So far this year, a wide array of investment analysts are asking finance companies that bring in any non-prime or subprime paper about their current risk appetite. Another occasion came when Santander Consumer USA hosted its quarterly conference call recently, in which the finance provider reported a total year-over-year origination volume drop of 21 percent in the first quarter.
While SCUSA originations came in at $5.4 billion, the company took action to compensate itself for risk since the average FICO score of the contract holder attached to the originated paper it retained ticked down to 593 from 601 a year earlier. As a result, SCUSA pushed the average APR on those contracts up to 17.0 percent, up from 15.3 percent.
President and chief executive officer Jason Kulas explained during his opening remarks that SCUSA Q1 originations with FICO scores below 640 in its core and Chrysler Capital channels decreased 16 percent and 33 percent, respectively, versus the prior-year quarter.
Part of what triggered concern from Wall Street was SCUSA’s nearly $26 million regulatory punishments involving the attorneys general in Massachusetts and Delaware. Kulas referenced the company’s presentation that mentioned more than 800 dealerships have been terminated for performance-related issues.
The company went on to say it “further enhanced dealer oversight to include qualitative metrics such as negative media, false documents and consumer complaints. If dealers breach any of the qualitative or quantitative metrics and performance does not improve, SC may terminate the dealership.”
Kulas added, “As the industry continues to focus on this area, we are committed to be leaders in dealer management, moving beyond the traditional methods of monitoring credit performance.”
Furthermore, Kulas was asked to explain if the paper SCUSA is now accepting — especially in the lower credit tiers — should perform better than what the company originated in 2015 within similar credit segments. Multiple conference call participants made the comparison, insinuating how that 2015 vintage isn’t performing up to expectations.
The company did acknowledge that its net charge-off and delinquency ratio for its retail installment contracts increased to 8.8 percent and 3.9 percent, respectively, for the first quarter of 2017 from 7.6 percent and 3.1 percent, respectively, a year earlier. SCUSA noted the increases in the net charge-off and delinquency ratios, and in troubled debt restructurings (TDR) balances, were driven by the aging of the more non-prime 2015 vintage and slower portfolio growth since the prior year first quarter.
“We always want to maximize our capture with all applications that we get. The issue we always have is that many times at different parts of the credit spectrum at different times what we think is the right pricing structure, the market may have a different view so we get less,” Kulas said when asked about those metrics during the call.
“Our cash rate to non-prime, even though they’re up sequentially, are still in the high single digits, which historically is the range we’ve been and that’s the range that has served us well through several cycles,” he continued. “So, for us, we track competitive factors, we track market share, we look at volume, but what we really want is the right risk adjusted return for every single asset we book, and that’s where we’re going to be focused; not on doing more or less of any certain part of the credit spectrum.”
Kulas then addressed the specificity of the newest vintage against what came into its portfolio so far this year.
“I will say, being specific about comparing 2015 to what we’ve originated so far in 2017, there are some very key differences,” Kulas said. “We feel like our — going back to the other comments about the trade-off in risk adjusted yield versus loss — we feel like there’s a much better trade-off in our early 2017 vintages on those two factors than what we had in 2015. There are certain pockets of what we originated in 2015 that we are no longer originating. So, just by definition in terms of our approach to the market, it’d be different.
“We saw that same thing, by the way, when we went through 2006 and 2007,” he continued. “When you go through those types of situations, you learn from them. You leverage your data, you make decisions based on what you’re seeing and some things you never do again and some things you just make sure you price for.
“For us, it’s a little bit of both. That’s what we’re doing,” Kulas went on to say. “We’re learning from what we see. We’re factoring it into the new originations and we would expect that, for example, if we were sitting here on our second quarter call talking about incremental growth in non-prime originations, that we would be getting more than paid for those originations and we’d feel very good about them, or we won’t do them.”
All of the Q1 activity left SCUSA with $143 million in net income, down from $208 million a year earlier.
“We believe there’s a direct connection between strong consumer practices, a culture of compliance and the creation of shareholder value,” Kulas said near the end of his opening remarks. “Simply stated, the companies that embrace and execute on these concepts will be more successful than those who do not.
“In 2017, SC will drive value through enhancing compliance controls and consumer practices, continued credit discipline, diverse and stable sources of liquidity, industry leading efficiency and technology, a focus on recognizing upside in Chrysler Capital through dealer VIP, floorplan and the Santander flow program, and finally, being simple, personal and fair with our customers, employees in all constituencies,” he went on to say.