How ‘fairly stable consumers’ could impact subprime

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CARY, N.C. - 

Certain macroeconomic trends — especially employment and consumer confidence — prompted Santander Consumer USA president and chief executive officer Jason Kulas to say that he sees a “fairly stable consumer” after he examined the finance company’s portfolio as well as the entire auto finance market.

However, those two particular economic trends could leave negative ramifications when consumers look to obtain auto financing later this year, in particular individuals who fall into the non-prime or subprime spaces.

To recap those upbeat trends, the U.S. Bureau of Labor Statistics reported this past Friday that total nonfarm payroll employment increased by 235,000 in February, and the unemployment rate remained virtually unchanged at 4.7 percent. Federal officials said employment gains occurred in construction, private educational services, manufacturing, health care and mining.

Meanwhile, The Conference Board Consumer Confidence Index, which had declined moderately in January, increased in February. The index stands at 114.8, up from 111.6 in January.

The monthly Consumer Confidence Survey, based on a probability-design random sample, is conducted for The Conference Board by Nielsen

“Consumer confidence increased in February and remains at a 15-year high,” said Lynn Franco, director of economic indicators at The Conference Board. “Consumers rated current business and labor market conditions more favorably (in February) than in January. Expectations improved regarding the short-term outlook for business, and to a lesser degree jobs and income prospects.

“Overall, consumers expect the economy to continue expanding in the months ahead,” Franco added.

SCUSA conducted its annual investor day just before each of those trends were updated. Still, Kulas conveyed an optimistic assessment.

“This is an interesting topic because there's a lot of people are out with their earnings calls talking about what they're seeing with the consumer. We've done the same,” Kulas said according to a transcript of the event posted by the finance company. “What you'll hear from us is we still think the consumer is pretty strong. It’s not that we ignore trends. We certainly factor in what we see into how we originate and how we think about the future, but the facts are pretty interesting.

“The first one is obviously employment. … The consumer has a job,” he continued. “Consumer confidence is a really positive story right now.

“If you look at debt ratios, while they’re increasing, they’re still below where they were pre-crisis, particularly if you look at auto,” Kulas went on to say. “So for us, it’s not that we ignore the trend. We certainly factor in the trends, but in our assessment of the consumer, the consumer is still relatively strong today, and that’s why we see positive performance. … That's what we see reflected in our performance, a fairly stable consumer.”

Evidently, the Federal Reserve thinks consumers are “fairly stable,” too, which is why it’s widely expected that the monetary agency will push up interest rates later this week. Comerica Bank chief economist Robert Dye is projecting the uptick to be 0.25 percent.

Dye also touched on what else the Federal Open Market Committee (FOMC) is likely to share when it meets this week. The Fed will release a new “dot plot” and economic projections on Wednesday, and chair Janet Yellen will have a press conference.

“With a Fed funds rate hike a near certainty, the focus is now on forward guidance,” Dye said. “If the Fed hikes on Wednesday, they will have begun a pattern of raising interest rates every other meeting, and on meetings with scheduled press conferences. So analysts will be looking for clues in the policy announcement, in the dot plot and in Janet Yellen’s answers to reporters’ questions about the pacing of interest rate hikes for the remainder of this year.

“The December 2016 dot plot was consistent with three rate hikes for 2017. We could see the March dot plot shift upward to be consistent with four rate hikes in 2017. The minutes of the March 14/15 FOMC meeting should prove interesting when they are released on April 5,” Dye went on to say.

Turning back to the event hosted by Santander Consumer USA, chief operating officer Rich Morrin described how interest rates inching higher might impact non-prime auto finance applicants.

“The biggest impact for the most part is going to be the fact that fewer people will not be able to actually transact because we're going to be requiring, for example, more money down to get to a certain amount financed that we're willing to extend,” Morrin said. “So what generally will happen is they just can’t come up with those dollars.”

Morrin went on to mention why SCUSA could handle that development better than other finance companies that book non-prime and subprime paper.

“If the overall market starts to kind of fall, the reason why we feel comfortable given where we are in that space is the fact that we’re a large player in the space and smaller players who are taking share, we start to become in an environment like that given our marginal cost relative to those competitors, we start to be able to pick up volume that they might not be able to pick up in that kind of environment and make better decisions about which consumer should get the right price given that dynamic.

“In an environment like that for non-prime consumers, we would expect that we actually can maintain share or actually potentially grow depending on the ultimate impact to smaller players in the space,” he added.