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Transcript of Santander Consumer USA Holdings Inc (SC) Q1 2020 earnings call




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Santander Consumer USA Holdings Inc (NYSE: SC) Q12020 Earnings Call April 30, 2020, 8:00 p.m. ET


Prepared remarks
Questions and answers
Call participants

Prepared remarks:


Hello and welcome to the Santander Consumer USA Holdings Q1 2020 earnings conference call. [Operator Instructions]

It is now my pleasure to introduce your host, Evan Black, responsible for investor relations. Evan, the floor is yours.

Evan Black – Investor Relations

Thank you. Hello. To start, I just wanted to say, on behalf of the team, thank you to everyone who obviously joined the call on short notice today given yesterday’s events. We appreciate the flexibility and look forward to the questions and answers at the end.

So on the call today, we have Mahesh Aditya, our CEO; and Fahmi Karam, our chief financial officer.

As you know, some of the statements made during today’s call may be forward-looking, and we encourage you to review our risk factors and the SEC filings for these statements. We will also likely refer to certain non-GAAP financial measures, and believe they are useful to investors. And of course, we will have a reconciliation of these with US GAAP with the presentation we tabled yesterday.

And with that, I pass the call to Mahesh.

Mahesh Aditya – Director

Thank you Evan and hello everyone. Again, apologies for yesterday’s glitch and thank you for joining us to review our quarterly results.

Let me start by saying that our thoughts are with those who have been affected by COVID-19. In particular, sick people and the health professionals responsible for taking care of them. We sincerely thank all those who put themselves in daily danger to deliver food, operate essential establishments, drive ambulances, taxis and buses and ensure that the business remains operational. Many of these essential workers are our customers, and we want them to know that Santander is there for them. And I want to thank our colleagues in call centers who are at the forefront of this crisis and who made us proud by being there for our customers in a period of extreme stress, by listening to them, by demonstrating empathy and a willingness to find solutions.

I would like to draw your attention to the third slide to review the critical steps we have taken in response to this unprecedented crisis to support our employees, customers, dealers and the communities in which we operate.

Starting with our employees. Over 95% of our employees work from home. Thanks to the massive efforts of our IT team and our operations managers, thousands of laptops were deployed in a matter of weeks so that we could continue to serve our customers without missing a step. For jobs that require employees to be in the office, we have taken additional measures to ensure security at each of our sites, such as social distancing and increased protocols to keep the workplace as clean as possible.

We have launched a company-wide emergency paid leave program so that our employees have time to make arrangements for family and child care. Finally, we temporarily offer a weekly allowance to our front line employees, and a big thank you, finally, to all of our 5,000 colleagues for their tremendous resilience during this period.

Then our customers. As you saw in our previous announcements, we have implemented a series of actions to assist our customers during this crisis. These include the extension of deferrals of payments for loans and leases, exemptions from delay and the temporary suspension of involuntary reversals.

We have provided significant financial assistance to our clients through loan extensions since the start of the pandemic. As of April 22, we had executed more than 350,000 loan modifications specifically related to this economic crisis. As a reminder, in 2019, we granted approximately 25,000 to 30,000 loan extensions per month. Although at a much higher level recently due to the crisis, loan modifications for our clients are common practice. We have a long experience in assistance in times of financial difficulties. We have the experience and the tools to quickly execute forbearance programs and help clients get through these uncertain times. The initiatives we have implemented for our customers as a result of COVID-19 are also consistent with our response to major natural disasters with a single event in the past. The most recent case occurred in 2017, when hurricanes struck Houston and surrounding areas, as well as most of the state of Florida. We have a large percentage of our customers in Texas and Florida, and have completed approximately 80,000 extensions in these affected areas.

Although the impacts of COVID-19 are clearly more extensive than recent natural disasters, our service and operations team has a lot of experience in providing financial assistance to customers, and we are convinced that the measures we have taken are customer centric and appropriate at the moment we are in.

One point to note is that the majority of our clients who asked for help during this pandemic have not used loan forgiveness in the past. And at the time of the request, most of them were not late in their payments. Based on our experience, we believe that these accounts could have a high cure rate once normalcy is restored.

Next, for our Chrysler dealers and potential Chrysler Capital customers, we partnered with FCA to launch new programs, including the first 90-day deferred payment on certain FCA models, no APR payment for 84 months, and certain FCA models 2019 and 2020. And for our relations with floor plans, Santander Bank offered 90 days of deferral of interest from floor plans; restriction reports for older, new and used vehicles; deferral of principal and interest on term loans; the ability to recover old models, used vehicles and free up money; and unique lines of credit and term loans.

The government, the Federal Reserve, the Department of the Treasury, the Senate and the Congress reacted urgently and launched a historic recovery plan to help our American citizens to feel this crisis. More specifically, I want to acknowledge the support of our regulators as they have helped us quickly facilitate solutions for our customers.

Finally, for our communities, Santander U.S. will provide $ 25 million in funding to community development financial institutions. SC also donated $ 3 million to organizations serving vulnerable populations in our communities hardest hit by the crisis.

Let’s go to slide four to discuss our first quarter performance. At the start of the year, our financial performance was headed for an excellent quarter and the continuation of the good results of 2019 before the disruption caused by the virus. Sales of new vehicles got off to a good start and prices for used cars were high in January and February. Our business began to be under pressure in mid-March and our results for the quarter began to reflect some of these pressures, as highlighted in the first quarter results.

During the quarter, we recorded $ 452 million in provisions for loan losses related to economic factors mainly attributable to COVID-19. Excluding these reserves, our estimate of the CECL on day 1 was relatively consistent with the estimate we provided last quarter, and our net profit was slightly higher than that of Q1 2019.

We ended the quarter with a provision / loan ratio of 17.8%, compared to 9.9% at the end of 2019 and 16.8% on January 1, 2020 after the implementation of the CECL. Fahmi will discuss the underlying assumptions of the loan loss reserve, but it should be mentioned that the two important drivers of our reserve formation are the inherent quality of the portfolio determined by the historical performance of the accounts and the prospective economic vision of the term of the loan in our books. .

Our total auto emissions amounted to $ 7 billion in the quarter, relatively stable compared to the first quarter of 2019. Origins started the year again strong until mid-March, when the On-site shelter orders nationwide have started to decrease demand and volumes.

The volume of preferential loans has increased thanks to the new programs that we have launched with FCA and $ 1.1 billion in initiations through our program at Santander Bank. The volume of leases also increased slightly due to the strength of January and February, as our share increased, however, loan volumes excluding loans decreased. Fahmi will provide more details shortly.

During the quarter, we also announced a strategic multi-year preferred lending relationship with Vroom, an innovative end-to-end e-commerce platform designed to provide a better way to buy and sell used vehicles. We have been supporting Vroom since 2018 and this new privileged relationship will make it easier for Vroom customers of all credit profiles to obtain financing.

Let’s move on to credit performance. While we are still assessing the impact of the pandemic, our first quarter performance has remained stable to better compared to the first quarter of 2019. Gross and net load ratios have improved as well as early phase failures. Late payments have increased by 40 basis points and our collection rate has decreased year over year. Most credit measures were only slightly affected by the economic slowdown this quarter, and we expect performance to be further enhanced in the future.

Factors That Could Affect These Credit Parameters Include Short Term Loan Extensions That Will Improve Unpaid Payments And Reduce Charges Over The Next Months, Temporary Suspension Of Repossession Will Reduce Collections and the price reductions for used vehicles while the dealers clear their used lots, the activity of cars and auctions remains slow. We also expect that once repossessions begin, there will be increased downward pressure on used cars until supply decreases and demand begins to recover. All of these will be important determinants of our credit performance in the future.

During the quarter, Santander Consumer demonstrated continued access to liquidity, by performing two securitizations and accessing additional financing in late March. After the end of the quarter, we were one of the first issuers of ABS to execute a transaction since the start of the crisis.

Since April is almost behind us, I would like to provide a brief overview of some of the recent trends we have seen in our business. Until April 22 compared to the same period last year, our total number of requests decreased by approximately 26% and the total number of requests decreased by approximately 22% due to orders for on-site shelters , dealer closings and lower demand. Due to the closings of auction houses and the suspension of repossession, we also saw a decrease in collections in April. For example, our auctions decreased by about 50% in April compared to the same period last year. However, the auction house’s activities appeared to resume in the past week. And Fahmi will cover some of the other green shoots that we are starting to see in our business shortly.

During this crisis, our goal was to protect our employees. We knew that if we could take care of our teams and position them for success, they, in turn, would take care of our customers. Fortunately, this is exactly what we saw happening. In mid-March, when we saw the surge in the number of customers calling for help, we saw our post-call survey results reach record levels. Two key pieces of evidence about what our customers think of us. First, the overall satisfaction of our customers in the past four weeks has been more than 10 percentage points higher than previous levels. Even with extended wait times and highly stressed customers, our service team was there when they were needed most. Second, and just as impressive, we have seen the response rate for responding to the post-call survey double in the past four weeks.

In summary, I am very proud of our performance and the teamwork displayed by our employees over the past few weeks. It was not easy, but we managed it well and our business continuity plans worked. Despite the progress we have made in recent weeks, we still have headwinds to come, and I am confident that our teams will continue to come together to identify innovative and effective solutions to help our customers and further improve our brand and reputation. . . We are entering this difficult period from a position of strength supported by solid capital and liquidity, which gives us the certainty that we can absorb this brutal economic slowdown.

We have been preparing for a potential economic slowdown at the end of the cycle for several years. In the past three years in particular, we have made great strides in improving and improving our risk management framework, including operational risk and credit risk. We have added high quality talent to our risk organization and invested in advanced tools and data sources, which allows us to better understand people through the door. The quality of our portfolio has improved thanks to better analyzes and targeted credit actions until 2018 and 2019. We have eliminated certain sectors that performed poorly and captured market share and others that are profitable and with better risk.

We are still less than two months away from the crisis, and it is very difficult to estimate its duration or its severity. We are encouraged by the unprecedented and swift action taken by government and bank regulators to relieve individuals and small businesses, but the magnitude of the economic impact and the speed of recovery are difficult to assess and are still uncertain.

With that, I give the floor to Fahmi for a more detailed review of our results. Go ahead, Fahmi.

Fahmi Karam – Financial Director

Thank you, Mahesh, and good morning everyone. Before entering into the performance of the quarter, I also wanted to recognize and thank our employees who go beyond everyday to help our customers and our company meet the many challenges presented by the pandemic. I was impressed with the dedication to implementing emergency plans, solving new problems and working as a team in all functions to get the job done.

Now let’s turn to slide five for some key economic indicators that influence our performance. All the measurements on this page started the year off pretty well. However, the macroeconomic environment has changed considerably since our last intervention due to the impacts of COVID-19. The pandemic has caused continued uncertainty in the outlook for our economy and, as a result, consumer confidence has recently deteriorated and the job market has stopped for millions of Americans as the federal, state and locals as well as businesses are evaluating the best way to move forward. The main factors affecting the economy will be the duration and severity of the crisis and the impact of the United States’ unprecedented support and stimulus packages. Specifically for our business, the main drivers are the level of unemployment, the growth or contraction of GDP and the prices of used cars.

With that in mind, on slide six, there are a few key factors that influence the severity of our losses and our credit performance. Annualized new car sales fell considerably in March as many dealerships closed nationwide due to orders for on-site shelters. Various industry sources predict that sales of new cars in the United States will drop significantly from initial expectations. Current estimates are slightly over 11 million units for the year. Pre-owned vehicle price indexes did not report any significant deterioration in March. However, some industry data providers previewed April’s performance, showing prices of used vehicles down about 10% from the same period a year ago.

At the start of the pandemic, most major auction providers only offered virtual auctions. Bids are usually a mixture of physical and virtual auctions. However, as the severity of the pandemic worsened, many car auctions were closed entirely. In recent weeks, the virtual channel has reopened and we now have access to more than 90% of the auction sites we use. In addition, we, along with many other large car lenders, have temporarily suspended repossession of loaded vehicles. These two factors caused uncertainty in the auction lanes and had a negative impact on prices.

Given this interruption, it is difficult to extrapolate future prices for used cars based on the last two weeks of performance. However, we are encouraged by the reopening of the virtual channel at first. Our recovery rate, which includes metallic and non-metallic products, bankruptcies and sales of deficiencies, was 50.1% during the quarter. We will discuss later the recovery rate and the performance of losses.

Let’s go to slide 7 for the original trends. As Mahesh mentioned, this quarter was relatively stable compared to the first quarter of 2019. However, the story between premium and non-prime retail volume has been mixed. The issuance of basic loans decreased by 12% compared to the quarter of the previous year. Total loan origins for Chrysler Capital increased 7%. Chrysler’s main volume increased 29% year over year thanks to exclusive offers from Chrysler Capital by FCA. Chrysler’s non-premium volume decreased 11% year over year and leases increased 3% from the first quarter of last year.

Volumes were negatively affected by the economic disruption and the closings of approximately half of our dealers. We anticipate that volume will continue to decrease year over year in the second quarter, particularly in the non-premium product segment. The number of applications on our non-premium channels has dropped by more than 50% so far in April. However, over the past week, we have seen a significant increase in requests as dealers have started reopening and consumers are spending tax refunds and / or stimulus checks.

On the premium side, the emissions are supported by FCA incentive programs which are generally exclusive to Chrysler Capital. As incentive programs are stimulating consumer demand, we believe that our premium programming and our FCA penetration rates will continue to increase in the second quarter.

Rental volumes have also been significantly affected in the past six weeks. Our leases are somewhat concentrated in the Northeast and Midwest, where several key markets have been hit hard by the virus. At the beginning of April, our rental requests decreased by more than 70% from one year to the next. But as with the non-premium segment, we saw an increase over the past week, although still well below the same period last year. Volume levels will depend on the main drivers I mentioned earlier and will impact our finances through net interest income and reserve balances.

In addition to the macroeconomic context, the volume will be driven by the level of competition during and after the crisis. Our underwriting standards and pricing approach are designed to withstand a recession. We believe that our non-prime orientation will give us a competitive advantage in these times. We will remain disciplined and focused on achieving good risk-adjusted returns on our portfolio while continuing to serve our customers and support our dealers.

Going to page eight, you can see the FCA and Chrysler Capital results. American automakers, including FCA, have temporarily closed their auto factories since late March. This, along with dealer closings, put pressure on vehicle sales in March and we saw continued downward pressure until April. However, we ended the quarter with a penetration rate of 39% as we continue to partner with FCA to provide solutions to our customers. The drivers of the year-over-year increase in the penetration rate are the programs we launched with FCA and our program to create Santander Bank. As mentioned, our penetration rate is likely to increase as incentive offers drive consumer demand in the short term.

Let’s go to slide nine. We continue to identify ways to leverage our service capabilities and drive growth in our service balances for others. During the quarter, we added $ 1.1 billion in origins to the SFO platform through our agreement with Santander Bank. In addition to our own master volume, we successfully converted the previously announced TCF portfolio acquisition in the first quarter, which included approximately $ 500 million in OFS balances. The third-party serviced platform generated $ 19 million in service fee revenue this quarter. In addition to these management fees, $ 6 million of SG&A origination fees are included in fees, commissions and other items.

During the last crisis, SC converted more than $ 35 billion in assets on our platform. We believe our track record positions us well to take advantage of any new opportunities during and after the crisis to leverage our scale and our service platform. Our expertise in non-premium services is a differentiator in times of recession.

Let’s go to slide 10 and liquidity. At the end of the quarter, SC had total $ 50 billion in cash. This liquidity continues to be a source of strength for SC and the basis for us to continue to issue loans and leases, supporting clients in these times of market uncertainty and volatility. At the end of the first quarter, we had approximately 45% of the unused capacity on our $ 12 billion revolving warehouse lines. In the past six weeks, SC has raised or renewed nearly $ 2.5 billion in wholesale funding, demonstrating the resilience and solidity of SC’s liquidity and balance sheet. From mid-March to the end of March, we renewed a $ 1.25 billion revolving warehouse line and obtained more than $ 1.1 billion in new term credit facilities from private banks.

In addition to the solid support of the 13 lenders from our banking syndicate, we were also able to access the ABS public market in April. We are one of the first to do so because the markets have been closed since mid-March. We concluded a $ 965 million SDART transaction. And with the strong support of our institutional investors, we were able to intensify the transaction and obtain better than expected prices. As a result, our anticipated sources of cash can support our business.

In addition to our third party lenders, we also have ongoing support from Santander. At the end of the quarter and today, we have an additional $ 3 billion of unused capacity available through our Santander credit facilities. Our liquidity capacity coupled with weaker sources in the short term positions us well to emerge from the crisis in a position of strength, ready to capitalize if organic and inorganic opportunities arise.

Let’s go to slide 11 to review our financial performance for the quarter compared to the quarter of the previous year. During the quarter, we added approximately $ 442 million in economic outlook reserves primarily attributable to COVID-19. Interest on financial receivables and loans increased 2%, thanks to average growth in the loan balance of more than $ 2 billion. Leased vehicle net income decreased 5% due to slightly higher depreciation and limited auctions at the end of March.

Interest expense decreased by 2% due to lower benchmark rates as the cost of debt benefits outpaced the increase in outstanding debt balances. The charge for credit losses increased to $ 908 million during the quarter, up $ 357 million due to the implementation of reserves associated with CECL and COVID-19. Total other income of $ 51 million in the quarter was consistent with the prior year and included $ 63 million of adjustments held for sale related to the personal loan portfolio.

Continuation of slide 12. Most of the parameters on this page have improved from year to year, as the COVID impact had not started to materialize at the end of the quarter. Compared to the prior year quarter, late payment defaults decreased by 10 basis points, while late payment defaults increased by 40 basis points. The gross RIC subscription rate of 15.5% was down 400 basis points from the first quarter of last year. The 7.7% net withdrawal rate decreased 90 basis points from the first quarter of last year as we continued our positive withdrawal performance from the fourth quarter.

As Mahesh mentioned, we started offering our clients extended deferral programs in March. From March 1 to April 22, we executed approximately 350,000 extensions in our loan portfolio and more than 30,000 in our lease portfolio. The majority of these extensions were granted to customers who have never received an extension in the past, and about 80% of the extensions were never late in payment before the crisis. The number of extensions granted to customers in the current compartment is more than 3 times per normal month.

As you all know, loan modifications have been part of our normal and customary service practices for some time and are designed to help consumers who show willingness and ability to pay to overcome temporary financial difficulties. Over time, we have developed the tools and expertise to successfully execute these extensions for our customers as well as for SC. Nous avons des capacités existantes pour suivre et ajuster les conditions de ces comptes s’ils montrent des signes de détérioration du crédit. Bien que les impacts de COVID soient assez incertains et contrairement à tout ce que nous avons connu dans le passé, nous disposons de plusieurs années de données de performance que nous pouvons exploiter à la fois pour des modifications de cours normales ainsi que pour des extensions liées à des catastrophes naturelles.

À l’avenir, ces paramètres de crédit seront touchés par nos niveaux d’extension ainsi que par plusieurs autres facteurs, notamment les niveaux de chômage, les prix des voitures d’occasion, le rétablissement des reprises de possession, les niveaux des stocks des concessionnaires et la demande globale aux enchères.

Passons à la diapositive 13 pour revoir les chiffres des pertes en dollars et la marche de l’année précédente. Les radiations nettes des CRI ont diminué de 22 millions de dollars par rapport au trimestre de l’exercice précédent pour s’établir à 593 millions de dollars. Décomposer le changement. Les pertes de 96 millions de dollars sont principalement attribuables à des soldes de prêts moyens plus élevés, en hausse de 2,1 milliards de dollars par rapport à l’an dernier et de 48 millions de dollars de pertes en raison du taux de recouvrement plus faible. Celles-ci ont été plus que compensées par une baisse du taux de charge brute, qui a diminué de 124 millions de dollars et d’autres ajustements de 41 millions de dollars.

Tournant notre attention vers les provisions et réserves sur les diapositives 14 et 15. À la fin du premier trimestre de 2020, la provision pour pertes sur créances totalisait 5,5 milliards de dollars, en hausse de 2,4 milliards de dollars par rapport au dernier trimestre, ce qui représente un ratio de provisions de 17,8% à la fin de ce trimestre. En ce qui concerne la marche de réserve, l’allocation a augmenté de 2,1 milliards de dollars en raison de l’ajustement CECL au jour 1. La provision a augmenté de 442 millions de dollars supplémentaires en raison de facteurs économiques au cours du trimestre, principalement en raison de COVID-19. Les augmentations ont été partiellement contrebalancées par une diminution de 127 millions de dollars en raison de changements dans notre portefeuille, tels que la composition, le solde, les remboursements et les radiations.

La différence entre le ratio global de 17,8% et notre estimation de 16,5% par rapport à l’appel du dernier trimestre est principalement due aux perspectives macroéconomiques. Les facteurs économiques de la marche représentent notre détermination de la façon dont les principaux facteurs de prévision affectent notre portefeuille de prêts tel qu’il était constitué à la fin du trimestre. Nous utilisons une période de prévision raisonnable et justifiable de trois ans et plusieurs scénarios économiques avec différents degrés de résultats potentiels et de stress, y compris l’impact de COVID-19.

En plus des résultats modélisés, nous avons enregistré une réserve qualitative qui, combinée, a entraîné une augmentation de 442 millions de dollars pour le trimestre. Les variables économiques clés ayant le plus grand impact sur la réserve sont le PIB, le chômage et l’indice de Manheim. Notre scénario économique de référence était basé sur les dernières prévisions dont nous disposions à la fin du trimestre. Les hypothèses étaient une forte baisse des variables clés au T2, suivie d’une reprise au second semestre, en supposant une réouverture de l’économie et en tenant compte des programmes de relance des pouvoirs publics.

Au début du deuxième trimestre, nous continuerons de surveiller et de suivre ces variables économiques ainsi que l’incidence des programmes de stimulation sur les consommateurs et notre portefeuille. La provision globale dépendra du niveau des origines et du solde des actifs, des perspectives macroéconomiques et de la combinaison des TDR et des non-TDR.

Passons à la diapositive 15 pour couvrir le CECL par désignation de prêt. Sur la diapositive 15, nous avons fourni l’impact CECL ventilé par TDR contre les soldes non-TDR. Comme nous venons de le voir, notre méthodologie CECL repose sur divers modèles et hypothèses pour prévoir les pertes à vie du portefeuille en fonction d’une prévision économique et d’autres variables pertinentes. L’impact de CECL dépendra entre autres de la composition de notre portefeuille, des tendances récentes du portefeuille, de la croissance ou de la baisse du bilan et de notre vision des perspectives économiques à la fin de chaque période.

Comme nous en avons discuté au dernier trimestre, notre réserve dépendra également de la combinaison des TDR et des non-TDR. Dans le cadre du CECL, l’impact de la baisse des soldes du TDR sera toujours un avantage, mais à un degré moindre que celui que nous avons connu par le passé. Comme vous pouvez le voir sur la diapositive, le solde du TDR a continué de baisser ce trimestre par rapport au dernier trimestre, en baisse d’environ 300 millions de dollars.

La majeure partie de l’impact du CECL au premier jour provient du portefeuille non TDR, dont l’allocation passe d’environ 8% à plus de 16%.

Le solde du TDR à l’avenir dépendra du niveau des extensions et des conseils continus de nos régulateurs concernant les modifications COVID. Sur la base des récentes orientations et du statut de délinquance des consommateurs recevant des extensions jusqu’à présent, la majorité des reports d’assistance client liés à COVID-19 ne seront pas considérés comme des TDR.

Passant à la diapositive 16. Le ratio des dépenses pour le trimestre a totalisé 1,9%, en baisse par rapport à 2,1% par rapport au trimestre de l’exercice précédent. Nos dépenses d’exploitation ont légèrement diminué par rapport au trimestre de l’exercice précédent, principalement en raison de la diminution des reprises de possession en mars.

Enfin, en passant à la diapositive 17. À l’instar de la liquidité, notre capital reste robuste et supérieur à nos objectifs internes. Au cours du trimestre, nous avons racheté avec succès 18,4 millions d’actions pour un coût total de 467 millions de dollars, y compris les résultats de l’offre publique d’achat qui faisait partie de notre plan d’investissement autorisé. Pour les directives révisées de la Réserve fédérale, nous avons choisi de reporter les impacts liés au capital associés au CECL pendant deux ans et de commencer le processus d’introduction progressive en 2022.

Notre ratio CET1 pour le trimestre était de 13,8%, en baisse par rapport à 15,8% au trimestre de l’année précédente. Nous pensons que ce niveau de capital est plus que suffisant pour résister à un scénario sévèrement défavorable tout en restant au-dessus des limites post-stress. La société a déclaré un dividende en espèces de 0,22 $ par action à verser le 18 mai 2020 aux actionnaires inscrits à la fermeture des bureaux le 8 mai 2020. Nous avons établi notre dividende pour résister à des conditions défavorables. Compte tenu de notre fort ratio CET1 ainsi que de la capacité d’absorption des pertes de nos réserves à près de 18%, nous n’avons actuellement pas l’intention de réduire ou d’éliminer notre dividende. Cependant, nous continuerons à adopter une approche disciplinée de la gestion du capital et à surveiller le contexte macroéconomique global.

For further context on our loss-absorbing capacity, our reserves as of the end of the first quarter represent approximately 115% of the DFAST severe adverse scenario from SHUSA’s most recent public results in 2018. The size of our portfolio has increased since that time. So looking at the 2020 test results, we are approximately 85% reserved for losses under the severely adverse scenario.

We further stress key macro drivers for our informational purposes, including GDP contracting 35%, unemployment reaching 14% and remaining elevated throughout 2020 and returning to 10% by 2022, the Manheim Index dropping 18% and not returning back to prerecession levels. Under this extremely severe scenario, based on our current capital levels, we would be able to make all of our planned capital distributions and still be above post-stress minimums. From a reserve standpoint, our Q1 reserve is approximately 68% of cumulative losses over nine quarters in this extreme scenario.

To conclude, notwithstanding the current environment, we are confident that we have the team, liquidity, capital and resources to achieve our long-term goals and support our customers. We will maintain our disciplined underwriting of loans and leases at appropriate risk-adjusted returns. We will continue to service them effectively while retaining sources for opportunistic strategic initiatives in the event they arise.

In light of these unprecedented events, we are withdrawing our financial targets for the second quarter and for this year. We look forward to the economy improving as states and businesses begin to reopen. We are hopeful that the extraordinary government support has an immediate positive impact on our consumers. As things stabilize and the severity and length of the crisis becomes more certain, we will provide you with updated guidance.

Before we begin Q&A, I would like to turn the call back over to Mahesh. Mahesh? Thank you, Fahmi. I’d like to conclude by summarizing the areas of attention for us in the coming months. In this time of extreme certainty uncertainty, we will remain focused on the essential drivers of our business. The demand for new and used vehicles are important to restoring top line growth. The auto OEMs have been quick to react to the crisis with aggressive and attractive offers, which have brought back new vehicle financing applications to almost precrisis levels in April. We expect to continue to see promotions in the market as manufacturers look to support new car sales. Our nonprime portfolio is our most resilient and profitable business, and we anticipate that it will continue to perform through the next several months. While still early, we are seeing positive effects of the stimulus package and are encouraged by recent consumer behavior. Used vehicle auction prices will also impact our recovery rates [to reveal] values. Supply and demand dynamics will play a significant role in these values. Santander Consumer has demonstrated a track record of profitability and resilience through economic cycles, and we are confident we have the capital, liquidity and support from our parent to withstand these headwinds. In these unique and trying times, I rely on the depth of my management team and the amazing stamina and creativity of our frontline support staff. We, together, are there to support our customers, dealers and our OEM partners and most importantly, our communities. With that, I’ll open up the call for questions. Operator?

Questions and Answers:


[Operator Instructions] Our first question comes from Jack Micenko with SIG. Please go ahead.

Jack Micenko — SIG. — Analyst

Good morning everybody. Hope everybody’s I wanted to drill into the mods a bit. Back of the envelope, it looks like if I take the loan and the lease and choose an average loan amount, kind of feels like a 10%, maybe 10% to 12% take rate on the mods. Is that the right way to think about it?

And I think you’d said in your prepared comments, they won’t be TDRs. Would that require another extension beyond the initial 90 to sort of fit your TDR definition? Just wanted to get some color.

And then lastly, on the mod side, can you talk to the cadence of the take? Was it the March payment? Was it the April payment? Are we plateauing now? Would this $350 million balloon to something? How do you think about all that?

Fahmi Karam — Chief Financial Officer

Sûr. Thanks for the question. So first, let me say that these extensions are we believe they’re a very effective tool to help customers navigate through these the financial distress. It does mitigate losses and hopefully keeps them in their vehicles a little bit longer. I think the percentage that you mentioned is a little bit light. We’re close to about 19% from a unit count standpoint, have had some kind of extension over deferral. From a balance standpoint, it’s just over 20% of the owned portfolio. We did give our customers a lot of different tools to reach us online or over the phone. And as Mahesh mentioned, the response has been very positive. As far as the level of extensions, it will depend on a lot of the key factors that we mentioned already on the call. The bottom line is we’re going to try to make solid financial decisions for the consumer as well as ourselves and then continue to assess their willingness and ability to pay.

From a trending standpoint, we obviously saw a pretty big wave at the end of March and in the beginning of April. But the trend has begun to slow down. The pace of the request over the last week or so has begun to level out.

Mahesh Aditya — Director

Yes. And just one more add to that. Most of our extensions today are 60-day extensions. So the TDR treatment will kick in, in the second round once they go into a second round of extensions and the and as Fahmi said earlier, the majority of extensions are coming from customers who either never asked for an extension before and are in an or are in a nondelinquent status. So we expect a significant amount of them once the stimulus package kicks in to be in self-care status.

Fahmi Karam — Chief Financial Officer

Yes. So the TDR status will be impacted by how long this the crisis lasts and how it’s going to impact the consumers. So the way the guidance works from the Federal Reserve, it really depends on their delinquency status on the onset of our COVID-19 extension program, which, for us, was the beginning of March. So if they were in, as we mentioned, current or less than 30 days past due, our COVID-related extensions will not classify as a TDR.

Jack Micenko — SIG. — Analyst

C’est génial. And then a follow-up. How has your credit box changed over the last six weeks? Are you maybe verifying more employments? I know there was a real mix toward prime. I know usually that means we’re in this kind of scenario, the captives tend to do well because of the promotional activity. But any points around underwriting you can maybe point to that may have changed proactively in the last couple of weeks to month?

Fahmi Karam — Chief Financial Officer

Sûr. So yes, I think in these times, I think it’s appropriate for us to proceed with caution, and that’s the approach we’re going to take from an underwriting standpoint. We have to appropriately price for the risk that we take on for our balance sheet, and we’re going to remain very disciplined in our approach and make sure that we get the right risk-adjusted returns. Of course, we’re going to be there for the dealers to make sure that we support them and continue to support consumers that are creditworthy. So we’ll continue to do that. We think it’s prudent to be cautious given all of the uncertainty in the market, but really be there for the rebound and really pick our spots on where we want to play, be very selective. And some of the things you mentioned around stipulations, verifying income, all of those things that we have as a tool to try to determine the underlying risk of the deal, we’re going to utilize those tools. So for the time being, I think caution is probably our best approach and then coming out of the market, be very opportunistic as opportunities arise.


Our next question is from Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Ari Orenbuch — Credit Suisse — Analyst

Awesome. And maybe following up on that, as you start to see dealers open up, maybe could you talk a little bit about the competitive dynamic in both kind of the new car and the used car market? I would imagine, given what you’ve seen with Chrysler, a lot of that stuff was put in place before this whole thing hit, and so how you think your market share will fare. And then given your better funding capabilities, are there going to be opportunities there in the nonprime?

Fahmi Karam — Chief Financial Officer

Yes. Thanks, Moshe, for the question. So coming into the year, competition, I would say it was pretty intense but rational coming into the year. January, February, we actually probably saw heightened competition, especially on the nonprime segment. You’ve seen some of that in our results. I think competition going forward, you’re right, we have to separate it between prime for us and nonprime. On the prime side, we mentioned because of all the incentives that FCA is putting in the market that are exclusive to us and exclusive to Chrysler Capital, we expect our new FCA vehicle penetration rate to continue to increase. We ended the quarter for just at 39%. If we look at April so far, we’re closer to 50% plus. So we continue to kind of see that going forward. And really, for us across all of our new vehicle segments, we would expect the captives to drive the volume there.

On the nonprime side, I mentioned we’re going to be pretty cautious in our approach, at least in the near term, to position ourselves to come out of this thing in good shape. We do think our scale and platform and our liquidity position, we’ve worked a lot of years to diversify our funding approach from a liquidity standpoint. And given our scale, we do feel like we do have a competitive advantage in the nonprime segment compared to some of our other nonbank competitors. So we’re going to position ourselves for kind of being opportunistic in select segments of our market as we come out of it.

Mahesh Aditya — Director

Yes. And just to add to that, it’s a sort of tale of two cities here right now the way we see it. We see these captives being very aggressive in the new car space and we see dealers looking to clear out their existing inventories of used cars. That’s a huge opportunity for us. We consider subprime and near prime our strength. So we are we have advanced scoring models. We have our uses of alternative data sources. And all of that plays a big role in our in how confidently we approach the market. And to what Fahmi said in response to the earlier question around some of the increased credit checks that we are putting into place like proof of income and verification of employment, all of that goes in making sure that we are not that we continue to book high-quality loans through the crisis.

Moshe Ari Orenbuch — Credit Suisse — Analyst

Awesome. And as a follow-up, just with respect to capital, I appreciate the discussion about the capital strength, stress testing and the dividend. Could you talk a little bit about what you would need to see to in either the financing markets or the economic environment to begin share repurchase again and particularly given that the share repurchase has potentially to a point could have some positive capital implications for the parent? So could you just discuss that?

Fahmi Karam — Chief Financial Officer

Sûr. So first of all, let me say, we designed our dividend policy, our capital distribution policy and our plan to be supported through the cycle. And so we think that, first of all, the dividend, as I mentioned, is very sustainable as we kind of withstand the crisis. Capital for us has been something that we focused on. There’s been a lot of efforts for us to have a more efficient balance sheet. Since 2018, we’ve worked really hard to distribute our excess capital. And luckily for us, we’re still in an excess capital position. We feel like we’ve taken a very thoughtful and disciplined approach, especially from a pricing standpoint, very price disciplined in our approach. We’ve been very good stewards of capital. And going forward, we’re going to make the same determination. Coming off the tender in February, we feel good about the execution there. We still have $400 million left from the previously announced $1.1 billion plan. And we just submitted the submission early April through SHUSA for the CCAR submission. So we’ll be able to talk about the go forward more in the coming months as we get those results back.

But in general, we feel really good about our capital position. We feel really good about our liquidity position. We’ll continue to try to make the best financial decisions on how we deploy our capital going forward. The good news for us is I think all of the options that we’ve talked about in the past, whether it’s organic opportunities, inorganic opportunities, whether it’s shareholder distributions through dividends or through share repurchases or if we feel like the right time right now is to preserve capital, all of those options are still being considered and go through our thinking.


Our next question is from Mark DeVries with Barclays. Please go ahead.

Mark C. DeVries — Barclays Bank PLC — Analyst

Yes. I was hoping to get a little bit more detail about the economic assumptions behind the reserve levels where you see kind of GDP falling, peaking. And then are those assumptions kind of consistent with today’s consensus? And if so, should we expect kind of a material reserve build in 2Q?

Fahmi Karam — Chief Financial Officer

Thanks for the question. I let me step back and maybe take just an overall view of our CECL process. So the process starts with a very detailed and granular loan level model, which looks at the underlying characteristics of the loan as well as some historical data of the loans themselves, whether it’s payment history, prepayments, delinquencies, whether they’re TDRs or non-TDRs. And that model then uses a macroeconomic forecast, which has the key drivers, which I mentioned throughout the prepared remarks.

So we come up with a we use a third party. We come up with a baseline economic forecast that’s made up of consensus estimates. We then also use three other forecasts, which have varying degrees of economic outputs. Some positive, some has kind of slow to moderate growth and one has a negative scenario. In addition to kind of the economic forecast and the model results, I mentioned we also use qualitative reserves to put in kind of management overlays as appropriate based on either other risks that we see that are not picked up by the model or we want to further enhance what the model is seeing.

So our day-1 CECL reserves follow that process. This day-1 reserve did have some weighting to a negative scenario and a downturn scenario. Obviously, not to the level of what we’ve just experienced or are going through with COVID, but it did have some level of a downturn blended in.

For the quarter end and day 2, very similar approach that we use, same exact approach that we used. So we came up with a baseline scenario that assumed a pretty steep drop-off in Q2, unemployment about 9%, GDP contracting about 18% to 20% and then a recovery beginning in the second half of the year as the economy started to reopen. So we did have that economic scenario baked in. And then we also had qualitative reserves on top of that just to protect on some specific downside risk that we saw at the end of the quarter.

Going into Q2, we’re going to monitor all of those key economic variables that I mentioned. We’re going to update all of the forecasts, including hopefully having a better understanding of some of the stimulus programs and the impact on the consumer. We’ve been very encouraged by some of the early signs over the last few days, the last week or so on some of the impacts on just applications, payments on accounts and things like that. So we have to assess all those things. I think it’s very early to give any kind of sense into Q2. We’re going to learn a lot between now and the end of June.

Mark C. DeVries — Barclays Bank PLC — Analyst

Okay. That’s helpful. And then do you expect that you would be able to complete a drive securitization in this market? If not, kind of what are your thoughts about the ability to term finance the nonprime assets?

Fahmi Karam — Chief Financial Officer

Yes. The short answer I think to your question is yes, we do have confidence that we’ll be able to execute a DRIVE securitization just based on the results that we just had with SDART. I think our track record in the ABS market speaks for itself. The ability for us to hit the market right at the beginning of April is very positive for us. So SDART is our benchmark platform. It builds off of that the successful execution we just had a couple of weeks ago, and we’ll go from there. But yes, we have confidence that we’ll be able to execute a DRIVE.

Mark C. DeVries — Barclays Bank PLC — Analyst

Okay great. Je vous remercie.


Our next question is from David Scharf with JMP Securities. Please go ahead.

David Michael Scharf — JMP Securities LLC — Analyst

I was wondering if I could maybe just follow up on the previous question regarding, obviously, all the inputs and certainly unknowns at this point on underlying, the reserving assumptions. But in particular, can you provide a little more color on what the expectations are for not just near term, but how you’re thinking about the ultimate trajectory of used car pricing as it ultimately drives recovery rates since it’s such a important input into the reserving?

Fahmi Karam — Chief Financial Officer

Sûr. So as I mentioned, it’s very hard to take a view of where used car prices are going over the next month, two months, three months based on the last month of activity with all the disruption between repossession and auction houses and the dealers also not being open or not being able to go to the auction to buy cars. So it’s very hard to extrapolate used car prices going forward. However, there are several factors that we’re looking at to kind of help influence where it’s going. And some are positive and some are will put downward pressure on used car prices.

On the positive side, new vehicles, with the plant closures recently, there could be more demand for used as new vehicle volume may not be there. Affordability has always been something that drove used car demand outside of the incentives the OEMs put into the market. There could be an affordability there that drives used car demand. I think for used car pricing, generally, the biggest impact is going to be what OEMs do, what OEMs do with their incentive packages. If they continue to be very aggressive and put out very attractive offers to customers, that typically impacts used vehicles and specifically vehicles in those kind of two to five year range. And that’s the majority of vehicles that we take to auction.

So I think if you watch those couple of data points and watch what OEMs do over the next couple of months from an incentive standpoint, that’s ultimately going to drive the used car price market.

Mahesh Aditya — Director

Yes. There are a lot sorry, go ahead.

David Michael Scharf — JMP Securities LLC — Analyst

Yes. Because I was curious. I mean there was some inflection point in the last financial crisis where after a sustained number of months of depressed new vehicle sales, which obviously translates into fewer trade-ins. But at some point, there was sort of a shortage of supply of used vehicles, which dramatically increased their values. Is that but is that type of dynamic built into sort of the forecast at any point in time in how you’re viewing the impact on recoveries? Or is that too aggressive an assumption?

Fahmi Karam — Chief Financial Officer

No. I think all of that plays into it. There’s a lot of press recently about consumer behavior kind of post normalization, if you will. And little things like how many people are going to be using public transportation going forward versus wanting to have their own vehicle, that may be something there that increases the demand. Mahesh mentioned dealer inventory, dealers right now not going to the auctions, not being able to replenish. They’re actually selling the vehicles and they have to go back to the auctions to replenish their inventory levels. So I think it all comes into play. There’s a lot of factors that can drive it one way or the other. What we do know is that we’re going to be tracking and monitoring it and adjusting to whatever those results are.

Mahesh Aditya — Director

Yes. And the news coming out of the auction houses isn’t all negative. I mean these are virtual auctions. Most of the auction houses through which we operate are open but open virtually. And the sale rate has been pretty high, and the percentage of sales to the Manheim market report has also been pretty high. So while we have seen a decline and we kind of expected a decline, we think that a lot depends on how the pent-up inventory of used vehicles gets released into the system. And that’s supported a lot by what the OEMs do as far as new vehicle manufacturing, which, right now, we’re seeing it’s kind of sort of in one particular area of vehicle category. So in the broad spectrum of used vehicles that are out there, we do expect that demand will eventually pick back up and pick back up pretty sharply.

David Michael Scharf — JMP Securities LLC — Analyst

Je l’ai. Maybe a quick follow-up just on yield. I mean, obviously, we appreciate why the guidance is suspended. And I realize yield is going to be impacted by what could be certainly a bigger mix of prime. But given the waiver of late, is there any rule of thumb we should think about maybe for Q2 in terms of just given the waiver of late fees and extensions? Sort of what may be a temporary depression in basis points on yield might be just for the next 90 days.

Fahmi Karam — Chief Financial Officer

Yes. We don’t have a rule of thumb necessarily, but I think what you’ve seen in Q1 from a yield standpoint is a lot of what you saw toward the end of 2019 and a continuation of some of the things you mentioned. Whether it’s the lease portfolio growing at a faster pace than our loan balances, whether it’s more of the prime volume being a bigger mix, I think we can expect that going forward as well, especially with the incentives in the market that is driving consumers to us. But outside of yield, if I just maybe mention the NIM. From a NIM standpoint, this low rate environment as credit spreads continue to normalize and stabilize, you will start seeing a benefit of that in our P&L over time. So as things improve throughout the month of April, you’re going to start seeing that benefit come through our P&L in the interest expense line item, hopefully, for the rest of the year.


Our next question is from Betsy Graseck with Morgan Stanley. Please go ahead.

Jeffrey David Adelson — Morgan Stanley — Analyst

It’s actually Jeff Adelson on for Betsy. I was wondering if you guys could actually give us an update on Texas. I know that’s a significant size of your portfolio. Obviously, there’s been some pretty sharp declines in oil prices there and an impact on the jobs market there in addition to everything else that’s been going on. Just help us understand the impacts of that portfolio maybe from both of those factors.

Fahmi Karam — Chief Financial Officer

So good question. The states that we look at, we look at things from an origination standpoint. We do try to factor in different sectors. Once those assets are booked onto our balance sheet, it’s tough to go back and try to reconcile by sector. So we have to use it by state. We have to do it by state and by ZIP code. So if we look at kind of the oil patch states, if you will, whether it’s Texas, Oklahoma, Louisiana and Mississippi, all of those states kind of combined, it’s about 15% of our portfolio. So I think the energy sector along with the entertainment, travel, hotel sector have all equally been distressed. And I don’t think Texas is necessarily any different.

But we are starting to see signs that we mentioned of recovery. I know here in Dallas and in Texas, we are planning to reopen over the next few weeks, and I think that will help across-the-board.

But that’s a very valid question because we have to take that in the context of the effect of the stimulus package and how that is affecting new car sales as well as repayments and what is the long-term impact of what’s going on in the oil patch, particularly as far as oil prices and general slump in Houston and the neighboring areas.

Jeffrey David Adelson — Morgan Stanley — Analyst

Okay. And then just following up on the appreciate all the other commentary on your assumptions and so on and so forth. But in terms of the qualitative overlay you were talking about at the end of the quarter, is there a way to think about how much of an additional macro really that was relative to your kind of 9% unemployment at the end of the quarter?

Fahmi Karam — Chief Financial Officer

No. I mean I don’t think we’re going to go into sorry, I was I don’t think we’re going into the size of the qualitative versus the overall impact. We have to take it all together, right? We have to look at the results and then ultimately look at the reasonableness of the reserve compared to our balance. And we felt at quarter end and now that 17.8% or approaching 18% reserve, and I mentioned a few other percentages there from a severe stress standpoint, we feel very well reserved for the time being.

Mahesh Aditya — Director

Yes. And going into CECL into the CECL build in the first quarter on the 1st of January, we had a qualitative component already in the CECL number, and then there was an additional add in the first quarter. And as Fahmi says, that is a large part of what our views of the macroeconomic forecast.


This concludes the time allocated for questions today. I will now turn the call over to Mahesh Aditya for closing remarks.

Mahesh Aditya — Director

So thank you, everyone, for joining the call today and for your interest in Santander Consumer. Our Investor Relations team will be available for follow-up questions, and we look forward to speaking to you again next quarter. Merci beaucoup.


This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Duration: 61 minutes

Call participants:

Evan Black — Investor Relations

Mahesh Aditya — Director

Fahmi Karam — Chief Financial Officer

Jack Micenko — SIG. — Analyst

Moshe Ari Orenbuch — Credit Suisse — Analyst

Mark C. DeVries — Barclays Bank PLC — Analyst

David Michael Scharf — JMP Securities LLC — Analyst

Jeffrey David Adelson — Morgan Stanley — Analyst

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