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.”
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.