Q2 2021 Santander Consumer USA Holdings Inc Earnings Call
Following today's presentation the floor will be open for your questions. Please dial star 1 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.
Thank you Sarah.
Everyone and thanks for.
Joining the call today.
On the call we have our CEO mass.
And our CFO Bonnie.
Certain statements made on todays call maybe forward looking.
Please refer to our public.
SEC filings.
Risk factors with respect to these statements.
We will also reference certain non-GAAP.
GAAP financial measures that we believe are useful to investors and a reconciliation of those measures to GAAP was included in the 8-K issued earlier today.
With that I'll turn the call over to our CEO and Matt.
Thanks, Evan and good morning, everyone and thank you for joining us to review our second quarter 2021 reserve.
Before.
Cussing the quarter on.
I'll address the offer we received from our majority shareholder Santander Holdings USA on July 2nd we received a non binding proposal from <unk> to acquire all of the outstanding common shares of FSC. It does not currently on.
DSC Board.
As farm the special committee to consider the proposal as the special.
Committees review is still ongoing there will be no further details shared regarding this matter our guidance given on this call.
We politely request that no questions be directed to this topic during the Q&A portion.
Thank you.
Now onto the second quarter.
Which was another record setting quarter for Santander consumer.
Representing the most profitable quarter and the company's history with $1.1 billion and net income the highest level of quarterly originations at $10.5 billion and we finished the quarter with a net credit recovery of $79 million.
Total quarterly originations increased 34% versus last year with.
Strong increases and lease and non prime loans more than offsetting a decrease and prime loan originations due.
Due to a sharp reduction in incentive levels versus the prior year.
Overall consumer demand remains strong however, we remain cautious and our underwriting to ensure resiliency and all new originations, especially given the unique environment, resulting.
Thanks on the much talked about supply shortages and increased competition.
The U S economy continues to recover even though uncertainty remains.
June unemployment reached its lowest level since the onset of the pandemic and approximately half of the U S population has been fully vaccinated.
And our portfolio credit metrics remained strong with delinquencies.
And is well below pre pandemic levels and unprecedented loss rates highlighted by net by the net recovery this quarter.
Payment rates and both the deferred and non deferred populations are stable and deferral requests are in line to lower than 2019.
Low levels of deferrals and government stimulus and the first quarter contributed to an increase and early stage delinquencies.
Quarter over quarter, but delinquencies remained well below historical levels.
Record used vehicle prices, coupled with low charge offs led to a net recovery during the second quarter.
June was the first month over month decline and the Manheim index in 2021 and this trend continued in the mid July report, but prices are expected to be elevated for some time.
As anticipated significant vehicle inventory shortages pressured industry sales as the June Saar fell to $15.4 million from $17.7 million in March.
New vehicle inventories are at historical lows, but the month over month pace of decline moderated in June.
The dynamic will likely be a challenge.
And for new vehicle sales and therefore, a prime originations for the remainder of the year.
Q1, primarily due to strong credit performance and an improved macroeconomic outlook.
At the end of the second quarter, our coverage rates down 17, 8 percentage remains more than 100 basis points above our day 1 season.
This level of reserve accounts. So the risks that credit performance may worsen month to governance, the governor of government stimulus programs expire and used vehicle price has been normalized.
We believe holding reserves at this level is appropriate given the continued uncertainty around the pandemic that delta variant and long term unemployment trends.
As we have discussed the last couple of quarters.
Digital investment is a priority for our company as we look to the future.
Yesterday, we announced the debut of and innovated.
Digital auto finance experience set of streamline and enhance our interaction with our dealers and customers a solution was developed with horrifying and established digital retail.
Leader to further our vision of simplifying the car buying experience.
Experience.
And as digital product product suite will enable dealers to self service across key vehicle underwriting interaction points with FC enhanced their ability to sell and enhancing their ability to sell vehicles.
The dealer digital experience includes tools to identify cars on the dealer lot that fit our consumers' budget as well as specifications to completely.
Quarters, and streamlining the financing process.
And this dealer tool is the first of several technology advancements we plan to rollout over the next several months as consumer purchasing habits shifts vehicles, a shift we are committed to changing our process and giving dealers the right tools and simplify the vehicle finance process.
We're also committed to educating our customers.
And our consumers about their finance options and ensuring a full understanding of our products. The next wave of technology enhancements will be focused on consumer financial literacy at the time of purchase throughout the life of the loan on lease and if modifications requested that.
Pandemic has highlighted the need to automate these tools for consumers, who have proven to be resilient and prefer to research ops and options online before.
<unk> all without speaking to 1 of our representatives.
With that I'm going to turn the call over to family for a more detailed review of our results.
Thanks, Mahesh and good morning, everyone turning to slide 4 for some key economic indicators that influence our performance.
Economic indicators have improved supported by the vaccine rollout.
Low continue federal aid and reopening across the country unemployment is down but remains well above pre COVID-19 levels with several million dollars less jobs today than in March of 2020.
Although the economic recovery is well underway, we remain prudent and our approach the impacts of the pandemic and the health of the consumer.
After stimulus benefits expire remain uncertain.
Covid spikes from the Delta variant have slowed reopening and caused some states to consider re instituting restrictive measures and.
In addition, we're also monitoring the recent uptick and inflation and the potential impacts to consumers.
Our performance will depend on the economic recovery.
Continuing and the health of the consumer remains strong until sustained employment returns across the economy.
On slide 5 there are a few key auto factors that influence our origination volume and credit performance.
New and used vehicle sales decreased versus last quarter.
<unk> demand remains high but supply shortages.
Can and elevated vehicle prices are pressuring sales the Manheim index increased 12% and June compared to March and 34% year over year.
As expected used vehicle prices are beginning to moderate, especially in the last month of the quarter. The mid July index decreased 2% from the end of June.
<unk> prices will continue to trend towards normal and decrease in the fall following seasonal patterns on average we expect 2021 used car prices will increase approximately 20% to 25% compared to 2020.
Turning to slide 6 for origination trends.
During the second quarter, we originated 10.
And $10.5 billion of auto loans, and leases, leading to 34% growth and volume versus last year and 22% higher than the first quarter of this year.
Reviewing our originations by channel core loan originations increased 79% year over year total Chrysler capital loan originations decreased 2% made up of Chrysler.
<unk> Prime volume, which decreased 15% and Chrysler non prime volume, which increased 41%.
Lease originations more than doubled reaching $2 billion and the quarter.
Volume and the quarter was driven by continued strong demand from consumers spurred by tax refunds and the third round of stimulus checks are core loans.
Patients have been strong since the onset of the pandemic and we expect that trend to continue.
Although competition has been intense our 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.
The majority of volume from this channel has.
Originally come from new vehicle sales, however, given the lack of new vehicle inventory and fewer incentives from <unk>, our strategy and mix shifted to more used vehicles.
We are very pleased with the level and credit quality of originations and our non prime channels, we remain disciplined and our approach from a risk perspective, while maintaining strong.
Long margins amongst heightened competition.
Prime loan originations increased 29% over the first quarter of 2021, however decreased 15% from the second quarter of 2020.
As we have discussed prime volume and 2020, especially in the second quarter was supported by significant OEM incentives and the market exclude.
Historically our capital.
We expect pressure on our prime volumes for the remainder of the year, depending on the supply of chips for new vehicles.
Lease volumes returned to more normal levels, increasing a 109% compared to last year. As you may recall lease volume was most impacted by the pandemic and 2020 as.
Lucid of heavy regions of the country remained and quarantine for an extended period of time plus significant incentives on the retail side likely shifted volume to loans.
Overall, our strong originations on a reflection of our team's execution and our relationships with our OEM partner and dealers, we believe the credit quality and margin profile.
File of each channel positions us well for future profitability.
On to slide 7 we break down our 2021 monthly originations by channel and product.
Our core loan origination began 2021 relatively in line with the prior years and followed the typical seasonal patterns with tax refunds.
<unk> previous years, we did not experienced a drop off and the first half of the second quarter because of the third round of stimulus checks, which kept demand elevated.
Coupled with higher demand or market share also increased due to our competitive market offering and dealer relationships.
Second quarter dollar volume was up nearly 60%.
Unlike or to the second quarter of 2019.
Volumes are elevated due to the continued strength of used car prices.
The average amount financed and our core segment has grown 3% to $4000 per vehicle compared to historical norms.
Unit growth for the quarter increased nearly 40% compared to 2019 and 45% compared.
Compared to 2020.
Chrysler capital non prime experienced a similar uptick for the first 4 months of the year and ended the quarter in line with 2019 levels.
Unit growth was also strong increasing 33% over 2020, and 6% compared to the second quarter of 2019.
Still on test incentives continue to influence the.
The level of our Chrysler capital Prime loans that beginning of the quarter benefited from strong demand and incentives exclusive to Chrysler capital.
However, as new vehicle inventory levels continue to decrease so to OEM incentives and the market.
Our volume, especially in June was impacted by both lower sales and lower market share as.
And were significantly reduced.
The prime volume ended the quarter in line with 2019 levels and continues to be supported by our partnership with Santander Bank.
Lease volume trends follow a very similar pattern as prime loans, starting the year at elevated levels and trended down throughout the quarter due to lower sales and reduced incentives we expect.
Incentive lease and prime loan volumes to remain under pressure as long as inventory levels and still onto incentives remained low.
Moving to page 8 and our <unk> partnership.
Year to date industry auto sales, including salons, and <unk> sales have benefited from robust consumer demand our penetration rate decreased versus the first quarter.
Both <unk> and remains in line with performance experienced in 2019.
We remain committed to still launches and providing exceptional service to their dealers as inventory.
Tori levels normalize, we expect incentives to normalize as well, increasing our market share and our volume.
Turning to slide 9.
Our servicer.
And there is balance increased to $15 billion at quarter end up 35% versus the prior year quarter, driven by $2.6 billion and originations via our agreement with Santander Bank and $300 million and off balance sheet Prime loan sales.
This platform generated $23 million and servicing fee income this quarter.
Moving to slide 10.
And for an overview of our liquidity.
As of quarter, and SCS committed funding, including Unutilized lines was approximately 55 billion.
At the end of the second quarter, we had approximately 94% of unused capacity available on our $11.8 billion of third party revolving warehouse lines and.
We also have.
$3 billion of unused capacity from our parent Santander.
Utilization levels have significantly been reduced in 2021 as customer payment rates have been elevated and we have successfully executed several large ABS transactions, along with our unsecured borrowings from Santander and 2020.
Given our greater utilization of ABS.
And unsecured debt, which are generally fixed rate liabilities, our balance sheet has become less sensitive to rate movements. We have historically been more sensitive to rising rates and we are today due to larger utilization of floating rate bank facilities.
The ABS market continues to be very supportive of our securitization platforms during.
In the quarter, we executed approximately $5.3 billion and asset backed securities across 2 loan transactions and 1 lease transaction.
All strength, all 3 transactions were upside that record low cost.
Subsequent to quarter, and we executed our third as star transaction of the year for a total of $2.5 billion.
This was the largest retail.
ABS transactions since 2008, and the largest non prime auto ABS deal on record.
And the transaction price of the tightest weighted average credit spread and lowest cost of funds and the SCR platform history.
Our liquidity position and continued investor demand positions us well to benefit from the macro environment and auto and grow.
Auto 8 across all of our channels.
Moving to slide 11 to review, our financial performance for the quarter versus the prior year quarter.
We achieved the highest level of quarterly earnings in company history more than $1 billion of net income or $3.45 per share.
Our earnings through the first half of 2021 and also the highest level.
Volumes generated and any single full year at SC the.
And the drivers of the quarter's strong results on a combination of our solid execution and supported macro conditions.
Interest on finance receivables and loans decreased 60 basis points due to the sale of the personal lending portfolio.
Interest on retail installment contracts increased.
<unk> of earning percent due to higher average loan balances during the quarter, which were up 6% or $1.8 billion.
Net leased vehicle income more than tripled primarily driven by an increase and the amount of lease dispositions the gain on sale from disposed units as well as lower depreciation levels.
Net yield on leased vehicles increases.
Increased to 9.6% up from 2.9% last year and 7.3% last quarter.
Interest expense decreased 23% driven by lower benchmark rates and lower average debt balances.
Cost of debt decreased 60 basis points versus the last year and was stable versus the prior quarter.
<unk> 7.
Credit loss expense decreased more than $1.1 billion due to a net recovery during the quarter as our auto recoveries exceeded gross losses and $186 million seasonal reserve release compared to significant reserve build in 2020 as a result of macroeconomic factors and COVID-19.
Profit sharing expense increased $39 million to sharing of lease residual gains which to launches.
Total other income improved $122 million due to the sale of the personal lending portfolio.
As a reminder, losses from that portfolio were recorded in other income.
Operating expenses increased 14%, primarily due to increased compensation.
And benefit expenses, and an increase and repossession expense versus the prior year. When we presented were temporarily halted due to the pandemic.
Continuing to slide 12 to cover delinquency and losses.
Our credit performance remains very strong and continues to benefit from the proactive credit tightening actions that we implemented.
And at the start of the pandemic the extensive customer relief initiatives and provided our customers the elevated governments and support and our robust underwriting capabilities.
Versus the prior year quarter early stage delinquencies increased to 120 basis points and late stage delinquent delinquencies were stable year over year.
Despite the increase in the quarter early stage delinquencies were nearly 400 basis points lower than 2019, and late stage delinquencies were 230 basis points lower.
As a result of our customer relief efforts during the pandemic and strong payment rates experienced in the first half of the year gross losses are at historic lows the.
And the rig growth.
Charge off ratio of 6.6% as 450 basis points lower than last year, and 950 basis points compared to the second quarter of 2019.
Our recovery rate as a percentage of gross losses was approximately 115%.
<unk> rates continue to benefit from low gross losses and high used car prices.
The net recovery ratio of 1% as 700 basis points lower than last year.
Ah stimulus benefits forbearance programs and mortgage moratoriums, and we expect delinquencies to increase and the latter part of 2021, and then begin to normalize throughout 2022 subject to any further government stimulus or deferral programs.
Grams.
Turning to slide 13, we detailed monthly loss and recovery rates versus 2020 and 2019.
Gross charge offs continued to trend lower as consumer balance sheets remain strong we expect this trend to continue into the third quarter.
Recovery rates as a percentage of gross losses and the quarter remained elevated.
The ratio of benefits from low losses and record used car prices on.
Low prices have begun to plateau, we expect used car prices to remain above historical norms into 2022.
And our own portfolio looking at auction prices on a vehicle basis, we experienced 44% increase and the quarter versus the prior year second quarter.
<unk> at 37% higher than 2019, and a 19% increase from the first quarter of this year.
Rates were strong across all vehicle ages and vehicle types.
Moving to slide 14 to review the loss figures and dollars and the walk from prior year.
Losses, and the quarter decreased $540 million, resulting.
Net recovery of $79 million.
Losses decreased $340 million due to strong recoveries 219 million due to lower gross charge offs and offset by $18 million due to higher balances.
Turning to slide 15, and the seasonal reserve.
At the end of the second quarter, the allowance for credit losses decreased to 180.
Faulting and Julian from last quarter, driven by an increase of $188 million due to higher asset balances a decrease of $283 million due to improvements in credit quality and portfolio mix and a decrease of $91 million due to improved macroeconomic factors.
Despite improvement and the macroeconomic outlook, the overall risk and uncertainty.
And the portfolio still remain.
Concerns over recent spikes and Covid cases, 7.5 million fewer jobs and pre pandemic levels and used car prices normalizing over the life of the loans are incorporated into our analysis and.
The macro scenario, we use quarter over quarter did improve our baseline macro scenario assumes unemployment.
$6 or approximately 4.5% and the fourth quarter of this year and come down to 4% and the fourth quarter of 2022.
Moving to slide 16 to cover seasonal by asset designation.
<unk> coverage ratio increased to approximately 36% up 570 basis points driven by higher delinquencies.
And we will average higher percentage of deferred accounts and a higher percentage of delinquent deferred accounts.
<unk> balances decreased approximately $200 million this quarter as deferral request remain low.
We believe we are adequately reserved for a riskier DDR portfolio with a coverage ratio of over 36%.
The non <unk>.
<unk> average ratio decreased to 15% down 200 basis points versus last quarter and in line with our day 1 seasonal reserve.
The coverage rate dropped due to the improved credit profile of originations lower delinquency and strong payment performance.
Overall, we feel our reserve is appropriate given the non prime nature of our portfolio.
So the ongoing benefits of government stimulus and the remaining uncertainty and the economic recovery.
Turning to slide 17.
Our expense ratio this quarter was 1.9% up 20 basis points versus the prior year quarter, and 10 basis points lower than the second quarter of 2019.
Operating expenses increase.
Increased $36 million driven by higher employee benefits insurance claims and repossession expenses as business activities normalize.
Turning to capital on Slide 18.
Our CET 1 ratio for the quarter was 18, 1% up 160 basis points versus the first quarter our.
Our capital levels were.
And by record income and the quarter offset by an increase and assets of approximately 1 billion.
Our board has declared a dividend equal to 22 cents per share to be paid and the third quarter.
At the end of the quarter, the Federal Reserve announced the maturity of the capital preservation rules and reinstituted the stress capital buffer framework, beginning and in the third quarter.
Supporting our parents use of stress capital buffer with a minimum of 2.5%.
Our capital levels are in excess of our 11, 5% target and we've.
We've discussed in the past we remain committed to utilizing this excess capital and accretive manner. We're excited about the opportunity to reinvest and the business as we announced yesterday with our digital.
As well as continuing to grow originations by enhancing our dealer experience, we will also be opportunistic and strategic opportunities arise.
To conclude the second quarter was another record quarter for SC. The portfolio has performed well demand for vehicles remains high and our portfolio has proven to be resilient.
Our disciplined underwriting over the years and our robust risk framework that we have established position the company to capitalize on the current auto industry tailwind.
Our balance sheet capital and liquidity remains strong and we will continue to take a prudent approach as we manage through the uncertainty and the market.
Before we begin Q&A I'd like to turn the call.
<unk> over to Mahesh Ash, Thank you Fermi I wonder consumer by thanking all of our employees and <unk>.
Fight the volatile environment caused by the pandemic continue to execute at the level of dedication and Thats unsurpassed, our employees' hard work and Houston, followed us and give us confidence as we look to the future and physician and the company's long term success.
Our employees are.
Our top assets, ensuring that engagement and supporting our communities and stopped priority for US we continue to make progress and on the.
And our diversity equity and inclusion programs and have had tremendous response from all of our employees and it's clear that our team is ready to drive change and how we interact recruit and manage the business.
Over the past year, we've more than doubled our.
Charitable donations in support of non nonprofit organizations and our communities I'm very proud to announce that we plan and additional $50 million donation to the foundation, which will fund a multiyear program focused on transforming lives of low income students young adults and families across the country. The programs with a target closing the digital divide and aiding students and families and education.
And to boost digital and financial competencies. Our goal is to reduce the opportunity gap day Minister shows the social and economic disadvantages and improved life outcomes.
In addition to the charitable donations this year, we'll be launching several customer relief initiatives for our existing customer base although.
Although credit performance has outperformed through the pandemic, we believe consumers.
And progress with tough times, and stimulus and and we are adjusting our servicing policies to accommodate our customers who have been severely impacted by the pandemic.
We are committed to offering superior customer service, starting with financial literacy at the final application and eating and a soft landing in case of hardships along the way.
With that I'll open the call up for questions operator.
Hello, and we will now open the call for questions. Please limit yourself to 1 question and 1 follow up question. Thank you. Our first question comes from Moshe Orenbuch with credit Suisse.
Great. Thanks.
Excellent results I would say.
The discussion of excess capital versus an 18, 1%.
And the number exceeds.
And $1 billion tier 11, 5%.
And just trying to respect that.
Question, maybe it's a friend and cash but.
Are you able to buy back stock now.
The accounts and stuff right.
Hey, good morning, it's Fannie.
So, yes, so what and the federal reserve and terminated the interim policy and the capital preservation rules that does provide us a lot of flexibility with our capital.
Distributions.
The board has declared that the ordinary dividend this quarter, we're going to continue to evaluate all the alternatives around capital distribution, including share buybacks.
But nothing further to announce on that front outside of the dividend that we've declared.
Okay.
And kind of my follow up question would be.
Given you've had really strong net interest income.
You talked about standard funding costs can you can you just talk can you put that together for us because also.
Coupled with the strong lease gains.
Obviously.
Paul you are seeing used car values.
Kind of moderate theres still going to likely be better. So can you put those kind of 3.3.
3 things together for us in terms of the outlook for net interest income.
Sure. So I'll talk about NIM kind of trends and I'll start with.
With that going on in dollars, so were up year over year and quarter over quarter. Because balances are also up on the loan side were up about 6%.
Year over year.
And as you mentioned, we're also benefiting from lease even though the average balance there is down around 2%, but obviously thats more than offset by.
And the gain on sales and the lower depreciation expense so lease on its own and from a dollar standpoint increased about $280 million.
Year over year over year.
On the right side of it. We're also up this quarter because of the uptick and lease recall, if you'd think about last year.
Lease yields really dropped.
Because of the higher depreciation expense and we just had lower units come back to us.
This quarter, we saw continued record prices depreciation expense continues to be low net yield lease of around 9.5%, which is a which is a record for us.
I don't know if that will persist.
And as we mentioned, we do expect used car prices to come down.
But generally speaking lease yields.
Our 8.5% almost a year to date and theyre going to look really good compared to 2020 and.
And 2019 on the auto loans side yield was up 30 basis points compared to last year. Despite.
And the cost of funds dropping about 60 basis points.
And really that's a result of our prime assets, we've talked about kind of the mix between prime and non prime and and since we did sell.
$2.5 billion, plus or prime assets and the first half of the year, you will see an uptick on the auto loan side.
As well.
Overall yield on earning assets and NIM. If you just look at those that we disclose you got to keep in mind that last year's results had personal lending business included which is a 25% plus top line yield assets. So that is offsetting some of the benefits that I just went through.
But to be 300 basis points higher than last year is pretty exceptional performance. So there are a lot of moving parts I think the auto loans will be stable to slightly down to do some of that competitive pressure that we mentioned.
And it will also be passing on some of the cost of debt benefits that we've seen at.
<unk>.
And as I mentioned, I think will remain elevated.
Thanks, a lot.
Our next question comes from Betsy <unk> with Morgan Stanley.
Hi, good morning.
Good morning, good morning Betsy.
Your first question and it's.
I wanted to see volume is slightly different just wanted to understand.
How you are thinking about the supply of autos entering into the market I mean, I think that's at the crux of how long this used car price going to stay high. So what are you hearing from your dealers.
Your partners, we hear different things from my colleague and covers autos you know some guys have figured out the chip problem you know others still have it but you know trying to understand what you're hearing and thinking and when you think the supply chain is going to be resolved.
Yes, thanks for the question Betsy So a couple.
And the 2 data points that we are going with and there are several obviously from the industry, but fundamentally the new vehicles, we sell our Chrysler vehicles and.
And I think Carlos about as the CEO of Chrysler recently said that he expects this problem to continue well into next year. The chip problem that is we also talk to our dealers and dealers tell us theyre running at historically low levels.
Full of things and entry on new vehicles.
So putting the 2 together.
And we fully anticipate that there will be there'll be a depletion and there'll be a low level of auto new vehicles have lagged going into the next at least the next 2 to 3 quarters.
Until something something definitive it happens on the production side and my understanding of the.
Others of enrolment and it's concentrated among a few manufacturers and therefore, there's a high dependency on a couple of factories being able to turn out the volume and I also understand and autos consumer only about 10 per cent of the total chipset on manufacturing.
So these are all data points you'd be sort of hold on to the good news is that Chrysler has probably got some new models that they are waiting to launch this.
Here and we're hoping that that will see some.
So.
There'll be a good reception and the market and we are we are.
Looking forward to support and Chrysler.
Through the sales of some of those new models that they have the 2020.2 as well as.
And as well as the new models as far as debris <unk> and.
<unk> Grand Cherokee and the Grand Wagoneer and.
Chip.
Does that answer can you talk a little bit.
Yeah, no that's great and <unk>.
And can you talk a little bit about how you anticipate.
Used car prices to respond as the supply chain is you know fixed stroke improved is this going to be a.
A slow burn and back to whatever normalized.
All his or do we remain at these elevated levels and.
And just trying to understand how you're thinking about that.
Yeah Betsy.
I definitely think it's going to be a slow burn and back to normal and we do not see and.
Necessarily a cliff event, where used car prices drop all in 1 month or 1 quarter I.
It's on chip shortage on its own and we'll keep you used car prices elevated the supply shortages and as just mentioned will also keep things elevated for a period of time, we do think we will see a drop we saw in June.
We started at the beginning of July even though last week and seem to have flattened out so.
I think Victor I mean compared to historical norms, it's going to be elevated, but we do see it gradually coming down.
Overtime.
Alright. Thanks.
Our next question comes from Steve Kwok with K B W.
Hi, Thanks for taking my question and I guess just.
1 question around the origination as we.
Think about it going forward given the new vehicle shortage along with the competition can you just.
Talk about your thoughts on originations going forward.
Sure good morning.
So total originations were up.
We think it will be up.
Up year over year, compared to 2020 and compared to 2019 and really that's a combination of unit growth, which is driven by pent up demand consumers with healthy balance sheets and general move away from public transportation and the second part of that is pricing vehicles I mentioned.
And size for our average finance amount is up so.
So I think both will drive higher volumes for US. We do think we will see some pressure on the prime loans and leases as those originations and Mahesh mentioned are heavily weighted on new vehicles.
And so those will probably be reduced and the second half of the year, but we.
Obviously.
And that.
It didnt feel that impact this quarter with a record level of originations. So I think the demand will be there I think our position with our dealers will keep up that momentum and originations for for the rest of the year.
Got it got it and then if you can do.
Right around the competition.
On the.
And on your core business and just what Youre seeing there understanding pie and there's a lot of competition, but that's not really the market you cater to.
Well, Scott I would say, we kind of cater full spectrum, both on the prime and non prime side and you can see that just based on the percentage of our.
Our prime and lease originations, but.
The comment on competition.
And we've said it now for a couple of quarters as it is intense but I would characterize it as still rational and we haven't seen anyone getting really too aggressive on policies, but we have seen some pressure on pricing.
Anytime you have really strong.
Wrong capital markets, and and robust access to liquidity youre going to see that heightened.
Competition, you couple that with.
Fewer vehicles to finance and you have a really good combo to spur competition again, it didn't hurt us this this quarter.
But the competition is there and.
Sometimes we have to make tough decisions between maintaining share and maintaining margins, we generally like to maintain our margins and general, especially on the on the non prime side.
For the competition does come and go it does ebb and flow month to month quarter to quarter, we're looking to be very consistent with our program.
And consistent with our profitability. So the competition is going to be there yeah, and the 1 thing that I'd like to on here is that we understand and our competitors I think pretty well there and there's some of them as Fahmi said, who come in and out of the market and to some that are staying there and the important thing here is to maintain both the margin as well as our credit quality, we don't want to get into sort of a race to the bottom kind of scenario and.
And we've kind.
Brands and the line of thought is great quantities and so.
Got it thanks for the color and per quarter.
Thank you Andrew.
Our next question comes from John Rowan with Janney.
Good morning, guys.
Yes.
And again kind of respecting your.
Asked and I talk about the offer is there any timing around when the board will be discussing stock repurchases.
Meeting or some type of.
Mark that we can look for.
And that will be discussed.
Good morning, John No Theres, no meeting or timeline.
And we're continuously evaluating.
And all kinds of different capital deployment alternatives and share buybacks are 1 of those.
Okay and then.
You guys have given net charge off guidance and the pass.
Past now assuming maybe you don't want and given that charge off guidance here.
Either talk about what you think about net charge offs will be for <unk> or Alternatively are we still running and a plus 100% recovery environment post the end of <unk> and that's it for me. Thank you.
Thanks, John.
So you know obviously the losses, we're experiencing today are certainly well below kind of normal levels.
Gross charge offs for the quarter were 450 basis points better than last year, and 950 basis points better than 2019.
We do not think the losses will stay this low going going forward.
Forward, especially on the long term and we've already started to see it with our early stage delinquencies ticking up quarter over quarter, although they are still well below normal but they have shown some signs of increasing there over the last couple of months, So I think near term.
And we will still with the consumer still having really strong.
<unk> balance sheet. So we should expect to see continued strong credit, especially for the second half of this year, but long term, we do expect it to normalize.
You couple that on the growth side, you coupled that with the used car prices and the commentary we had there on used car prices trend.
Trending down to normal so I think youll see both.
Position of gross losses, as well as on recoveries and ultimately our net losses.
And we do think it will be gradual again, we don't think it's going to be a cliff event, but you will start to see it delinquencies and the latter part of 2021, and then translate into losses and into 2022. So I think just 1 more thing John and thanks.
And normal ish and is that there is there's a couple of.
External events that we are keeping a close watch on Monday September 6th Nathan.
Assistance programs come off the other is how much dry powder do our borrowers have saved up which they are going to use to what's being done there auto loans, we continue to see very high levels of payment rates and notwithstanding the fact that early stage.
Thanks for the questions are picking up all of that stuff eventually as Fahmi said earlier, it's all going to have to normalize at some point and we generally now think looking at all the data for the past few months and it's going to be a gradual normalization and rather than any sort of cliff connection and all of this and supported by used car prices.
And the sort of deficit or the low levels of inventory have you on new vehicles.
And.
And and the value of the day of the car and it has increased in terms of the fact that people want now to field.
Feel safe are traveling and a cause and taking public transport is sort of a general statement. So I think all of that is working in our favor and we just have to wait and see what happens after September 6th and how long does that process take to unwind.
Okay. Thank you very much.
Thanks.
Our last question comes from John Hecht with Jefferies.
Good morning, guys.
And I don't know if we'll get another conversation with you guys on a public call, but it's been it's been a good experience. So good luck with everything.
My question is just pertaining yoga and more details about kind of elevated and used car prices, we've talked about the supply chain impact and I'm I'm I'm wondering what your guys perspective is on the demand side of the equation I mean, how much has used car demand and pulled forward because of stimulus and maybe.
So that tends to use public transportation how much of.
And call it profit bidding from big used car channels like Carvana and and so forth is it do you think is driving the market and how fast can those patterns change.
Okay.
So we think.
And those sort of trends have you seen you're exactly right. There's a lot of a lot of the the the sort of call them virtual and Tonight.
Uh huh.
Providers like Carvana et cetera are very active and the auction lanes and they are putting out are instead and picking up vehicles.
Some.
That is driving that and driving the inflation and used car prices and I think some of it has to do with genuine demand and people wanting to go out there and get it.
And for safety purposes easier to get around to safer et cetera.
So we think I'm not I think it's too early for us to say that there's this sort of a structural correction, that's going on where people.
And I'm moving away from from from collective transport and commodity individual forms of transport.
But generally we are seeing a couple of things 1 is the shift and to vehicle purchases. So as a general thing. We're seeing obviously for you Scott is much higher sales and the other thing the other and tended to trend and tendency that we are seeing is more and more.
And digital.
And there they are and they are discouraging the understand that borrowers wouldn't increasingly want to do their shopping and get every single point of interaction and as much of the fulfillment process on the internet as possible and which is why we've done what we've done with notified and sort of thinking a little bit ahead of how the market is likely to evolve with.
The next 3 to 6 months to a year, we're kind of preparing ourselves for that so you know used car prices largely driven by demand and the and the paucity of new view inventory new inventory will come back hopefully next year. Hopefully later this year, but probably sometime into next year and wants to chip thing.
And what's.
And I think we might it's a little early but I think we might be going into a period of significant vehicle ownership.
And more and more remote.
And more fulfillment.
Great I appreciate that.
Thanks.
There are no further questions at this time.
I'll now turn the call over to Malhotra day, Jeff for final comments.
Thanks to everyone for joining the call today and for your and interest and I see we appreciate you about sufficient support and have a great day and stay well.
This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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