Q2 2019 Earnings Call

Okay, and then second question.

Pertains to the allowance level yet.

Number one is do you have any comments on c. So number two should we expect the for you see still a side should we expect the AOL to continue to decline at a similar pace as a percentage of loans given what's going on with the Tdrs and thank you very much.

Thanks.

Yeah. So in terms of seasonal we are running.

The parallel so exactly in line with the guidance.

Or the discussions we've had.

The last several quarters those programs are going now with respect to.

Be able to come back with a better guidance of the impact in in the Q3 earnings call.

Yeah, all of that is going according to plan.

Your other question was related to the allowance ratio Yeah I think.

Yeah, right now the downward trend.

Sort of as you highlight is impacted mostly by.

The lower TDR balances.

Because if you look at the non P., the our allowance ratio is actually being very steady.

Okay. So yeah, yeah, I think it would be the same answer we've provided in the past the allowance ratio shoot.

Yes, stabilize a recent apples to apples should stabilize once the.

The TDR balances.

Stay with us.

Thanks, John Thank you.

Thank you got it right okay.

Well take our next question from Mark Devries with Barclays.

Hi, so the the billion dollar repurchase authorization is obviously quite large relative to the current floater is there anything you can share with us.

Around.

How you might look to go about repurchasing those shares if you are considering anything on an accelerated basis.

Yes.

Yeah, we're very pleased about.

Having announced the.

Well, increasing dividends as well as the one point up to 1.1 billion repurchase program is.

As you all know is.

Being able to distribute more capital is something that we've been pursuing.

For quite a while and so this is a very positive step.

Yeah in terms of how we'll go about it as we move forward, we're going to evaluate.

Yeah. So we have in the past evaluate market conditions and consider all execution strategies.

As we move forward okay.

It will also comes either or any other potential alternatives for capital deployment always to make sure that we're generating value okay.

Yeah. So I think right now we're looking at is flexibility in terms of how we execute a repurchase program over the next.

12 months really.

Okay got it and then is there anything you can share with us about just kind of specific substantive changes that were made to the Chrysler agreement.

And whether you consider extending that.

Yeah, the FCS agreement and you have a.

Redacted.

Contract is is there.

And you'll see it looking at it that there is say updates certainly certain performance metrics sharing practices that that sort of thing.

So that's.

You know again the importance how about the the agreement is that it will it solidifies our partnership going forward.

And gives us the ability to.

Yeah, better better business, right and better partnership Yeah, Jean Marc the only thing I would add to what we promise that is it was important to both sides that we have on operating framework that works given the current relationships. So.

Obviously, the tolling agreement they put in place at the end of the year.

You know froze their ability to.

Essentially continue to dispute some elements of the contract and so I would just tell you the new contract.

We're happy with it.

The amendment sorry, the amendment to the contract they are happy with that we're happy with it.

In frames up the relationship in a way.

The way that both sides can operate for the future without concern about.

Crane into default situation. So it's that's one of the reasons were very excited about it because it creates a framework that really works for us and lets FCTA do what they need to do as well.

I think specifically to your question about an extension.

The contract the amendment does not extend the contract, but I think as we said earlier.

And it gives us the ability to have this enhance relationship and it gives us the opportunity to.

To fight for the opportunity to lower to do more business even beyond that.

Something you kind of have to work.

Got it thank you.

Thanks.

And we'll take our next question from Steven Kwok with KBW.

Great. Thanks for taking my questions.

Just the first one is around the origination side it seems to be strong.

A year I was just wondering if you could touch upon the competitive landscape and then also implies some color around your outlook for used car prices, that's been holding up really well.

Yeah, I mean, it's a you know the competitive landscape.

Hasn't changed its super competitive continues to be Super competitive.

Yeah, It's a I I do think it's one of the most competitive.

Lending spaces out there in the U.S. market. So yeah. There is no let Austin.

And the competitive framework.

Going on there and you know you yelled for used car prices I think is actually pretty good.

Yes, obviously, there are people, who say, it's going to go down and.

But you know, it's obviously strong in the quarter.

Yeah, you know the outlook for the consumer and the economy remains good.

One of the things that's interesting is as <unk> as I mentioned I think.

That strength in used car prices in isn't just you know trucks and as Youve East.

So to answer were strong as well.

Which to me says, it's a bit of an across the board kind of phenomenon driving that so.

No we're not we're not changing our strategy because we think used car prices are going to continue to rise, but I don't have any I don't think we have any reason to believe that.

The decline in used car prices a significant decline is on the horizon.

Got it and just yeah, yeah, and just given your ability to increase the origination year over year are you guys taking share from others and then if so like who are the ones that you're taking share from.

<unk> our market share is up a little bit year over year, but you know, it's it's Uh huh.

I don't think we can see where that's coming from and we're up a few percentage points on market share I think.

No. It's just it's kind of grinding it out application by application.

On the non Chrysler side and then.

You know working hard working hard on the Chrysler relationship and improving our.

Service to dealers, which is very big I mean.

We haven't really talked about the specifics, but we've invested a lot and delivering better for dealers you know things like putting better staffing in place.

You know, which drives down our contract inventories, which means our we're funding deals faster and when I say faster were significantly improved below where we were last year.

We set up things like regional.

Credit teams.

And we're increasing our auto decisioning right and we're not done I mean, that's those are all made progress across all those issues.

But we'll continue to focus on on.

On how Santander Air works inside the dealer because that's a.

It's critical for continuing to get good volume from dealers and so.

Just the combination of all those things.

And like and also optimizing our credit credit and pricing engine no no magic. It's just the combination of all those things together.

Got it that's helpful. Thank you.

Yeah, you're welcome.

And we'll take our next question from Moshe Orenbuch with credit Suisse.

Hey, Moshe great. Thanks, Ah Hey, how are you.

And congratulations jaycee coffee stuff as well [laughter] and maybe talk a little bit about that you know the scitor integration with.

With your your Aaron.

With respect to the funding transaction, that's you've done this quarter.

And whether that has any effect.

How about you know where your volumes.

Yep.

We.

<unk> the funding you mean, the there's been a platform.

Yeah.

Yes, sorry.

Yep.

Yeah. So.

Almost like the previous times, it's not Neil right remember, we fully launched we last year, we talked about how we were.

Working on it then we work on a forum for a number of months.

To make sure that these platform Watson like the previous flow agreements, where we will originate warehouse.

And then pass on the or sell the loans to our partner.

In this case with <unk>, we have a platform.

No not only meets thereby box their credit box, but also allows us to originate directly onto a it would be a nice balance sheet, okay and in return, we get origination fees and servicing fees.

Yeah. So this was a fully launched exactly a year ago, Okay and we've seen.

The gradual improvement there.

ER with really a very strong quarter of this year as was discussed earlier.

Does that change or the study I think is your question.

Yeah that was your question right Moshe because you were fading out little bit well I guess I I guess, what I saw was the C. Johnsen gear Sochi credit notes, maybe your appetite.

Okay.

The product.

No no not totally I got you I got you.

Okay, not totally unrelated at those those notes the your cradling notes that you're referring to.

Hey are part of the old.

Flow program that we had with the group with a head office basically.

Remember, we use that as a breed something it has to be an eight came on board.

Well originate and sell those loans to head office recently the transaction that you were talking about a the group decided to securitize them and.

And basically distributed some some of the trenches yeah. So that's entirely unrelated to an ongoing tour ongoing platform, we've had to be any and nonrecurring from the SCS standpoint.

Got it thanks for the clarification just separately yeah.

Thanks, Jeff separately any any kind of update on the written agreement.

You know, where I guess ask it to your point since that.

As you know.

Since Oh, we pass that to your point. It was from 2017 I guess were in the second year, maybe in the spring when the spring yeah. So.

Yeah, I mean, it sounds like you've read it and it's a you know it's pretty a pretty wide ranging.

And for everybody's benefit the 2017 written agreement with the Federal Reserve is is on compliance issues at the holding company level and then into Santander consumer here.

And then I would tell you that.

Like the other written agreements that we closed out and you'll recall that we closed out one from 2014 on pain of dividends and then we closed out a very comprehensive one from 2015.

On overall risk management framework and so just like those two you know we're heads down.

We've committed significant resources and management effort.

To address those issues raised by the Federal reserve, which we don't agree with by the way. It's all when I when I say operating that large U.S. financial institution standards, that's exactly what I'm talking about.

So.

I can't really tell you when we closed out otherwise again big trouble Moshe but.

Hi, just working Super hard on it and.

We have good plans and we know our plans are good it's just a matter of following through in executing on those plans and that they will get closed out.

Great well certainly you don't once you get in trouble. Thanks.

So sometimes it's fun to get in trouble, but now with the federal reserve.

And we'll take our next question from David Scharf JMP Securities.

Hi, good morning, Thanks for taking my questions.

You know its first you know I I wanted to maybe just clarify or make make sure I heard correctly.

Regarding the U.S. being a origination volume did you suggest that a in the second half.

We should be thinking about a a level closer to a billion down from the close to 2 billion in Q2.

Yes, I mean, I am we we've talked about it in the in the past.

Not a part of this year the more normal cadence would be at about $2 billion a quarter. Okay. So this quarter was particularly strong okay. Some of because of some of the drivers we've talked about earlier right.

Yeah. So we're not expecting that platform to keep originating close to 2 billion every quarter it will be somewhere between Dod and any billion.

Got it and just see what when I look at the.

Both the fight going into new versus used in mix on slide 19, I'm assuming that.

The material shift to.

No greater than 645 go in hand.

The big increase in the new vehicle mix was.

<unk> driven primarily by the.

By the U.S.B. M&A volumes.

If if that were back at the billion level in the corridor with these relative mix is looked pretty consistent with the last couple of quarters.

Yes, that's.

It's definitely so the answer to the first question is yes, yeah. The the mix and the Ficos are shifts are largely driven by the increase originations hopefully as being a platform.

Ah So if we were to have a more.

Normal quarter.

It is still strong but somewhat above the level was just saying you would see these.

Percentages shift downward as well.

Okay. Thank you.

And we'll take our next question from Rich Shane with JP Morgan.

Hey, guys. Thanks for taking my questions. This morning.

And Jason Thank you for all your hard work over the last several years are really appreciate the conversations.

Scott I think this is really a question for you.

When we look at things one of the one of the factors that contributed to the strength across the sector is strong used car prices and I think that thesis is dan or that off.

He was going to create supply demand pressure.

As we look forward can you talk about what you see is the sort of supply demand for used cars in the context of off lease tariffs and also the ongoing negotiations.

Yeah, maybe I'll take a shot.

Yeah, I mean, certainly.

Yeah, [laughter] I don't think let's just do you guys I don't think I give myself in trouble on this one I mean.

Yeah, I mean, I think it's the relative value between used cars and new cars.

And you know yes. There is you know there's been comments made about increasing volumes of off lease cars and what impact that might have and then again I I.

Maybe I'm not smart enough that I really don't get into the details in a way because I just look at the overall kind of what's happening in the economy the strength of the consumer the demand for cars the relative.

The relative attractiveness of used car prices is still there and again I, we look at what happened in the second quarter I think it reflects that because it's not just people who like us he is buying issue visas and driving a best UBI car prices.

I think there is an underlying.

Macroeconomic effect here that has a big impact on it and the and the trade off versus new car prices is real and so.

I think that will continue that's my best view of it.

And yeah, I mean as a lot of the conversation about increasing volumes off lease cars isn't really had that big of an impact so.

We've had those sort of tsunami Reits almost every year in the spring and the other the mine has dealt with its very well yeah, it's a very efficient system.

It probably wasn't very helpful.

No I mean look at it it's obviously a.

Yeah, you know what are these things were eventually everybody you'll be right about declines in your scars pricing.

Timing is a little bit trickier.

You alluded to somebody I find interesting, which is the commentary on that she needs are and that ties into something.

<unk> well do you think some of this has really been a function of U.S. consumers, becoming pretty complacent about low gas prices are and they're you know increased penetration of sq needs as a result.

Yeah, I mean, I think that has an effect sure yeah, I think again I can't I won't even try to say well how big of an effect it has but sure it does.

Uh huh.

Again, I I, just there's so much going on in the market that.

Has an m. you know.

Just good old fashioned consumer preference do it has a big influence it so.

Yeah, and I like I've said on this call many times I think the forecast to your point or.

Not.

Usually accurate ER and my forecasts are not usually [laughter], so it's somewhere down the middle.

I think probably the thing to highlight more recently that they should be trends was there what's the driver for quite a while yeah. It's been when we benefited from having the main.

Very good.

As you will see some trucks or portfolio.

More recently, so that's also going very well.

Yeah.

So he's not us the complacency on gas prices right this probably lighter than that.

Rotor yep.

Okay. Thank you for that clarification appreciate it I hope that helps you bet. Thanks.

And we'll take our next question from Chris Donat with Sandler O'neill.

Hi, Chris Hi, Good morning, Thanks for taking my question had one about the the F.C.A. agreement.

Because you mentioned the 60 million.

Payout that you would make two S.T.A. I'm just curious it doesn't seem like I saw it in the second quarter and I Didnt hear J.C. mentioned it for the third quarter. So.

How does that show up is it is it one timers unamortized or does it show up at a later date.

It's it's somewhere five over the remaining life of the contract.

Okay. So so there will be some in the third quarter then.

There is already some in the second quarter and you will see the same proportion over the remaining.

The life of the contract.

Got it Okay and then just one more question on on T.D. ours, I thought I heard you say that.

The the reduction in TDR balances was partly a function of of a decision on your part to do fewer modifications.

With that.

Sort of strategy change is that driven by the the economy or just to take on fewer TDR is just trying to understand why the balances are are coming down or likes us getting put on to replace what comes off.

Yeah remember this is something we've discussed I think on the last couple.

<unk> earnings calls.

And we've highlighted at the time that we.

Starting in the first quarter, we were seeing less and modifications.

Yeah, and generating less inflows into TV ours, and that's a result of our pump opinions continue process to evaluate servicing practices. Okay.

And that trend you can see we responded to some of the information that we put in or Merck Hughes.

Where you have the the friend of what is being never leave for her once or twice. If you plot that out you will see that the the trend for less that the perils has been pretty consistent scenes.

Starting really after the big Spike that we so coinciding with the hurricane season right. The late 2017.

And we're just seeing more of it no I don't know Scott if you like.

No I think you said it right which is <unk>.

You know the governing principle here is is.

Consumers have to demonstrate ability and willingness to pay before he can do you know either short term or long term modifications and determining that is.

Subtle and complex process and so we're always looking to optimize that our criteria for doing that to make sure. We're applying those very important tools when it's appropriate and it's one Carlo said you know when there's a hurricane or flooding, we do hardship modifications.

Occasionally then and so.

You know, yes, when you look at the combination of less hardship modifications and then a consistent refinement to improve what were doing everyday to help people is whats really driving it.

Got it thank you very much guys.

The only other thing is going to add is and I think there's there's less demand for it from consumers. When the economy is good too. So a combination of all those facts takes it down.

Thanks for taking my question from Vincent Caintic with Stephen.

Hi, Thanks, Good morning, guys.

Morning.

Thanks for the.

Color on this sensitivity to.

From rates to your funding.

Also talk about the asset side, so if I just look.

This quarter.

Hi yield didnt drop that much even though benchmark rates dropped significantly.

Just wondering if you could talk.

Maybe a bit about the sensitivity. It seems like you do have pricing power. If you could maybe talk about what my that is and if that maybe changes your appetite on different parts of the.

Spectrum. Thanks.

Yep.

Yeah. So one thing to note, though you mentioned that dealer the yield on receivables from.

From dealers right, then I think you're referring to dropping from 3.4, a year ago to 1.6.

That that yield right. There from dealers is really just on a very very small balance that you have down a in the press release and the but on page eight you will see I, just wonder like $30 million balance is thus a legacy.

Loan really.

I am so that doesn't really.

Get baked into into the equation.

But more to your point to your question about pricing power.

Yeah, you're right yields and on on the acquire rigs dropped.

10 basis points only right despite the move down in.

In swaps.

I am.

Really at this point, we do retain it we talked about it already is still competitive out there right. So this has.

It's not like we've lost pricing power, but it's not as if weve gained Moreover, either it really has to do with the the mix that we.

Originate.

Each particular quarter.

If we happen to retain a little bit more of the near prime or prime paper that doesn't quite a goal or feet into the <unk> as being a bob by box.

The yields for the originations down month will drop a little bit.

And all in all I would say or ability to pass higher rates to their consumers while rates were going up.

Was evident we were able to do it now stropp swap rates come down it will also pass that along to the consumer because we have to compete.

Okay.

And so really our key.

Driver in terms of pressuring.

NIM right, which we've seen.

Is how quickly we can benefit from the lower trend in rates that we've seen.

This this year right.

Turning to the earlier point.

We're starting to see that benefit as we secure thanks.

Okay, but to really turn the cost of that around.

Also need a car in.

In the short end that will help LIBOR goes down.

In the US we reprice, then theres talk of that that will help our income for.

Okay. Thanks helpful.

And not just necessarily for pricing but.

Do you have any view on a change and sort of the risk here as you want to play with a notice that there's been more.

Dr. securitizations versus as start.

Any any thought to the change there I kind of just following the market with that thank you.

No no no significant attention.

In a strategy at all.

Jim This is.

It's more of the grain for you. It's called you called out Ryan. This is still single swipe every as we go along we revise.

Yeah. There are pricing, we look at the marker where pricing models, we look at the market, where there are pockets of opportunities and.

And no dramatic tension in originations.

Or in underwriting.

Okay got it thanks very much.

But the one thing to keep in mind when you compare it to drive a nest I remember that we used to fund a drive through private deals right.

And the drive is a more recent we brought it back more recently, so that also might impact that the number of one platform versus the other but there's really no change in on claims running.

Great. Thank you.

And we'll take our next question from Arren Cyganovich switch city.

Thanks, Yeah, just kind of getting back to the TDR balances I think last quarter, you talked about that normalizing maybe at the end of this year. It's kinda continues to get better is the is then the new formation is coming in like as you talked about before.

A bit slower than I had in the past it what do you still expect that to be kind of towards the end of the year. When do we get more of kind of a of a leveling off of that TDR balance.

Yes.

If you remember even a little bit further back we used suspected to level off earlier in the year and it was said sometimes the in the early part of the year.

Absolutely so they lower generation of of TDR slower TDR inflows.

Or update at this big station, it's exactly what you said, we now expect it to continue through the end of the year.

Okay. Thank you.

Thank you.

And we'll take our next question comes back to Chris back with Morgan Stanley .

Hey, good morning.

A couple of questions. One just a clarification on the Eni outlook I know you mentioned her babs 35 million is that a spot move and is that you know an immediate something familiar that the spot that's a spot move well with a 35 million over the course of 12 months that right.

Yeah. This is a parallel more 400 basis points over the course of a year.

Yeah. So you don't like it's not based on the forwards and then I guess the other question is doesn't matter. If it's a 50 bip caught you know all at once versus 25 does that you know change the numbers materially it off the 35 million.

Yeah.

Yeah No is it does it the most.

Be more upfront definitely will help right.

And you'd be in whatever we do on the very short then right if ER.

One month LIBOR drops instead of 25 to 50.

Good.

The benefit the immediate benefit from the average balance for the period.

Yeah.

Yeah, Okay, and then the flip side is how do you expect lower rates are going to impact the consumer in your business do you think.

They are going to you know.

The for it going out for you know bigger exposures do you think your loan growth will pick up.

Do you think it's less probably you know probability of default or something else.

Yes, [laughter] I think it's all those things are certainly reduces Uh huh.

Average American certainly reduces their monthly payments that they have to make.

Kind of.

On the same kind of debt. So yeah, I think it's going to be good for the consumer I think it'd be good for the industry to.

Just generally like freely.

Yeah I guess the question is like what have you been seeing in your probability is a false over the past couple of quarters here has it hasn't changed that much given.

The you know the length of time that we've been sitting here at like 240 on the front end or or not really.

Oh, no not materially no and we do look at it we try to isolate you know similar.

Segments in sandals and see if there's change is a crime and no we don't really see any.

Plus or minus to the performance given what's happened so far.

Okay.

And then just lastly separate topic, but you know the parent is obviously increasing their share of ownership and you know we know that if they go over 80.1% that's a benefit for them from an accounting perspective, but I'm wondering does it impact at all how you operate is there anything different that happens you know if when they they go over an 80% ownership stake.

So Tim this is herb answer is no we have.

I mean.

First of all the the borrowing costs increase their ownership.

And so it's close if that's a function of us having executed repurchases since last year right.

Hey, Jim Yep, so they they 80%, which we and something their holdings of how these close.

Yeah. It does highlight that there are additional benefits.

Who if and when is the 80% ownership threshold were to be.

Hey reached it but or planning the analyses that too poor or a repurchase program is based on our benefits or the benefits for SC and its shareholders and so there doesn't necessarily mean that there would be anything different.

Hey, going up to 80 or or beyond me.

Yeah for us here or anything.

Yeah, I just wanted to make sure I understood like operationally was there anything that it changed with that threshold getting cross if one that threshold that cross sell your answers not operationally all right. Thank you not it yep.

You're welcome.

Okay.

Well this will conclude our <unk> session I will now turn the call Alberta stockpiles for final comments.

[noise]. Thank you thanks, everyone for joining the call. Thanks for your questions and your interest in our company.

As always our investor team will be available for any follow up questions you have.

And they look forward to speaking with you and we'll see you next quarter. Thanks very much.

Thank you.