OneMain Holdings Inc. Q1 2023 Earnings Call

And also some of the pricing increases that we've been making over the last year that we expect to start taking hold so we do expect that modestly throughout the year to improve losses, we're still trending in the seven seven to seven 5%.

Thinking about the market.

Most vendors have announced some type of pullback.

In these periods historically that kind of presented an advantage for someone like onemain in the sense that you.

You could be more selective yet see a higher quality customer new customer.

With that said you know that we cigna.

Getting it because we have a balance sheet that can book loans that meet our return hurdles because we still are in the.

In the market marketing and see we've done a lot around just our product our customer experience our value proposition that we think.

Okay can we see.

Yes, sure Kevin I think.

For changes in benchmark rates to really move through our interest expense.

Advantage for us.

In terms of our our NIM and our profitability, we've talked a little bit about yield and how yields going to gradually return.

Okay, great. Thanks, and then a follow up on the tightening of underwriting.

From August 2022.

Each of the loans in the cohorts of loans that we're originating are meeting that 20% return hurdle and what youre seeing on those delinquency charts for vintage performance is really reflective of that so we like the earnings on those loans, we'll have to see how the macro economy.

On a quarter change in loans held up better than I expected. Those wondering are you seeing the impact of less seasonal payoffs during this year's tax season.

I think I heard you mentioned something about positive payment dynamics in your remarks also.

Yes.

Good question, Michael I did reference the payment dynamics and when I was walking through some of the expectations.

We are seeing similar patterns from what we view as you know this is tax season. So we typically will see.

The last couple of years, we see this as a sign of the competitive environment.

<unk> ability of credit and also affects from government stimulus continuing to wear on that really influenced the last couple of years I don't see it as a credit challenge.

With these are actually accounts that are accretive to our earnings and our yield and theyre paying customers. So we view this as a positive.

The next question is about funding the secured mix as you outlined is up to 55% you got another 200 million maturing in the second half and another $1 3 billion in early 2024, I mean, how much longer is going to be comfortable.

That's it for that in quite some time already quite a wanted to be out of that market for too long. So maybe you could provide some more color on that.

I said before we have an incredibly strong balance sheet.

Liquidity is really important to us we've got seven 5 billion of committed bank lines that we can flex when needed those are largely undrawn today.

One of the.

Positive dynamics of the asset backed securities as they do we have revolving period. So we get some duration there, but once they also start to amortize so.

As they are amortizing down if we're putting on new ABS it doesn't move that mix as much.

We really feel like if we needed to issue nothing but ABS for the remainder of the year, we certainly could without really having a big challenge in terms of our funding mix.

Our long bonds.

Long duration bonds as you noted on our unsecured bonds.

It's been about a about a year and a half since we issued there are.

We created that flexibility for ourselves in the way, we structured the balance sheet, but you know it.

In terms of the pricing.

Our longer duration bonds are trading in the mid eights as of yesterday.

You're kind of at a new issue concession and convexity premiums for some of the deeper dollar discounts.

On the complex and you're probably in the nine area. So.

We will be opportunistic if we see an opportunity in an opening for unsecured.

But we have no real need to do so we feel pretty comfortable where we are.

Okay. Thank you.

Thank you.

Our next question will come from Moshe Orenbuch. Your line is now open.

Great. Thanks.

I was wondering Doug and Mike Cold weather.

There is a way to think about like.

What you need to see before you would expect.

Two two.

Have a kind of a.

An increase in.

In origination sort of be able to underwrite more of those applications that are coming your way.

How to think about maybe as you know give me the second part of the question at the same time, how to think about that 5% decline year on year.

Or what's the what's the amount that you.

If credits had normalized.

That number how much higher do you think that Margaret.

Yeah look Moshe.

Interpreting your question to be like what would it take for us to open up our credit box.

And.

I look one I'd say as we mentioned.

In our remarks, we still have an uncertain macro picture.

Clearly unemployment is the bright spot low unemployment employment and.

It looks promising that inflation is starting to moderate but inflation is definitely still impacting customers.

I think we've now shown in two quarters that are post tightening originations are performing as expected and I think we need to see a couple more months of that just to feel comfortable that that trend is.

Stang.

We're super careful stewards of.

Our shareholders' capital and we've said before that we're going to be conservative with our balance sheet and conservative with underwriting and we're gonna be innovative and aggressive when it comes to product innovation customer experience digital et cetera.

We very well may be leaving money on the table, but we're okay with that given the uncertainty in the environment.

I think.

If we started to open up it's not going to be a big Bang, where we say because just clear, let's just open up the credit box.

It's going to be by state depending on what we can charge by risk grade of customer. We now have a set of products, we have a secured and unsecured loan we have two flavors.

Credit card, one would feed one without a fee.

So we'd be looking at pockets, what I will tell you is.

We are always booking loans right at the margin of loans that don't meet our credit box.

In very small quantities that we test we call it weather vein. So we've already got loans out in the market to see how they're performing just below our credit standards and that data helps tell us kind of how are things performing it's not material to our our book, but it's just part of how we go so look what I, what I would say is.

Right now where we.

We like the market share, we're picking up and as we mentioned originations are above expectations already with a tight credit box I think we're just going to have to keep watching our book in the economy and will move win.

It will open up the box more when we feel comfortable doing it but it's not right now.

Got it.

Maybe just a quick follow up you mentioned Mike.

Half the expense growth is coming from from.

Some new initiatives can you just give us like the the biggest one.

We're the biggest dollar investments are going in.

As you look forward is that going to be the same.

Yes.

Thanks Moshe.

It's mostly I mean, I think I think the answer is quite simple frankly.

It's really coming from our credit card initiative, and the acquisition costs and the servicing costs associated with building out that business and the same is true for our secured distribution channels.

Again acquisition costs servicing costs and building out the <unk> folks and infrastructure associated with those two businesses is that the majority of the.

The investment that I called out year over year.

Thank you.

Thanks.

Thank you.

Our next question will come from David Scharf with JMP Securities.

Your line is open.

Thanks, Good morning, and thanks for taking my question.

I wanted to.

Follow up a little on.

Just the not just the competitive dynamic but.

Maybe how to think about.

How youre thinking about your target market kind of longer term and specifically, we're obviously kind of appropriately focused on all the cyclical Matt.

Matters right now, but as your funding profile.

Continues to improve structurally I mean is your overall cost of funding on a comparative basis continues to get better.

Is the 660 and above increase of your mix.

Is that just something we should think of is cyclically as we typically do when you tightened or are you starting to feel that you can meet your longer term return requirements by actually.

Moving up the credit spectrum longer term.

Yes look it's a good question.

660, plus has always been a part of our business.

Call. It the lower end of prime higher end of near Prime However, you want to.

Define it and we like that business.

As you mentioned, we also think we have some competitive advantages and our balance sheet.

One of the reasons, we built out a whole loan program isn't because we needed it for funding, but we wanted to build the pipes and get the expertise of having a off balance sheet option.

For our distribution that we have that's quite powerful.

As you mentioned, where we're in a cycle now so it's always hard to predict what it looks like coming out of a cycle and how much competition will be there coming out of a cycle, but I could envision this being a higher percentage than it was historically, especially given now that we have balance.

Sheet Optionality in different places.

Put this business so.

We know how to serve this customer generally its unsecured loans.

We've been working on our cost structure and as Mike has said, we have a lot of operating leverage and you know between efficiencies in our branches efficiencies in our central operation and our new digital capabilities. We've got a very good cost structure that we can service potentially lower yielding.

Assets over the long run so.

It's a long way of saying that it is certainly a possibility you know we're not going to declare that we're going to keep this kind of market share you know as the cycle moves but.

We're getting these customers now we're serving them well, we clearly meeting a need it's clearly profitable for us and so and we've done it for a long time exactly what part of the book, it's going to be over the long run I think will depend on how we evolve in the market evolves.

No. That's very helpful. I mean, it sounds like lost in all the cyclical can ringing as potentially your Tam may be.

Leasing over over the long haul.

As a quick follow up.

And card balances.

I know Q1, obviously, we typically.

See paydowns.

The tax refund season or in this case kind of modest growth for a new product.

It only increased about $15 million sequentially.

Are you still comfortable with that year end $400 million to $500 million.

Balanced target that I think he provided last our last call.

I think it'll be in that range.

We're having a very targeted and disciplined rollout and our goal. This year for cards is to prove out the model make sure. We're really focused on spend patterns usage credit performance digital.

Instrument.

<unk> it.

And the plan was always to get more data in the second half would be a bigger rollout. So we're on plan with the rollout now with that said, we're watching the environment, we're going to be Super careful we're going to keep a tight credit box.

For now and so we're really not managing it to growth.

As we mentioned receivables overall, we think are going to be in the top end of our guidance, which is in the mid single digits exactly how much cards contributes will depend on what we see for the next few months and the decisions we make about the second half of the year and how big of a rollout.

Do but we think it'll be somewhere in that range.

Got it thank you very much.

Yeah.

Thank you.

Next question will come from Rick Shane with Jpmorgan. Your line is open.

Thanks, guys for taking my questions. This morning.

Look when we think back about last year.

One of the.

Conclusions is that not only is your customer base sensitive to employment.

But there are also extremely sensitive to inflation.

Seen gas prices declined very significantly since mid year last year, we're starting to see some other prices come down is there anything that youre seeing in terms of the portfolio that suggests that the reversal of some of those inflated prices is having an impact on credit.

Okay.

Yes, Rick this is Mike.

It's a great question I think it's it's one that's challenging to answer I think the dynamics year over year on Bank account balances are also has something you know theres something at play there.

Customers may have still had some inflated bank account balances it particularly in the beginning of last year.

All the stimulus so.

That has has warned us that has kind of run down and inflation continues to be a challenge for them. We really haven't seen any big change in the dynamics I mean, Doug mentioned the weather vane testing were doing so.

We are still seeing some challenges with the non prime consumer.

You know were not enough not enough some some green shoots maybe but not enough to cause.

Cause us to increase or open up our credit box at all.

And I think we need to keep remembering also that even if inflation is only up 5% that's on top of.

Last year's high single digits inflation rates. So these things are building on on themselves year over year and it's just it's what our customers finding challenges, making ends meet with their expenses and so we do see some positive signs here as we've talked about our new originations are are performing in line with X.

<unk> or our back book has stabilized. So we saw delinquency increased pretty dramatically in may and June of last year and since then it's kind of just been following seasonal trends so are.

We feel good about the book going forward in terms of what we've been able to construct and yeah. We're just gonna have to keep watching this thing, but I think the net.

Net here in terms of the individual consumer they are still challenged with inflation.

Got it okay. Thank you.

Look I have my own views on the credit card business, but one one advantage. Perhaps is that you are seeing transaction level data for your customers.

I'm curious two things one are there insights that you're gathering from that transaction level detail that circles back to your broader lending and second.

Can you share any sense of what percentage of spending for your customers is at the pump.

Yes, Rick first of all on insight.

We've always said that the credit card business is quite complementary and strategic.

And fits in well with with our business model for a number of reasons one is yes.

We get a daily transactional product that.

Is matches are more episodic episodic larger loan that gets paid off effort over time and a credit card customer can stay with us longer to as we think we have a lower cost of acquisition because we already have current and former customers to save that cost and then third is what you mentioned, which is we get.

Daily transactional data.

I would say is yes, we're getting insights not enough yet not not enough yet.

<unk> not.

Either volume or length of time to put into our credit models, yet, but we're always adding new data to our loan.

Credit models and so for instance, a couple of years ago. We started collecting bank account data as a way of doing income verification, which is now part of our credit models.

For our lending business I think eventually this transactional data and in credit cards will be able to use in our lending business, obviously data from our lending business we can.

Used for the credit card.

You know I think on.

I don't have at the top of my.

Fingers the exactly what's in the pump, but the percentage of credit card that is used to gas stations, but the top three spend patterns, our groceries gas and dining which is exactly what we had hoped for again the credit card is providing a utility that alone.

Doesn't provide which means we mean more to our customers now than we did before.

Terrific. Thank you guys very much.

Thank you.

Thank you.

Our last question will come from Vincent <unk> with Stephens. Your line is open.

Hey, good morning, Thanks for taking my questions first one on the pre and post heightening loans.

So just wondering if you could compare and contrast, those in more detail about understanding that the post tightening loans are going to be.

Over two thirds of the portfolio by the end of this year. If there's anything you can help us with understanding what the.

The impact of that would be say for instance, the.

Underwriting losses are for or what the yields are for those loans. Thank you.

I would say for the.

If if we're tracking right around kind of 19 levels on those vintage.

Vintages as we put on that as we showed you on that page that generally translates to about a 665% loss rate alright.

Alright, but that's.

That's on average and over time, our portfolio, that's constructed that way that remains that way for the entire life.

So, but hopefully that gives you a little general general direction as to where.

That is heading I think as this portfolio of front book becomes a bigger part of our overall portfolio, we should start to see.

Delinquency levels moving back down towards those 2019 2018 levels, but you know I want to also caution you I think there's just so many dynamics that go on in a given year around delinquency and growth of receivables. So it's hard to have just the perfect year to compare to.

But we do anticipate at least some.

Modular decline in delinquency back down to those normal levels. If if the economy stays away. It is if our underwriting stays the way. It is it does the back book continues to be stable and we continue to see that 19 type performance from our newer vintages.

Okay, great. Thank you and see kind of a related follow up when I think about return on receivables for our Onemain.

And there being a lot of moving pieces recently, you know of course cost of funds seem to maybe be going up.

Moving upmarket tightening the portfolio also getting into credit card I think just this quarter the return on receivables of three 7%.

<unk>.

Wanted to explore whether the I guess the long term 6%.

Return on receivables.

Is that what we should be looking for as all these moving pieces are happening.

Yeah, I think so.

Been a lot going on over the last few years. So I would say our ror is for 2000 22021, and 2022 were certainly not what we would consider to be normal.

But also on the first quarter first quarter because of the seasonally high loss rate tends to be on the lower end for cap Gen ror simply because of having a loss rate of seven 7% on loans in the quarter I think as we go through the year again, I gave you a little bit.

Guidance at the beginning of the Q&A session here on where we thought some of the trends were heading.

With an expectation of losses, dropping by 100 basis points in each of the third and fourth quarter relative to what we think the first half looks like.

That's certainly right. There is after tax about 70 basis points of of Ror on top of what we're seeing so I don't think I wouldn't say that anything we are seeing is changed our views on the long term health of the business and our profitability. We've got a lot of levers here.

<unk> you know, we certainly can tightened credit really quickly we are seeing good demand we're competitive in the marketplace. We've got the stability of our interest expense and I keep coming back to it but our fixed cost base and our ability to add loans at a marginal cost of expense is really really powerful we're adding.

New business lines with our credit card, we've expanded our acquisition channels from beyond our traditional branch network.

With our secured distribution channel expansion and you know all of that comes with very very attractive marginal marginal returns on our receivables. So we feel very very good about the future and.

Nothing about our profitability has been impaired by anything we're seeing today.

And look everyone. Thank you for joining us we are.

More than happy to do any follow ups with Pete our IR team are Mike and I and hope everyone has a great day.

Exactly.

Thank you. This does conclude today's onemain financial fourth quarter and full year 2022 earnings conference call.

Please disconnect. Your line at this time and have a wonderful day.

Yeah.

Thanks James.

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