According to the February Equifax National Consumer Credit Trends Report, 2015 marked another strong year for the auto loan market as originations increased year-over-year, while the mix of loans across the entire credit spectrum held for the fourth year in a row.
From January 2015 through November, analysts pegged 21.7 percent of all auto loans originated during this timeframe were issued to consumers generally considered to be subprime.
Equifax also noticed subprime auto loans have consistently accounted for between 21 percent and 22 percent of new auto loans for the past four years.
“Considerable attention is being given to the subprime segment with some analysts mentioning concern that it is growing disproportionately faster than originations to other segments of the credit spectrum, although the proportional mix has remained relatively static since 2012,” said Amy Crews Cutts, chief economist at Equifax.
“Credit performance is still excellent, showing that lenders are prudently extending credit to well-underwritten borrowers,” Cutts continued.
“Lenders are making more informed lending decisions and the underwriting process has been strengthened as a result of new data and technology that is available to the marketplace,” she went on to say. “For example, today lenders have access to instant income and employment verification which help to accurately portray a consumer’s ability to repay the debt.”
The National Consumer Credit Trends Report cited normal cyclical patterns in delinquency and write-off rates, but also mentioned to a shift in the marketplace with finance companies growing originations more quickly than commercial banks. From January through November 2015, Equifax indicated 53.7 percent of all new auto accounts came through finance companies.
Other highlights from the report included:
• Originations are at highest levels since 2008.
More than 26.8 million auto loans, totaling $554.8 billion, were originated between January and November 2015. This is a 9.4-percent increase in accounts and a 12.4-percent rise in balances over the same time period in 2014. These are the highest levels for the period since Equifax began tracking this data.
• Increase in car sales drives more loan activity, including growth in prime and subprime volume.
A total of 5.8 million auto loans have been originated between January and November 2015 to consumers with an Equifax Risk Score below 620. These are generally considered subprime accounts. This is an 11.2-percent increase over 2014. These newly issued loans have a corresponding balance of $104.2 billion, a 14.5 percent increase year-over-year.
• Delinquency rate for auto loans remains unchanged in January 2015 versus January 2016.
Total auto loan and lease severe delinquency rate in January were 1.15 percent, the same as in January 2015. (Severe delinquency is defined as loans 60 or more days past due or in collections and calculated as a share of outstanding balances). The recession peak delinquency rate was 2.84 percent in January 2009.
• Loan write-offs saw modest increase of 1.8 basis points in January 2015 versus January 2016.
Write-off rates on total combined auto loans and leases outstanding rose to 22.5 basis points in January, up 1.8 basis points from the same month last year. (Write-offs are defined as accounts that terminate in severe derogatory or bankruptcy status and are calculated as a share of outstanding balances). Write-offs peaked at 50 basis points in March 2009.
• Severe delinquency rates on bank loans remained fairly consistent in January 2015 versus January 2016.
Severe delinquency rates on auto loans held by banks were 0.48 percent in January, up from 0.46 percent a year ago. Severe delinquency rates on loans originated to consumers with subprime credit scores were 2.15 percent; in January 2015 they were 2.06 percent.
• Delinquencies experienced a slight decline in finance company portfolios while loan write-offs remained fairly consistent in January 2015 versus January 2016.
Severe delinquency rates in January on auto loans held by finance companies were 1.99 percent, down from 2.01 percent in January 2015. Among subprime accounts, the severe delinquency rate fell from 4.76 percent a year ago to 4.72 percent in January.
TransUnion named its newest suite of solutions Prama, which in Sanskrit means the source for accurate and valid knowledge about the world.
No matter if they speak English, Spanish, French or even Sanskrit, TransUnion’s Steve Chaouki insisted that finance company executives — especially ones that delve deep into the subprime space — will be able to comprehend the data and insights Prama can deliver through a cloud-based solution portable enough to be taken into the board room, the underwriting department or even a gathering with state and federal regulators.
“That’s really what Prama is,” said Chaouki, who is executive vice president of TransUnion's financial services business unit. “We’re trying to build it up as a knowledge and delivery hub. It’s a place where our customers can go to tap into knowledge and information and work with that knowledge and information to further their understanding of their business and act on their business.”
The Prama portfolio will start with two flagship solutions in 2016 — Prama Insights and Prama Studio.
TransUnion explained Prama Insights includes anonymized information on virtually every credit active consumer in the U.S. The data set leverages the power of CreditVision and a seven-year historical view of data, providing finance companies with what TransUnion calls “dynamic” insights that can translate into “clear” benefits at every touchpoint.
During a conversation with SubPrime Auto Finance News in advance of Thursday’s initial launch, Chaouki explained why players in the subprime space are often “heavy” users of analytics.
“They want the resources and capabilities of Prama but don’t want to build it all out themselves. Now it will be all available to them in a turn-key kind of way,” he said.
Chaouki touched on why the release of Prama is so timely since “fear” is starting to bubble up in the industry as delinquencies are starting to rise. In fact earlier this week, Fitch Ratings discussed how analysts are seeing delinquencies and their impact at levels not spotted in almost 20 years.
“If I were a subprime auto lender, I would want to know how I stack up and look by different regions to understand my exposure so I can manage it,” Chaouki said. “What Prama will allow you to do is to go into specific states, look at your risk ranges, the kind of loans you’re underwriting by score and dig into that.
“Then you can see how your loans are performing versus the other loans in that space within that state by vintage,” he continued. “How are the loans you made last month doing versus those from a month before and going back in time up to 84 months? You can look at the trends of how your originations are flowing. You can look at it by region and compare it to the benchmarks and begin to understand if you have something to worry about or if your portfolio is holding up well.”
“It’s a really timely for subprime lenders as we’re talking about these things,” Chaouki went on to say. “You can dig in and ask if there’s a problem in the oil states — North Dakota, South Dakota, Oklahoma, Texas. You can drill into those states and look at how your vintages are performing versus other states. You can begin to segment your population and understand your risk.
“Then as you engage with your regulators, with your board, as you think about your strategy, you can begin to inform them based on how you’re performing relative to the market and relative to your own expectations,” he added.
What’s going to be available soon
The first two modules of Prama Insights are Vintage Analysis and Market Insights.
The Vintage Analysis module leverages TransUnion’s detailed anonymized tradeline history of more than 200 million consumers, allowing users to view seven years of performance data on a cohort basis so they can:
— Monitor underwriting policy: View delinquency trends across various timeframes and origination cohorts, which can help risk managers adjust application scorecards and underwriting strategy to acquire accounts of acceptable risk.
— Forecast losses: Use vintage curves to project charge-offs and estimate loan loss reserves; this is valuable in general business as well as when engaging with regulators or investors.
— Calculate loan profitability: Leverage vintage performance insights to help calculate loan profitability by risk tier, determine the most appropriate credit terms and determine pricing strategy.
— Define marketing strategy: Influence market segmentation, acquisition channel definition and more via vintage performance analysis.
The Market Insights module can provide quarterly views of key lending metrics at a state, regional and national level — enabling customers to access relevant benchmark trends in seconds.
The module includes nine quarters of anonymized data and a more granular understanding of delinquency rate changes by credit tier, geography, line of business and product. Customers using this information can better measure their own performance against their competition in the industry.
“Prama Insights allows lenders to gain real and timely market intelligence that can be used for a wide variety of purposes, such as adapting risk and product strategies,” Chaouki said in TransUnion's release about the suite. “Studio, the second phase of Prama, will allow users to upload their own data, conduct detailed analyses and test strategy changes across a number of dimensions.
“The next phases of Prama will actually allow customers to seamlessly execute new strategies, or changes to existing strategies, in an automated manner that minimizes manual intervention,” he continued. “In short, Prama will fundamentally change the way lenders develop and deploy their strategies, with enormous benefits for them and their customers alike.”
The first Prama Studio modules will be offered to TransUnion customers in mid-2016.
“The tool is only possible because we have spent a better part of three years now upgrading the entire systems of TransUnion,” Chaouki told SubPrime Auto Finance News. “It’s a huge investment for us in bringing our systems up to the most modern systems available at this time. … It’s one of the largest databases that’s out there at this point.
“One of the things we really wanted to do with this software is make it user friendly and easy to integrate,” he went on to say. “You don’t want to create something like this and have it be a huge technological job to allow the customers to access it. We built it as a portal for the customers to come in and engage with TransUnion. The modules are all sitting on the portal and they can select what they want to use and engage with it.”
A video further highlighting Prama can be seen at the top of this page.
Jason Grubb conveyed a similar message not only to the board of directors that hired him to be the chief executive officer of Exeter Finance, but also the workforce of nearly 1,000 employees that he became entrusted with overseeing about a month ago.
During an exclusive phone conversation with SubPrime Auto Finance News on Tuesday, Grubb explained that he focused on three main points, including:
— His experience with a wide array of finance companies that spans more than 25 years
— Where he sees Exeter currently standing in terms of growth and development
— The value in Exeter’s relationship with Blackstone, the investment firm that purchased the company nearly five years ago
“I truly believe Exeter is in a prime position to become one of the premier subprime lenders in the industry,” Grubb said. “One thing I’ve emphasized that we definitely need to continue is to access our organization and areas of opportunity. We have to become scalable.
“At the same time given the regulatory environment we have to make sure we mitigate our regulatory risk as well as our reputational risk,” he continued. “I believe we have a strong capital structure in place. We have an extremely high level of talent within our workforce.
“I also told everyone I was excited to be a part of the Exeter family and that I look forward to our journey together,” Grubb went on to say.
Grubb’s journey to this point included stops with Nissan Motor Acceptance Corp., WFS Financial and most recently with Santander Consumer USA where he departed after 11 years and served in leadership roles including president and chief operating officer of originations.
“I’ve been very fortunate to work for successful companies throughout my career,” Grubb said. “They were all very different companies structurally as well as culturally. I really believe that diversity of experience is going to benefit me greatly as CEO of Exeter.”
Grubb made special mention of Thomas Dundon, who was CEO of SCUSA for nine years before departing last summer.
“The education I got from Tom definitely was invaluable. He’s quite a unique individual,” Grubb said.
A month ago, Exeter chose Grubb to lead the company and replace Mark Floyd, who returned on an interim basis to be CEO for the second time. With Grubb in place, Floyd went back to his position as a member of Exeter’s board.
“He continues to impart his experience and knowledge. He has a real passion for Exeter. He exited retirement twice to help build this company through amazing growth,” Grubb said about Floyd leadership that helped Exeter build a $3 billion portfolio and become the third-largest subprime auto ABS issuer.
“Personally I’m eternally grateful that through Mark’s accomplishments while at Exeter, he set the table nicely for me,” Grubb said. “He definitely made the transition easy. He was very gracious during the meetings we had. I couldn’t be more pleased and honored to know the man.”
Now at the controls of Exeter, Grubb explained that his attention turns to what he described as the company’s two primary constituents — its network of dealerships and the consumers who hold vehicle installment contracts.
“If we’re able to take care of both of those groups, I believe the rest will take care of itself,” Grubb said.
“On a higher level as far as reputation, I’d want us to be known for a company that strives to have exemplary customer service for both the dealers and customers,” he continued. “I also believe it’s important for the organization to be known for its consistency as well as transparency.”
Along with being named CEO at Exeter, Grubb also was chosen to be on the board of directors for the American Financial Services Association, which will host its 20th annual Vehicle Finance Conference later this month in Las Vegas.
When participating in industry-wide endeavors such as what AFSA looks to accomplish, Grubb said, “I treat everything as a learning experience.
“Obviously the individuals who are on the board and the constituents of AFSA are accomplished,” he continued. “As a participant, I will definitely go in listening first and talking second. I would love to hear others’ opinions about what they’re seeing. Then hopefully I would be able to convey some of my experiences and hopefully they would find value in that so we can learn together and collaborate on solutions that will impact the industry.
“AFSA is vital to the auto industry,” he added. “There’s a lot going on and I know people look to AFSA for knowledge and education. I’m just honored to be a part of it.”
When SubPrime Auto Finance News asked Grubb to project the situation when he reaches his first anniversary with Exeter, he focused the finance company’s dealer network similar to what Floyd did when he took the CEO reins just before 2015 closed.
“If we’re talking specifically to our dealer base, I’d want them to recognize the value that Exeter provides as a subprime lender by funding incremental loans and that they hopefully enjoy conducting business with us due to our transparency and consistency,” Grubb said.
“A year from now, I would want there to be ample evidence that we value our dealer feedback,” he went on to say. “I believe that by working together with our dealers to continually improve our program, we both prosper.”
This week, Dominion Dealer Solutions introduced what it’s calling My Payment for dealerships nationwide. Dominion’s My Payment is a suite of tools designed to drive more leads from dealership websites by giving shoppers “real answers” to their payment questions.
The company explained the application embedded in the dealership’s website can move consumers deeper into the sales funnel and increase leads for dealers by 25 percent to 40 percent. Dominion indicated the lead generation process from My Payment can allow online shoppers to select exactly what they can afford and learn what their monthly payments would be for any specific vehicle.
In today’s automotive market, Dominion believes many shoppers are more concerned with the price of the vehicle than the vehicle’s specifics or add-ons. The company claimed My Payment can capture the segment of consumers that are most focused on payment rather than a specific make or model.
By targeting these shoppers, Dominion said the reach of the dealership’s website is broadened to include highly qualified leads, not just browsers. My Payment can let dealers provide easy, informative and engaging methods, which shoppers can use to get accurate payment information and secure credit pre-qualification, and to shop based on the consumer-set payment levels.
The company went on to stress that strong calls to action can encourage shoppers to contact the dealer after selecting a payment option by either phone or setting up an appointment online.
“Most website customers never convert because dealers offer so little for that conversion. My Payment helps dealers offer the customer real information. This is why it generates so many leads from the dealership’s website,” said Nicole Case, general manager for managed services and digital at Dominion Dealer Solutions.
“Best of all, these are leads that enter into the buying process and result in higher front end and back end profits for the dealership. It’s the best Web and marketing conversion solution available today in the automotive industry,” Case went on to say.
Dominion also highlighted My Payment instantly can calculate monthly payments for banks, OEM leases or finance programs, based on configurable dealer profit structure including:
— Customizable reserve markups
— Down payments
— Pricing options
— Credit tiered rates
— All applicable rebates and incentives
Dealers using My Payment on their website can pull reports on interested shoppers by income as well as credit score. My Payment includes fully compliant disclosures for all qualifying programs and terms and is updated daily.
The company added the proprietary soft pull credit technology does not require a Social Security number or date of birth from the consumer. It displays monthly payments for every vehicle in stock and is mobile-optimized, providing highly-qualified leads to the dealer.
Dominion emphasized My Payment’s suite of tools can equip shoppers to make better decisions about which vehicles fit their budgets, thus creating a relationship of trust with the dealership.
”My Payment is a shining example of a suite of tools that gives shoppers something truly valuable while driving results for the dealer,” said Sean Stansell, product director for Dominion Websites. “It’s the true definition of a win-win.”
This week, CUNA Mutual Group announced it is investing in a new direct-to-consumer lending platform SpringboardAuto.com. Officials indicated the relationship means this new technology solution can provide a direct online auto loan platform so credit unions can lend to members with below-prime credit ratings without creating additional credit or operational risk for the credit union.
CUNA Mutual Group noted that its minority ownership interest will help SpringboardAuto.com build scale and invest in its technology platform and third-party data sources.
“CUNA Mutual Group is helping credit unions find new ways to support their members’ financial needs, and SpringboardAuto.com represents one of those new ways,” said John Wallace, senior vice president of lending products at CUNA Mutual Group.
“Auto loans are a core credit union member service, and we believe SpringboardAuto.com provides a valuable option for members who otherwise might not be able to get vehicle financing through their credit union,” Wallace continued.
SpringboardAuto.com will begin offering auto financing services through credit union referrals in selected states later this year, expanding to additional states thereafter.
SpringboardAuto.com explained that it uses a sophisticated automated credit engine for real-time responses. The tool can offer flexible approval terms that can enable approved members to configure their loan preferences, empowering them to see the impact of their decisions throughout the process.
After receiving a referral from their credit union, members can complete the application online without conventional obstacles that borrowers with below-prime credit sometimes experience. The process is geared to minimize requests for redundant customer information, creating a more streamlined experience.
“We are excited about the strategic investment and support from CUNA Mutual Group, and we look forward to helping credit unions serve more members with auto lending alternatives,” said SpringboardAuto.com chief executive officer Jim Landy.
“We believe we have built an attractive path for credit unions to deliver a rewarding member experience with the compliance rigor our partners require,” Landy added.
General Motors Financial president and chief executive officer Dan Berce offered some noteworthy details about the finance company’s subprime business even though more and more of its originations and outstanding portfolio balances are attached to installment contracts and leases associated with prime consumers.
GM Financial closed the year with 18 percent of its originations being considered subprime since the contract holder had a FICO score of 620 and lower. That level is down from the company’s 2014 reading that stood at 37 percent.
However when looking at the value of those originations, Berce pointed out that the origination amount was nearly flat year-over-year as the 2014 figure came in at $1.482 billion and the last year’s stood at $1.479 billion.
Berce delved into the topic of subprime even more when GM Financial hosted its recent conference call with Wall Street observers and shared its fourth-quarter and full-year report.
Here we see on the surface, improving credit trends with losses declining to 3 percent from 3.6 percent a year ago and delinquencies, whether it's 31 to 60 (days) or 61 plus, being fairly flat,” Berce said.
“These metrics are being impacted by the increasing amount of prime and near prime business that we are doing, which tends to have lower losses than our legacy subprime book,” he continued. “And as we continue to grow our prime origination, these metrics should continue to improve.
“I want to point out, though, that 60 percent of our North America retail loan portfolio still would be considered subprime by credit score, and so our metrics are higher than what a purely prime portfolio would look like,” Berce went on to say.
Overall performance
GM Financial reported that its Q4 net income rose to $131 million, up for $59 million. The company’s earnings for the year came in at $646 million, compared to $537 million for 2014.
The company indicated its Q4 retail loan originations dipped a bit on a sequential basis, coming in at $4.4 billion compared to $4.7 billion for the previous quarter. But the Q4 figure was up year-over-year when GM Financial originated $4.0 billion to close 2014.
For all of 2015, the company said its retail loan originations totaled $17.5 billion, compared to $15.1 billion a year earlier.
GM Financial’s outstanding balance of retail finance receivables stood at $29.1 billion as of Dec. 31.
Within the leasing space, GM Financial noted its Q4 originations totaled $5.4 billion, up significantly from a year earlier when the figure came in at $2.1 billion. However the company’s leasing originations did soften a bit on a sequential basis as they dipped from $6.2 billion in Q3.
For the year, GM Financial originated $20.2 billion in leases, up from $6.2 billion a year earlier.
Also of note, the company mentioned its outstanding balance of commercial finance receivables was $8.4 billion as of Dec. 31; a rise from $8.1 billion at the close of 2014.
Continuing a three-decade relationship of supporting the auto financing endeavors of its credit union partners, Enterprise Car Sales calculated that it generated close to $500 million in loan volume to nearly 28,000 credit union members during 2015.
Officials highlighted recent reports that show credit unions are steadily gaining market share in auto financing. They added that credit union membership is on the rise across the country, and used-vehicle auto loans at credit unions have seen an almost 14 percent increase compared to a year ago.
Enterprise Car Sales said it is further supporting this growth through tailored used-vehicle buying programs that are meant to create opportunities for credit unions to increase their used-vehicle loan portfolio and optimize member loyalty.
In fact, Enterprise Car Sales determined that it has helped generate almost $10 billion in loan volume during the last 30 years with more than a thousand credit union partners nationwide.
"We are very appreciative of the mutually beneficial relationships we have built with credit unions in our local communities," said Beth Wheeler, corporate director of business development at Enterprise Car Sales.
“We gain increased exposure to new customers through their referrals, and in return, we refer their members back to them for financing,” Wheeler continued. “With more consumers turning to credit unions for their auto loans, we expect these partnerships to continue to flourish in the coming year.”
Strong credit union partnerships are a driving force behind the overall growth of the Enterprise Car Sales network.
In 2015, Enterprise Car Sales made a significant investment in its facilities, including opening three new locations in Burnsville, Minn., East Syracuse, N.Y., and Cranberry Township, Pa. The company also relocated six locations to enhanced facilities.
“Enterprise's integrity in sales and service has made them a great partner for us," said Darin Woinarowicz, chief executive officer of Arrowhead Credit Union in southern California.
“Our team looks forward to referring our members to Enterprise because we know they are going to have a great experience. It’s a great way to do business,” Woinarowicz went on to say.
For more information about how Enterprise Car Sales partners with credit unions, visit www.enterprisecarsales.com/perfectpartnership.
Credit Acceptance Corp. chief executive officer Brett Roberts sees only one scenario where the competition for auto financing originations will diminish.
Until that condition ever arrives, Credit Acceptance still is adding contracts to its portfolio at a strong pace having closed 2015 with booking 298,288 vehicle installment contracts. That figure represented 33.2 percent jump year-over-year.
Investment analysts wanted to know if Credit Acceptance could keep up that pace, especially since its active dealer pool is much deeper, too. The company reported 9,064 active dealers as of Dec. 31; those stores closed at least one contract with the finance company during the quarter.
“I think the best way to get a sense for the competitive environment for us is to look at volume per dealer and the volume per dealer for the quarter increased by 3.8 percent,” Roberts said. “That’s less of an increase than we saw in prior quarters of the year, although we did have a tougher comparison as the fourth quarter of the prior year was when we started to grow the business.
“Beyond that, I think as long as there is capital available to the market, we will continue to see lots of competition,” Roberts went on to say when Credit Acceptance hosted a conference call following the release of its latest financial performance.
“It is very competitive right now. It has been for some time. But in terms of an outlook, it’s really hard to say wouldn’t look for much of a change until capital dries up for the industry,” he went on to say.
Credit Acceptance continues to be on the hunt not only for originations but to grow its dealer network. Roberts estimated there are 60,000 franchised and independent dealers nationwide; many of which have limited resources to work with subprime customers.
“We have very small market share currently. There is a lot of dealers out there that could use our program and benefit from it. They don’t have it currently,” Roberts said.
“We would like to think that we have lots of room to continue to grow our active dealer count. We made some progress on that this quarter,” he continued.
Credit Acceptance also acknowledged that as its origination volume is growing within an expanding dealer base, the terms of those contracts also are lengthening as well. The company indicated its average initial term for contracts assigned in 2015 was 49.8 months as compared to 46.9 months for contracts assigned in 2014.
The combination of all that activity pushed Credit Acceptance to a consolidated net income level for the year of $299.7 million, or $14.28 per diluted share. That figure is up from $266.2 million, or $11.92 per diluted share, in 2014.
Ally Financial reported that $14.8 billion of its $41 billion in total auto financing originations in 2015 stemmed from installment contracts for used vehicles. The figure marked a rise of $3.1 billion year-over-year.
Chief executive officer Jeffrey Brown reiterated why the used-vehicle portion of its portfolio is so valuable, especially in light of expectations that charge-offs likely will tick higher as 2016 rolls along. When Ally shared its fourth-quarter and full-year financial statements, investment observers asked Brown about the potential impact if used-vehicle prices soften by 5 percent or more this year.
“Obviously the amount we lend against the car and the (loan to value ratios) are determinant on those used-car prices,” Brown said. “But keep in mind, when we originate a loan for a used car, the predictability of where the value of that car is going over the next few years is pretty consistent. We can predict that pretty well.
“Where you really see the drop off is really on a new car once it rolls off a lot and you see a much bigger drop in the value of that car and it's much harder to predict because it’s a brand new car and you haven't seen it,” he continued.
“So if we're out financing two-year, three-year, four-year old cars, believe me, from a loss perspective, we're very comfortable with that and honestly over the last year as we've gotten more and more into used,” Brown went on to say. “Where we've really exceeded from a loss perspective, where we've done better than expected really has been in the used-car channel. It's been very consistent, so I wouldn't' think that the overall drop in used-car prices that we're expecting is going to be a significant driver really of our loss rate in used cars at this point.”
Earlier in this week’s call, Ally acknowledged that its net charge-offs closed the year at 1.21 percent, a level 56 basis points higher than the 2015 low point that came after the second quarter. The finance company also noted its delinquency rate stood at 2.91 percent after the fourth quarter, a level 18 basis points higher than a year earlier.
“We continue to watch our vintages very closely and overall, we feel very good about credit trends. With stable to improving unemployment, the overall environment continues to show healthy signs and asset quality continues to perform in line or better than expected,” Ally chief financial officer Christopher Halmy said.
Another part of why Ally feels so strongly about its portfolio is it doesn’t contain as much subprime paper as perhaps the finance company originated in the past. Brown noted in his opening comments that contracts connected with customers holding a FICO score at 620 or below constitutes just 8 percent of Ally’s outstanding portfolio. And deep subprime — customers with a FICO score below 540 — comprises just 1 percent of Ally’s auto financing business, according the CEO.
“Subprime players including one that we often get compared to are well over 40 percent,” Brown said. “This is a very different model. This is a high quality balance sheet generated from the business that has been consistently profitable including during the Great Recession.”
Brown described an upward drift of 10 to 15 basis points in Ally’s charge-offs as “normalization of our mix as some of the older vintages roll off and some of the new mix that we're putting on comes on the books.” He pointed out that during the worst parts of the Great Recession, the levels were more than double the most recent readings. And during that span, Brown insisted Ally had only one quarter where its charge-off rate climbed that high.
“When we think about the overall book, where we’re going, the originations we put on, we think this book is going to be very profitable even through a crisis,” Brown said.
Overall performance
Ally indicated that its core pre-tax income for 2015, excluding repositioning items, improved 11 percent year-over-year to $1.8 billion with $446 million of that amount coming during the fourth quarter.
That $41 billion in auto financing originations for the year marked a 35-percent climb. Ally highlighted the improvement came as the result of successfully replacing and exceeding the reduction in General Motors subvented and leasing originations in Q4. The company added origination volume also was driven by year-over-year growth in the non-subvented new-vehicle channel, which was up 33 percent, and in the used-vehicle channel, which was up 27 percent.
“Ally’s performance in 2015 reflected the fundamental strength and adaptability of our operations and the successful execution of the multi-year plan to improve profitability,” Brown said.
“Our auto finance business is more diversified than ever, and our leading presence in the industry enabled us to shift capital from incentivized business toward retail auto contracts and post $41 billion in auto originations last year, which will be a significant contributor toward a consistent earnings stream in the future,” he went on to say.
Santander Consumer USA highlighted that its auto financing originations moved higher both during the fourth quarter and for the full year. However, the finance company that also serves as the captive for Fiat Chrysler Automobiles acknowledged it lost market share.
And SCUSA believes it knows the places where the market share went.
“If you take the top 20 lenders in the market as a group, the top 20 lenders lost share in the fourth quarter, and if you look at them all individually, there are only a few that didn’t lose share,” SCUSA chief executive officer Jason Kulas said when the company shared its Q4 and 2015 financial report.
“We obviously lost some share in the fourth quarter. But, if you compare that to the smallest players in the industry, the smallest players actually picked up share,” Kulas continued. “So, there’s this interesting dynamic going on where the people with the most history and the most data have held the line on credit and structure and lost a little bit of share, and the smaller competitors at sort of the very low end from a size perspective in the industry, appear to be picking up some share.”
Kulas was quick to calm any fears investment observers might have had about SCUSA’s origination capabilities and its market status. The company wrapped up Q4 with $5.9 billion in originations (up 7 percent year-over-year) and generated $27.9 billion in all of 2015; a figure that landed 6 percent higher.
“That’s not a trend because it’s only happened over the last quarter or so, as far as the smaller players, but it’s something we want to watch because the move was pretty significant relative to where they were entering the quarter,” Kulas said.
“Just a sign, I think again of some of the increase in competition,” he added, “So that leads us obviously to watch things very closely.”
The impact of smaller finance companies taking a bigger piece of the market pie also spilled over into SCUSA discussing its performance in the ABS market.
“What we’ve seen is there’s still a lot of demand, and so you’re right, many different types of issuers have been able to access the markets fairly successfully,” Kulas said when asked about the topic. “What we’ve seen as far as changes, is that — and I mentioned this last quarter — there’s been a little bit of an increase in the spreads for the executions, but the demand is still there and that continues into early 2016 with the transaction that we priced recently.
“Although we’re seeing it, the market continues to have its challenges, and so I think what you’re seeing reflected in the market right now is concern about where we are in the credit cycle, concern about some of the volatility that they’re seeing in the credit markets,” he continued.
“Our perspective on that is that we have a significant following in the credit markets because we have such a long history of performing through cycles,” Kulas went on to say. “We tend to be in a position, as liquidity goes away, that we remain fairly strong on a relative basis, and so I think we’ll benefit from that.”
Overall performance
SCUSA reported its net income for fourth quarter came in at $68 million, or $0.19 per diluted common share. That’s down compared to third quarter net income of $224 million, or $0.62 per diluted common share, and fourth quarter of last year of $247 million, or $0.69 per diluted common share.
Executives explained the most recent were negatively impacted by lower of cost of market adjustments on the held for sale personal lending portfolio, driven by seasonal balance increases as earnings were positively impacted by provision model adjustments.
The company’s full-year net income rose to $866 million, or $2.41 per diluted common share, up 13 percent from $766 million, or $2.15 per diluted common share in 2014, and up 3 percent from 2014 core net income of $842 million, or $2.37 per diluted common share.
“We continue to be strategic in our originations approach, maintaining disciplined underwriting practices and selectivity while growing auto originations 6 percent over the prior year,” Kulas reiterated.
“Recognizing our reported results for the quarter are challenging, there are several factors that are not a true reflection of the earnings power of our franchise,” he continued.
“I would like to thank our employees, customers and dealers for being a large part of another successful year. SC's fundamentals remain robust and we remain committed to generating shareholder value,” Kulas went on to say.
SCUSA highlighted its finance receivables, loans and leases held for investment increased 4 percent to $30.0 billion as of Dec. 31, up from $28.8 billion a year earlier.
The company indicated its average APR as of the end of the fourth quarter for retail installment contracts held for investment was 16.8 percent, in line with 16.9 percent as of the end of the third quarter and up from 16.0 percent as of the end of Q4 2014.
“The year-over-year APR increase is driven by the opportunity to increase originations in a disciplined manner within lower FICO buckets at appropriate returns,” executive said.
SCUSA noted its provision for credit losses increased to $800 million Q4, up from $560 million a year earlier. Executives mentioned the Q4 2014 reading benefited from $149 million in model impacts, including seasonality and a reduction in months' coverage; neither of which impacted provision in Q4 2015. The year-ago figure also benefited from $58 million due to outperformance in net charge-offs.
“Additionally, effective in the fourth quarter 2015, SC recognized changes in value of the personal lending portfolio, including customer defaults, as lower of cost of market adjustments in net investment gains or losses, rather than recognizing provisions and charge-offs on this portfolio,” executives said.
They went on to point out that after adjusting for these impacts and net growth and mix of the portfolio, Q4 2015 provision was impacted by $41 million related to deterioration of forward-looking loss expectations, consistent with the trends in net charge-off ratio and delinquencies.
SCUSA’s net charge-off ratio and delinquency ratio on the individually acquired retail installment contract portfolio increased to 9.6 percent and 4.4 percent, respectively, for Q4 2015 from 8.1 percent and 4.2 percent, respectively, for the fourth quarter 2014. The company’s full year net charge-off ratio on the individually acquired retail installment contract portfolio was 7.3 percent.
After adjusting for lower of cost of market impairments, the company’s the net charge-off ratio of 7.0 percent was up 10 basis points compared to 2014.
"This quarter, seasonal balance increases and seasonally high customer default activity drove net investment losses on our personal lending portfolio, which was classified as held-for-sale as of the beginning of the quarter,” SCUSA deputy chief financial officer Jennifer Davis said
“Balances on this portfolio and customer defaults both generally decline throughout the first half of the year, so we expect smaller lower of cost of market adjustments over the next couple of quarters,” Davis added.
SCUSA announces approximately $900M in asset sales related to its personal lending business
In other company news, SCUSA said on Monday that it completed the sale of assets from its personal lending portfolio to an undisclosed buyer. The portfolio was comprised solely of Lending Club installment loans with an unpaid principal balance of approximately $900 million as of Dec. 31.
“This sale is consistent with our decision, in the third quarter of 2015, to focus on our core objectives of expanding the reach of our vehicle finance platform, creating opportunities in our serviced for others platform, diversifying our funding sources and growing capital,” Kulas said.
“The assets in the personal lending portfolio were classified as held-for-sale beginning in Q3 2015, and we are pleased that this sale of a significant portion of the portfolio is complete,” he continued.
Deutsche Bank Securities acted as sole financial advisor and Mayer Brown acted as legal counsel for SCUSA.
