business in 2021 channel.
Also how does that affect maybe any discussions you have lost the line is in terms of the programs, we launched like any subvention or anything like that thank you.
Thanks. Thanks for the question. So yes, we are fully committed to supporting still on just the production and whatever happens in this whole of semiconductor right now its just speculation Whatsapp then when I'll quickly supply will be restored, but we are as Sami said, we utilize the figure it out really we've had Australia. The thought is utilizing the.
The flow of agreement, we have with SG&A and being able to service B of full service full spectrum lender for Atlanta, So that really helps a lot because of the prime near prime subprime at lease.
And I think as the market begins to sort of settle and production comes back it's of Nobody's interest right now to see production start paying out in the inventory levels being where they also im sure Theyre doing all they can to bring back the semiconductor supply and all of the other issues but.
But we'll be there to support them, but our prime I mean.
The other very profitable businesses as the used car business that we do due to a core of.
The subprime part of the.
Part of the business and that continues.
That continues at full steam and we expect to see continuing growth growth.
Growth of the supported by higher demand for used car prices higher demand for used cars and as Fahmi said that's.
That's also very very profitable part of of it.
Okay that makes sense so there isn't.
Even with the vehicle supply issues. It doesn't seem like there's maybe a falloff in origination volumes or anything like that.
Potentially you could see later in the year of shift more into the use sides of the.
The new side from an origination standpoint, but we haven't seen that we haven't seen that yet.
Okay, Great. That's all I had thanks very much.
Thank you.
Our last question comes from Rob <unk> with Autonomous research.
Good morning, guys, you highlighted the expense ratio lower and repossession expenses contributing there longer term as repossession expense does normalize would you expect the the <unk>.
The ratio to revert or do you have some levers that you can use to offset there.
I think we'll stay in that 1819 range, Rob I mean, we've been pretty consistently under two under 2%.
But I think we're pretty tighten that range.
Yeah, Rob Scott.
Okay.
How do you do.
Possession of expenses coming back collection costing down because of lower delinquencies originations, possibly.
The expenses, possibly also staying flat so the puts and takes as evidence that we've operated in the 181 9 million Bobby.
The stay there.
Right right that makes sense.
The broader question on credit and how Youre thinking about modeling going forward, obviously losses in 2020 and year to date have not followed what macro trends and historical correlations might have suggested.
Wondering how you treat that going forward, you're going to bake that in and trained models at least partially using 2020 data or do you just kind of the week that from the record.
The.
That's the that's the secret sauce kind of question.
So we want to we want to be.
Need to come out of the situation right now before we decide whether to factor all of these two years of this one and a half years.
The artificial the performance that we've seen.
We know that our models go back several years, particularly the CSO model and and we're going to be of going just talking just going to have to wait and watch and see whether there is any way in which we can make.
Make sense of this data are is what we need to factor it off of PD.
Okay got it thank you.
Thanks, Rob.
Alright, and there are no further questions at this time I will now turn the call over to Mahesh of <unk> for final comments.
Thank you and thanks, everyone for joining the call today and for your interest in SC or Investor Relations team will be available follow up questions and look forward to speaking with you again next quarter. Thanks a lot.
Thank you that does conclude todays presentation. Thank you for your participation you may now disconnect.
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Yes.
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