The company, which has a strong 97 IBD Composite Rating, is
60.3% owned by Santander Holdings USA, a subsidiary ofBanco
Santander (
SAN
).
Automaker Alliance
Making nonprime auto loans remains Santander Consumer USAs
main business. But the mix is becoming more balanced, with more
auto loans to prime borrowers following a 2013 accord to
originate loans for Chrysler Group, which became FCA US, a unit
ofFiat Chrysler Automobiles (
FCAU
). Santander Consumer USA launched the Chrysler Capital car
purchase and lease finance program.
Still, making nonprime auto loans remains its forte.
Santander Consumer USA uses a largely technology-driven
approach to its underwriting that distinguishes it from peers,
says BTIG analyst Mark Palmer.
It uses algorithms formed by many years of experience to make
its lending decisions, he said. In many cases a potential
borrower gets a decision in seconds or minutes vs. days or
weeks.
While the company declined to comment for this story, one of
its filings with the Securities and Exchange Commission
elaborated: As a result of our deep understanding of the market,
we have consistently produced controlled growth and robust
profitability in both economic expansions and downturns.
Adds Sandler ONeill analyst Christopher Donat: By paying
attention to some of the trend developing in their lending going
into the financial crisis, they were able to side-step some of
the worst of the credit problems during the crisis. And some of
their competitors, who were hurt by the financial crisis, ended
up selling their businesses to Santander.
With its focus on subprime loans, Santander Consumer USA
charges interest rates significantly higher than for prime
loans, says Donat.
Prime Loans In Focus
But the company is revving up for more business in the new car
auto financing and prime auto loan space in the wake of its
10-year agreement with Chrysler.
Under the agreement, which became effective on May 1, 2013,
Santander Consumer USA originates private-label loans and leases
to Chrysler Group customers and dealers via the Chrysler Capital
brand. It offers a full spectrum of auto financing products and
services under it for Chrysler, Dodge, Jeep, RAM, SRT and Fiat
vehicles.
As a result of the pact, Santander Consumer USA serves as the
captive auto loan provider for Chrysler, says Palmer. Many of
the loans its making for Chrysler are prime, he adds, which
has resulted in a mix change the past couple of years with
prime making up more of Santander Consumer USAs loan
originations.
A captive auto loan provider to a carmaker is involved in
about 60% of its loan originations, he adds, while Santander
Consumer USA is involved in around 30% of Chryslers loan
originations — so theres room to grow the business.
This (agreement with Chrysler) provides more stability to the
platform, and will achieve the majority of the companys growth
over the next few years, he said.
In the fourth quarter of 2014, Santander Consumer USAs
revenue rose 27% from a year earlier to $1.59 billion alongside a
27% increase in total finance and other interest income to $1.46
billion. Earnings per share rose 109% year over year to 69
cents.
Total originations of $6.1 billion were up from $5.8 billion a
year earlier but seasonally down from the prior quarters $7.4
billion. Managed assets rose 37% year over year to $41.2 billion
and were up from $40.4 billion in the prior quarter.
In the fourth quarter, total originations included $2.4
billion in Chrysler retail loans, $722 million in Chrysler leases
originated for Santander Consumer USAs own portfolio, and $565
million in Chrysler lease originations facilitated for an
affiliate.
Fourth-quarter return on average equity was 29.1%, up from
23.9% in the prior quarter and from 17.3% in Q4 2013.
The main driver of growth has been the Chrysler
relationship, Palmer said.
Analysts polled by Thomson Reuters expect 2015 earnings to
rise 3% to $2.45 a share. They see a 5% gain in 2016 and an 11%
increase in 2017.
I anticipate closer to 11.5% earnings growth in 2015, said
Palmer. We think that the Chrysler relationship in particular is
going to translate into pretty healthy growth.
Through strategic relationships in the unsecured consumer
lending space, the company also does point-of-sale financing,
personal loans and private label credit cards. One strategic
relationship is with Bluestem, which owns the Fingerhut,
Gettington.com and PayCheck Direct brands.
Palmer says that while unsecured consumer lending is not an
enormous contributor to the companys business now, it could be
over time. As for the current climate for the Santander Consumer
USAs business:
While there are always concerns when youre talking about
subprime loans, (its) particularly at the later stage of the
(credit) cycle that loan losses would increase, said Palmer.
Losses have ticked up somewhat, but it hasnt reached a level
that it would significantly eat into the companys
profitability.
Loan Loss Provision Lowers
Palmer adds that the company reduced its provision for loan
losses in the fourth quarter. That decrease was to $560 million
from $770 million in the prior quarter and down from $629 million
in the fourth quarter of 2013.
We continue to be upbeat about the companys business, said
Palmer, who has a buy rating on Santander Consumer USA stock.
Its demonstrated recently and historically that its
technology-fueled approach to underwriting has been effective and
we believe it will continue to be so and should continue to
benefit from its role as Chryslers captive auto loan
provider.
Adds Donat: Since the financial crisis its been a pretty
benign environment (for nonprime auto loans). Car sales have been
rising, credit quality has been improving and jobless claims have
steadily been working down.
Lower gas prices, he adds, should mean that borrowers have
more money in their wallets, which should make them better able
to stay current on their loans.
Santander Consumer USA is a part of IBDs Finance-Consumer
Loans industry group, where it holds the best IBD Composite
Rating. Other highly-rated stocks in the group areCredit
Acceptance Corp. (
CACC
) andORIX Corp. (
IX
)