Q3 2021 OneMain Holdings Inc Earnings Call
[music].
Yeah.
Welcome to the Onemain financial third quarter, 2021 earnings conference call and webcast hosting the call today from Onemain.
As Peter pointed on head of Investor Relations today's call is being recorded.
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It is now my pleasure to turn the floor over to Peter.
You you may begin.
Thank you Britney good morning, everyone and thank you for joining us.
Let me begin by directing you to page two of the third quarter 2021, Investor presentation, which contains important disclosures concerning forward looking statements and the use of non-GAAP measures. The presentation can be found in the investor.
The section of our website.
Our discussion today will contain certain forward looking statements, reflecting management's current beliefs about the company's future financial performance and business prospects and these forward looking statements are subject to inherent risks and uncertainties and speak only as of today.
Factors that could cause actual.
Actual results to differ materially from these forward looking statements are set forth in our earnings press release and include the effects of the COVID-19 pandemic on our business our customers and the economy in general we caution you not to place undue reliance on forward looking statements.
If you may be listening to this via replay at some point after.
Today, we remind you that the remarks made herein are as of today October 21, and have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Shulman, our chairman and Chief Executive Officer, and Micah Conrad our Chief Financial Officer.
After the conclusion of our formal remarks.
We will conduct a question and answer session. So now let me turn the call over to Doug.
Thanks, Peter and good morning, everyone. We appreciate you joining us today.
After I take a few minutes. This morning, reviewing our financial performance for the quarter I'd like to spend the bulk of my time discussing the economic.
For our lending products and the progress we're making on the strategic initiatives that will allow us to continue to realize our mission of improving the financial well being of hard working Americans.
I'm quite pleased with our third quarter performance as we once again saw strong.
Climate loan originations throughout the quarter, resulting in an 800 million dollar increase in receivables.
Our capital generation was excellent in the quarter and we remain well positioned for continued growth with healthy demand bolstered by our strategic growth.
<unk>.
In the quarter, we generated $360 million of capital.
66 million more than the prior year up 22%.
C&I adjusted earnings for the quarter were $2 37 per share up 8% over the third quarter.
<unk> of 2020.
Our record low loss performance largely reflects the credit tightening actions that we took in 2020 and the government support programs over the last year and a half.
Third quarter losses reached an all time low for Onemain of.
Three 5% and while we anticipate credit normalizing over time, we feel confident about our ability to continue to generate strong risk adjusted returns.
The economic and business trends, we observed in the quarter remain positive labor.
Markets continue to improve and wages are rising modestly which is a positive for our customer base.
Household balance sheets remain healthy.
Savings rates and retail deposit levels remain elevated and revolving credit balances have declined.
Consumer.
We are confident and continue to support economic growth through personal consumption.
Importantly demand for our product has picked up to pre pandemic levels and is again driving portfolio growth, we saw strong originations in the quarter.
Up 34% compared to a year ago, and 6% higher than 2019.
This resulted in third quarter receivables growing 7% year over year and 4% over the quarter.
The environment is currently positive for consumer.
Lending, but nonetheless, we will remain vigilant and continue to closely monitor economic conditions as we emerge from the pandemic.
Let me now pivot to provide an update on a few of our key growth initiatives as I've said before our vision is to be the lender.
Place for non prime consumers, we're leveraging our core strength lending to the non prime consumer while also expanding our suite of products services and experiences to deepen our customer relationships increase engagement and enhance our proprietary data.
To set we will provide a range of responsible lending options to meet customers' needs today and offer products and services that enable a better financial future.
I'm really pleased to tell you that we launched our two digital first credit cards.
<unk> of trade August.
As we've discussed in the past the cards are designed specifically for the non prime consumer by reinforcing credit building behaviors. If you haven't seen them already they are a great way and bright way plus and we encourage you to go to the website.
And linked to checkout, our differentiated offering.
As I've described before we're starting with a very deliberate pilot program designed to test marketing effectiveness line usage and credit results, we anticipate issuing about 60000 cards this year.
So you can give us a big enough sample for our pilot before we have a scaled rollout that will likely occur at the end of 2022.
It's very early days, but the initial results show strong take up rates by our customers and usage of the card for everyday purchases like gas.
Which will freeze and dining out. These early results confirm our hypothesis that our customers' affinity to the brand will drive adoption and then pairing of daily transactional product with our more episodic loan product will provide value to our customers.
The card it's Kirk.
Currently available to customers in about 60 branches on the West Coast and we recently began a direct mail campaign.
We plan to scale, our branch footprint and other origination channels further in the weeks and the months ahead, we're very excited about.
Our card offering and the value that it will provide to customers. We anticipate cards will be a multibillion dollar receivables business for us over the coming years.
As we discussed last quarter. We're also in the process of integrating trim, our financial wellness Fintech.
<unk> Tec with a focus on helping customers save money by analyzing bills and spending as of today. We are on track to offer trim to onemain customers by the first quarter of 2022 and are excited about the long term value trim will bring to our customers and our company.
We also added new channel partners. This quarter. One example, with sunlight financial our financing platform provider for home improvement contractors. The partnership allows us to provide credit to consumers at the point of sale with loans of similar size and economics.
To our core product, we anticipate further such partnerships in the future and it is another example of how we have built a flexible platform that allows us to meet customers, where and how they want to do business.
The critical investments, we have made and are continuing.
Going to make in technology, new channels and products and digital capabilities continue to have a positive impact on our results. Our strong quarterly performance would not have occurred without our strategic product innovations data driven operational enhancements and expanded.
Digital capabilities, it's worth noting that we continue to see about half of our originations closed digitally.
Finally, let me briefly comment on capital deployment during the quarter, we returned about $560 million to shareholders via our regular.
<unk> quarterly and our enhanced dividends.
In addition, we returned more than $140 million via share repurchases that included programmatic purchases under our current authorization as well as the nearly $100 million block purchase we made in the July secondary offering.
Using our capital allocation framework as a guide we will continue to invest in loans that provide value to our customers and meet our risk return criteria invest in the business to position us for the future.
And return capital to shareholders with that let me turn the call.
Over to Micah to take you through the financial details of the third quarter.
Thanks, Doug and good morning, everyone, we had a great quarter as the strategic growth initiatives, we've been executing over the past several quarters combined with strong consumer demand to drive healthy receivables growth.
Quincy levels remain.
And below the comparable period of 2019 and net charge offs reached an historic low of three 5%.
We remain confident in our full year guidance for net charge offs of approximately four 2% and managed receivables growth in the 8% to 10% range.
We earned.
$288 million of net income.
Or $2 17 per diluted share in the quarter up 17% on a per share basis from the third quarter of 2020.
On an adjusted C&I basis, we earned $316 million or $2 37.
Per diluted share up 8% on a per share basis from the third quarter of 2020.
Capital generation or C&I adjusted earnings excluding the impact of changes in loan loss reserves was $360 million in the third quarter up $66 million or 22% over.
Prior year.
Managed receivables grew to $19 $1 billion.
Up over $800 million from the second quarter, and up $1 3 billion or 7% from a year ago, reflecting strong consumer demand and the continued impact of our growth initiatives.
Interest income.
Income was $1 1 billion in the third quarter up 2% compared to the prior year, primarily driven by higher average net receivables.
Yeah.
Portfolio yield was 23, 8% as compared to 24, 3% in the third quarter of last year and 24, 1% in.
Quarter of 2019.
The modest decline was a result of competitive risk based pricing with better credit quality customers, which has contributed meaningfully to our receivables growth while exceeding our minimum 20% return on tangible common equity threshold.
For the full year, we continue to expect.
<unk> to be approximately 24%.
Interest expense was 235 million.
Down $15 million or 6% versus the prior year as we continue to benefit from the ongoing liability management actions, we're taking to reduce our cost of funds.
Interest expense.
And third percentage of average receivables improved year over year from five 6% a year ago to 5.0% this quarter.
We continue to expect full year interest expense to be in the range of 5.0 to five 2%.
Other revenue was $152 million.
In the third quarter up 13% compared to the prior year quarter.
The increase was driven by economics from our whole loan sale program, primarily $15 million of gain on sale revenue from the $160 million of loans sold during the quarter.
In August we added a third partner to our whole.
As a sale program, which increased our ongoing sales to $180 million per quarter.
Our intent has been to scale these partnerships to a meaningful level, which we have done on an annual basis. Our current level of loan sales will add $720 million of committed funding to our already.
All loans strong capital markets programs.
Policyholder benefits and claims expense was $45 million in the third quarter up 3% compared to the prior year as discussed previously over the last few quarters. Our iui claims have consistently moderated since the second quarter.
Already 20 pandemic, driven peak and are now back to normal levels.
Let's turn to slide nine to review, our originations and receivables trends.
We originated $3 9 billion in the third quarter up 34% from third quarter of 2020 and 6%.
<unk> 2000 in the third quarter of 2019.
You may recall that last quarter originations improved progressively each month of the quarter originations.
Originations remained strong for us this quarter, resulting in manage receivables growth of 7% year over year and 6% since the end of last year.
Sent higher our managed receivables. This quarter include about $283 million of receivables sold but serviced by Onemain for our whole loan sale partners.
Let's now turn to slide 10, and walk through our recent credit trends.
Strong credit performance continued into the third quarter as net charge.
Reached an all time low of three 5%.
This strong performance reflects the impact of government stimulus and the resulting low for 30 to 89 delinquency in the first quarter of this year.
Strong late stage delinquency performance also contributed positively to our charge offs as an example.
<unk> third quarter recoveries were $58 million $22 million or 61% better than the pre pandemic comparison period of third quarter 2019.
We expect net charge offs to show a modest seasonal increase in Q4, yet remains still well below 2019 levels.
And we remain confident in our full year 2021, net charge off guidance of approximately four 2%.
30 to 89 delinquency in the quarter was $2 two zero percent 10 basis points below the third quarter of 2019.
90, plus delinquency was one.
At five 7% 36 basis points below the third quarter of 2019 as we've discussed previously delinquency will trend towards normal levels as the positive impacts of government stimulus are further behind us.
Our loan loss reserve trends are shown on slide 11.
After reducing.
<unk>, our loan loss reserves by a combined $331 million over the past three quarters, our reserves increased 59 million this quarter to about $2 1 billion.
While our reserve ratio declined to 11.0%.
Our reserve increase was driven entirely by portfolio.
Folio of growth in our loan loss reserve ratio reflects improving economic forecasts.
Yes at some level of uncertainty that continues in the environment.
As of the end of the third quarter, we have released nearly all of the reserves, we had bill associated with the pandemic in 2020, we have strong confidence in.
In the future credit performance of our portfolio as indicated by our loan loss reserve ratio, which is now just 3% above pre pandemic levels.
Turning to slide 12 third quarter operating expense was $338 million, our third quarter operating expense grew one.
<unk> percent against comparable third quarter 2019 levels, even as we continued to accelerate investment in growth initiatives and while our receivables grew by more than 7% over that period.
Our current period Opex ratio of seven 2% is well below the seven 6%.
<unk> achieved in third quarter 2019.
Benefits from the efficiencies, we've driven over the past several years and illustrating the strong operating leverage of our business.
We expect full year 2021 operating expense to be at the higher end of our 5% to 7% growth range given our continued.
<unk> investment in the business and continued strong loan growth.
Let's now move onto the balance sheet on slide 13 are.
Our significant liquidity sources include about $600 million of available cash of $7 3 billion and Undrawn conduit capacity and $11 billion of unearned.
<unk> receivables once again, we've been busy on the funding side of our business in August we raised $600 million of seven year unsecured notes at three 875% and earlier. This month, we issued $1 billion ABS deal at a weighted average coupon of just zero point, 98%.
Reflecting strong demand for our paper and once again, demonstrating the strength and maturity of our funding capabilities.
Across our last three ABS deals we've raised nearly $3 billion at an average coupon of approximately one 5% and an average term of approximately five.
Five years.
Our balance sheet has never been stronger and we believe our funding cost improvements will give us even more leverage to grow our balance sheet in future years.
I'm also very pleased the strength and momentum in our business was recognized by Moodys, who recently upgraded our long term corporate rating to.
<unk>.
We continue to focus on delivering on our capital allocation framework, which includes delivering portfolio growth at attractive returns investing in our business and our future and returning considerable capital to our shareholders.
At September 30th our leverage was.
<unk> four times leverage was up modestly from last quarter, reflecting capital return actions in the quarter.
We paid our regular <unk> 70 per share quarterly dividend plus an enhanced dividend of $3 50 per share.
We also repurchased more than two 4 million shares for one one.
$541 million.
On slide 16, we've laid out our consistently strong dividend history, including the <unk> 70 per share regular dividend to be paid in November we will have paid out $9 55 per share during the last 12 months equating to a dividend yield of approximately.
<unk>, 16% at the recent share price.
With that I'll turn the call back over to Doug.
Thanks, Mike.
We're excited about our initiatives as we continue to invest for growth and rollout products that provide real value to current and new customers I'm pleased.
<unk> that we launched our credit card that is specifically designed for near Prime consumers and rewards customers for their credit building behavior. We are also pleased to see the very strong growth of our core loan product.
And while there is a lot more work to do I'm incredibly proud of our more.
More than 8500, Onemain team members, who serve our customers every day I thank them for their incredibly hard work, especially throughout the pandemic.
With that I want to thank you for joining us today, and we're happy to take your questions.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question is answered you may remove yourself from the queue by pressing the pound key again, we do ask that while you pose your question do you pick up your handset, perhaps with some quality.
Thank you.
Our first question is coming from Michael Kaye with Wells Fargo.
Hi, guys. Good morning, it seems like some investments were surprised how quickly the delinquency rates.
Got back this quarter I understand youre, not likely ready to give 2022 guidance, but could you give a.
A little more color on the trajectory up delinquency and net loss rates from here when could we see net loss rates hit the more 6% to 7% rates.
During the pick up in loan growth that you've seen and is 67% spoke considered normal for you folks given more.
Originations and the loan sales.
Hey, good morning, Michael It's Mike Thanks for your question.
I'll start by saying last year and a half has certainly been highly unusual and impacted by.
A very large federal stimulus, obviously that helped drive the expected for 2% loss rate. We had this year we're certainly.
Not underwriting to an expectation of 4% losses, if we did that we wouldn't be serving as many customers as we should be.
We do expect delinquency and losses to trend towards normal levels over time, that's what our underwriting assumes it's also what our reserves assume.
So at the same time, we see portfolio collections.
Each stage delinquency performance continued to be really really strong I mentioned recoveries in the prepared remarks, which was 60% higher than normal levels. We're still seeing strength. There. So with all that said, it's very hard to pinpoint exactly when credit performance will normalize on the charge offline my guess sitting.
And what day would be likely sometime in the back half of 2022.
Okay, and I wanted to talk a little bit more about the quarter over quarter declining asset yields could you just go over some of the bigger drivers Darrin.
Any thoughts on Q4 asset yields.
This year and maybe into 2020.
Thing here.
I think it would be helpful for all of US if we could gauge where asset yields could eventually stabilize.
Yeah. So let me I can comment on that I don't think we're ready to give out 2022, our guidance on yields quite yet.
In terms of the yield in the current quarter being modestly down against the prior.
Your year quarter in 2019 levels.
As we've said in the past, we don't underwrite to any one metric and that includes both credit yield or any other metric in our P&L. We're looking at bottom line profit and we will as we've said in the past underwrite every loan that meets our return hurdles. So in this case the yield was driven.
You too.
Our trading of a bit of yield if you will for higher credit quality growth with long term positive customer and an earnings impact.
This business Leverages, our improving funding costs, it's also expected to generate.
Some lower losses on this particular.
This particular group of business and also incremental operating leverage in terms of the fourth quarter.
As we noted on our strategic priorities, we expect full year yield to still be around 24% I would expect fourth quarter yield to be in a similar range as to where we are today.
And again.
Given buoyed by our continued year over year strength in our funding costs.
Thank you so much.
Thanks, Michael.
Our next question comes from Kevin Barker with Piper Sandler.
I apologize your line is now active.
Okay. Thank you.
Our recovery rates have increased to about one 3%.
Support total loans outstanding or a default at months.
Do you expect the recovery rates to remain near that level.
Going forward, just given some of the initiatives that you've put in place.
With any follow up on Jeff.
Okay.
Yes, Kevin I think that one is hard.
To really tell also I mean, we typically run recoveries and an average range of around 35 $35 million per quarter going back to looking at 19 levels. That's certainly those levels certainly did impact did increase during the pandemic and have continued to be really really strong as.
We mentioned.
The $58 million, we had this quarter.
I think some of it's strategy we've done a really good job of just optimizing our collection strategy with post charge off recoveries, but clearly there is also some indication of continued strength in consumer balance sheets. So I would expect.
This to trend down over time again, just like with the losses that Michael asked about it it's really hard to pinpoint.
Exactly when but.
I would expect that to moderate versus versus falling dramatically in one given quarter you might view okay.
Okay, and then you raised.
Our debt.
Below 1%.
In October.
And your current cost of liabilities is over 5% today.
Meanwhile, you know only 40% of your funding is secured versus 60% unsecured.
You know when you look out over the next year to maybe 18 months.
Where do you think you can get your cost of funding down to just given the improving ratings you've received the.
The mix shift towards secured and then where were your unsecured debt is now trading in the market.
Yeah. So.
A lot there I'll try to unpack it Kevin the you know in terms of the secured mix. We've always said, we target about a 50 50 split.
There is no science to that it's we're trying to indicate we want to see a balance of the longer duration.
Longer tenor unsecured.
The secured debt against our our shorter attached somewhat shorter tenor and lower cost ABS deals.
We've been very opportunistic in the market for the last year year and a half it was where the unsecured market has been trading so you've seen our our mix moved down to that 39% secure that we printed.
This quarter that'll move up a bit after the October ABS deal that we just announced the $1 billion.
But that's certainly an opportunity for us going forward.
Give me a call staffed I think the gist of your question is.
Interest expenses.
And we certainly feel like we have a lot of tailwind theyre not ready to.
Commit to where it will settle as a lot still to do.
<unk> found out here with rates, but I mentioned, our last three ABS deals in our prepared remarks, we've raised $3 billion this year, including both unsecured and ABS.
We've raised about $3 billion, which is 18% of our debt at about two 3%.
I'll talk about our whole <unk> whole loan sale programs, we've added $700 million of committed funding and in whole loan sales, which is really debt and capital efficient earnings.
Our next maturity is a $1 billion.
In may at six in an eighth we also have about $600 million of callable debt.
Round may or June at $8 seven eight so there is certainly a lot of opportunity here and I think secured mix is another one if we choose to move that up from 40% to closer to the strategic 50, 50 minimum hopefully I.
Captured all of your questions there.
Okay. Thank you for taking my questions.
Thanks, Kevin.
Our next question comes from Ben say can't take with Stephens.
Thanks, Good morning, Thanks for taking my questions.
First one.
The credit card business. So I know, it's early days very exciting I was.
Wondering if you could.
Maybe share how you're thinking about the economics of that business versus.
The existing portfolio.
Do there.
With your trials going on right now what what are you looking for before you fully rollout. Thank you.
Yeah, Hey, Thanks Vincent.
Look we said before we think the.
Economics, and the return on assets are going to be very similar.
To the current business theres different drivers of it and different inputs, but I think when it all shakes out on.
Our models show that it'll be very similar to the current.
Business.
As I.
Mentioned, we've launched in 60 branches.
Within the next couple of weeks will be in 400 branches and then we're opening up other distribution channels.
Like.
Direct internet channels as well as direct mail.
Our goal.
<unk> is to have about 60000, plus or minus cards in the market by the end of the year that will give us.
Big enough statistical sample to validate all of our models and the three main things. We're looking at is take up in marketing both of currency.
Consumers and new customers second we will look at line usage.
And third we will look at credit it's going to take a while to have credit play itself through so you can anticipate first half of 2022 will be us.
Both validating.
The performance of the cards.
<unk> cut in market and then tweaking anything we need to tweak to get back to what our model assumptions are.
We've seen.
<unk> seen in the presentation. We have two cards one is called bright way, it's a lower line, it's a startup card in our feeder product and.
We think thats going to be a great pipeline to bring in new customers. There is also a bright way plus which is a larger line. It has points it will be offered to current customers and customers with higher credit quality.
Sample that we launch will include both of those.
That are in and we do think it is quite differentiated it's rewarding credit building behavior. Every six months that people have on time payments that will have an option for either a decrease right.
Increased line and so we're going to be looking at all of those things, we're gonna be iterating the product this quarter and the first two quarters.
<unk>.
2022.
If everything hits right on target in all our models are.
Exactly what we thought second half of the year, we will see a ramp if we need to tweak some more it'll be closer to the back half of.
2022.
Sure.
Okay perfect. Thank you for that.
Second question, just a quick follow up Mike.
Mike.
Sort of that expectation for normalized credit.
Maybe over the next year when Youre thinking about the reserve ratios.
Close to where you were.
Okay.
Just maybe clarify what can we get back.
Kind of your normalized charge off rates. The current reserve ratio it should be yours thoughts to that thank you.
Yes, sure Vincent I mean.
We've we've talked about the expectation of normalizing credit is certainly.
Present in our reserving.
We are very very close to pre COVID-19 levels right now we remain about $50 million above when you adjust for size of the balance sheet balance sheet. So it's really just 3% above pre pandemic levels.
Throughout the year, we significantly reduced our reserve coverage as we've gotten more comfortable with economic forecast per.
Unemployment in confidence in the future credit performance of our book.
I think I think it's certainly possible for us to move down to the 10, 7%, but relatively speaking it's a pretty small difference when you look at it.
As being $50 million on a $2 1 billion reserve.
Thanks very much.
Thank you.
Next question comes from Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks.
<unk> size this fairly fairly well so far in terms of the yields.
Talking about stabilizing into the fourth quarter, but.
Or is there any extra kind of detail you can give us as to as you think about those.
Higher quality lower yielding balances like what portion of your origination. So they are currently or what portion of that.
Your balances you do expect them to become over time.
Yeah, well sure I mean, as we've discussed on our origination.
<unk>, which were right at about <unk>.
Four or five 6% depending on the month, you look at middle Middle sort of middle single digits above 2019 levels. As a result of all of our strategic initiatives. This sort of risk based pricing with higher credit quality customers as part of that but also includes a lot.
<unk> enhancements and channel initiatives, we've spoken about over the last several quarters I would say we are.
It's a good it's a decent portion of our originations I don't think we're prepared to really comment on exactly the levels.
Sure.
As you know things Steve.
Okay.
What about for several years I mean, you've returned a significant amount of capital continue to generate capital.
Is there a way to think about just the proportion between dividends and buybacks is that something that as you.
Think about that going forward like how should we.
Maybe.
Kind of guidance you can give us on that.
Yes, I mean look let me give you.
Just some thoughts on our capital return strategy.
Just.
As you know it's evolved over time it was only two years ago or two and a half years ago, We actually started returning capital to shareholders. After we de leveraged.
Yeah.
Very.
Significantly we started out with a $1 regular dividend. We then added specials.
We've moved that dividend.
The regular dividend now up to $2 80.
We've always said that we kind of modulate that around our stress test.
Test and because we want to make sure even in a severely stressed environment.
That we're able to pay that dividend so.
And then we added buybacks.
At the beginning of this year and you saw we did about $140 million buyback in the quarter. So as you have.
<unk> seen over time, we've put a lot more regularity and predictability into our capital return and I think people should think about that regularity and predictability. That's the path that we're continuing on.
We don't we can't give you an exact.
Dividends versus buybacks I.
I do think.
We're going to continue to be a high yielding stock, but buybacks are now part of our capital return strategy and we anticipate it.
Being part of our capital return strategy going forward.
Great. Thanks, pretty rapid evolution I guess, thanks for the answer.
Our next question comes from Rick Shane with Jpmorgan. Your line is now open.
Thanks, guys for taking my questions. This morning.
Like to delve a little bit deeper into the card business.
Been around long enough to have seen.
<unk>.
Some non prime card issuers over the years.
So I am curious when you think about the risk adjusted margin on that product and the financing how do you think about it in the context of your overall.
Ro.
Yes.
Mike.
As Doug mentioned, we expect from the card business to see.
Ours in a row that are similar to our current loan business.
In terms of financing and we have a lot of opportunity there.
We have significant relationships with with many banks in our in our conduit book.
We think you know we certainly can can fund.
Our own credit cards to get started through those those warehouse facilities and then eventually develop.
ABS capabilities that we have today for our loan products. So we feel very good about that and we think we we feel great about the ability to underwrite the credit and we feel good about the ability to grow the book and I would say the same thing.
On the funding side.
We feel very very strongly about our funding and capital markets capabilities, and certainly that will translate into the success on the credit card growth.
Yes, the only thing I would add Rick is.
We.
Have built a card business.
<unk> has.
Some of them would be with the current business that utilizes our core strengths of nationwide distribution of funding of our understanding of near Prime credit our deep proprietary data and so we think we have cost advantages and we think it's quite synergistic.
With our.
With our current business funding being one of the synergies we think we'll fine.
Got it and if we think about that business historically in the context of your core business. It is a lower risk adjusted margin business. So in order to get to the same Roe.
And historically, we've seen it for me.
<unk> you.
Would run that business with slightly higher leverage the securitization markets would certainly support that is that the right way to be looking at it.
I think as we've said Rick the returns we expect to be very similar to the core business and we're going to.
Run our business overall as a portfolio, obviously, we're going to think about the product pricing and the dynamics in loss profile et cetera of the credit card differently, but I think we're going to try to leverage our existing funding programs and our strong capital markets programs across the business and maybe internally, we'll think differently.
<unk> leverage levels, but I would continue to think about our book in totality.
And our leverage in totality, yes.
Our model our model show that.
It can be a very profitable business, but we've really pivoted the company to be a very customer centric customer.
<unk> <unk> business and we've talked about our overall strategy, which has provided credit and we now have a large loan product and we're now moving into a daily.
Transactional product and like we said the early cards people are using it on just the things we thought it would be.
Gas groceries dining out, which we werent.
We didn't have a foothold in that market for credit.
Before and then if you look at the benefit. It's also part of our vision to help people move to a better financial future and the whole card is built on reciprocity and so people get something as they are good payers and as their.
We're building credit and for us it deepens our relationship and lengthens is it increases engagement because people will be much more involved and looking at expenses, we have a great app.
There and it gives us it gives us transactional proprietary data that we can use both in the card business envelope business and.
So.
The strategic view of us being there for our customers and being the lender of choice is the main focus obviously, we feel very confident the economics will work with our business as well.
Got it Okay and then.
You hit upon something interesting, which is the daily use.
And I see the strategic vision here one of the things that tactically really helped you over the last year was your ability to very very quickly curtail your underwriting.
You put a daily use card in People's hands.
Hans you arguably lose that ability I realize you can cut off credit, but as soon as you do that on a card.
You erode goodwill significantly do you think that you're changing your risk profile in terms of your ability to recast the book as quickly.
Yes.
Certainly that's a dynamic that other credit card issuers have faced.
Unprecedented over the last 18 months actually saw significant paydowns and improvement in and credit card delinquencies in.
And also in losses on the book I think that's something we'll have to look at in the years.
To come.
Okay. Thank you guys.
Thank you.
We will take our next question from Matt <unk> with Deutsche Bank.
Hi, Good morning, guys. Thanks for taking my questions I wanted to touch on the near Prime credit card space.
And competition overall.
Seen other companies go the inorganic path to getting a foothold in the space I'm just wondering if competition in your eyes is becoming sort of more intense within that space.
Look we it's a very big market, it's a $400 billion cross plus market.
We.
And we have a brand in the non prime space because for many years, we've been serving customers with responsible lending products. We've been there for them through good times and bad you know a lot of banks and others have pulled out of the space and we fill a unique.
A unique niche.
Rich.
With a 400 billion dollar market, our brand and competitive advantages.
We think theres plenty of room for us to have this be a multibillion dollar.
Receivables product over the next several years.
And so we think we've got a lot of opportunity.
<unk> compete.
Early take up rates Super early days are confirming that hypothesis. So yes, theres lots of competition, we need to compete we think our card is like no. Other card in the market and is differentiated and is focused on rewarding good behaviour and credibility and behavior.
Customers and that as they make progress we will have the ability to grow with them.
Got you Great and then I guess secondly, you know.
Three weeks into the new quarter I'm guessing are you sort of seeing the seasonally higher origination volume that you'd normally expect.
I'm just sort of any color as we go into the fourth quarter. It would be helpful. Thank.
Yes, so we're still early days in the fourth quarter, obviously only for about 20 days of October, but what I'd say is what we're seeing on originations is looks very very similar to what we saw in the third quarter.
In terms of when I say that let me be more specific just relative to 2019 levels obviously.
Obviously, you've pointed out there's a little bit of seasonality in our business. So.
I always we always look at things at this point gets normal 19 levels and we're sort of in the same ballpark of where we were growth wise in the third quarter.
Got it thank you.
Thanks, Mike.
And we'll take our next question from John Rowan.
Rollin with.
Jamie Your line is open.
Good morning, guys.
Hey, John just wanted to touch quickly on the recovery rate.
It sounded to me Michael like you said it was post charge recovery I'm wondering if there was.
Any debt sales in there.
And I'm wondering if.
Strong auto prices up anything to do with the higher recovery rate, obviously would like to figure out when that recovery will normalize and trying to figure out what the inputs are there.
Yeah. That's a good question in terms of sales. If you go back several years ago. We were we were doing a good portion of our post.
Post charge off with property through debt sales, we made some decisions over the last couple of years, just looking at an NPV and returns based on where prevailing prices were for charged off stock and we decided we were better we were better served doing things internally, which is when I talk a little.
The when I talked earlier about change in charge offs strategy that was what I was referring to.
This was probably late 18 early 19, we really decided to start doing more of our collections in house.
Still have a multi channel and multifaceted strategy for recoveries, we do a little bit with third party just to keep.
A warm touch there if we ever needed it the vast majority of it is internally collected and I would look at the recovery rate improvement is just being somewhat of a sign of of consumer balance sheets, but also the work we've put in to optimize our own internal post charge off recoveries.
A little bit.
Next on the credit card business, obviously, what you're using as a daily use type credit card do you foresee this changing over time to a larger ticket type credit card and if that's the case do you see running into competition from any of the new point of sale products.
I'll pay later or at least one thank you.
Yes look one of the things.
That we've said about the card is that Theres a lot of synergies. So we have loans that are average eight to $10000. We're having cards the lines are.
I was going to be.
Spine on the 500 the $3000.
Range the.
The next in line from product will be hybrid so people, who have a loan we will be able to put it.
But also.
Kind of on the card if somebody buys a $1000 TV they will be able to put it into installments and so we do think the card gives us the opportunity to be with the consumer.
When they are buying products and extend credit in.
Creative ways at that point, so to the extent, that's what point of sale providers are doing sure there'll be some.
Over last there, but again.
We know this customer it's a very large market, we're exclusively focused on the non prime consumer and so wow.
<unk>.
We're moving into a new space that has a different competitive set we think there's plenty of room for us to grow.
Okay. Thank you.
And we will take our next question from Kenneth Lee with RBC capital markets.
Hi, Thanks for taking my question.
Wow.
Just a follow up on some of the previous questions wondering if you could just talk a little bit more on how you think about the potential returns from that higher quality credit receivables, especially how they compare to the rest of the business. Thanks.
Yeah, again, I think Ken.
We've talked about at length about making sure that all of our loans meet a minimum return on tangible common equity threshold of 20%.
In the case of this risk based pricing for higher credit quality customers, we gave up a little bit of yield we attract more of those.
Customers. So there's a loan volume implication as well we're doing more volume in that particular area.
More volume comes with little extra costs. So it gives us a lot of operating leverage using the existing fixed costs. What we have there is also a benefit on losses for that business. So.
A lot of what we're doing is just more of what we do today, but we do believe that there will be some loss improvement there and of course, we're also as we mentioned utilizing the improvement in our funding cost to be able to maintain our existing returns on that business. So I would say all of this that we're writing in.
In this risk this risk sort of higher credit quality customer well exceeds our 20% return thresholds and it should be accretive to earnings both from a profitability and just regular way earnings going forward.
Great very helpful.
And just one follow up if I may.
Just more broadly I wonder if you could talk about the current competitive landscape within that non prime near prime segments, and whether youre seeing any potentially either increase or decrease in competitive activity. Thanks.
Yes look we are on.
I think there is.
It's quite a bit of competition in the market.
It is more or less you know everybody is open for business now it looks like most people have opened their credit box back up to pre pandemic.
Underwriting.
We.
We're.
We're back kind of underwriting to 2019 type losses.
The assumption that it's hard to normalize looking at all the competition.
For their credit boxes, but my assumption is some people have probably opened up more than that and are being lax with.
With credit.
And so look.
We're not seeing a lot of.
Big changes in the competitive environment right now.
Big market and there is a set group of.
Competitors going after the installment.
Lending business, but what I would say is it appears that everybody's back.
In the market full steam.
I'll tell you is.
We told you in early 2020 that.
We didn't it was uncertain we didn't know what the pandemic would bring I don't think anybody accounted on six trillion dollars of government stimulus coming in but we made a commitment that we were going to double.
Look down on investing in our business and our products and our technology and our digital channel and all of our analytics. So that we were positioned for growth on the back end of the pandemic and I think thats, what youre seeing and so if you look at overall demand.
For our product it is very soon.
Doubled versus 2019, but our production and originations are actually you are running in the mid to high single digits above that and I think that as a result of our all of the things we put in place over the last year and half strategic.
Strategic pricing for better credit quality customer.
<unk> innovations around size of loan all the analytics and operation and marketing.
Our digital channel, which continues to be a bit now about 50% of our origination plus adding new channel partners. So we could.
Find customers and be available to customers wherever.
They want to do there take their credit so.
Quite competitive we like we like our positioning vis vis the competitors.
Great very helpful. Thank you very much.
Thanks, Ken.
We have no further questions on the line at this time.
Great.
Well look thanks, everyone for joining us.
We appreciate all your continued support and interest and we're obviously here. If you have any questions. So everybody have a great day.
Thank you. This does conclude today's Onemain financial third quarter 2021 earnings Conference call. Please disconnect your line at this.
And have a wonderful day.
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Tom.
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