Has Santander Consumer turned the corner on credit?

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There is perhaps no bigger wind at the back of an auto lender than a strong consumer economy. But to take off, sometimes a company needs to give itself an extra push.

Such is the case at Santander Consumer USA Holdings, which on Wednesday reported a surprising improvement in credit quality. The provision for losses — a problem area in recent years for the Dallas lender — declined 32% year over year to $352.6 million.

It attributed the improvement, in part, to the bump it has received from falling jobless claims and the lowest unemployment in a decade. Auto borrowers, in other words, are in a good position to make regular payments on their loans. Moreover, changes made under CEO Scott Powell to pricing and assessing risk had a decided impact, too, experts say.

Still, as signs emerge in the banking industry of possible trouble on the horizon for consumer credit, particularly in credit cards, Santander’s high marks for asset quality raised the question: Will they continue?

“Quite candidly, we were a little bit surprised by how strong the credit performance was in the quarter,” Powell said during the company’s quarterly conference call with analysts Wednesday.

Delinquencies fell 70 basis points to 4.2% of total loans, while the net charge-off ratio plunged 150 basis points to 15.2%.

During the third quarter, Santander expects the provision to increase by between $185 million and $235 million, given what it describes as seasonal patterns. The high end of that range would put it above its fourth-quarter peak of $562 million. Still, executives emphasized on the call that asset quality has stabilized.

“There doesn’t appear to be anything in the near term that would change credit quality,” said Chris Donat, an analyst with Sandler O’Neill.

Donat pointed to the most recent report on U.S. jobless claims, which was published Thursday by the Labor Department and showed claims at their lowest level since 1969.

That bodes well for a business like Santander Consumer, given the high percentage of workers who rely on cars to get to work.

“As long as people aren’t losing their jobs, they should be able to stay current on their auto loans,” Donat said.

The improvement in credit quality at Santander Consumer — a unit of the Spanish banking giant Banco Santander — comes as Scott Powell approaches his one-year mark as CEO.

Powell — who also oversees the auto lender’s Boston-based parent, Santander Holdings USA — took the helm in August 2017.

Since then, he has made a number of subtle but important operational changes, according to Donat.

For instance, Santander Consumer has begun using new sources data and analytics in its underwriting and pricing models, Powell said on the call.

Additionally, under Powell’s leadership, the company has modified its approach to negotiating with dealers, according to Donat.

“Are they doing enough to give dealers what they want so the dealer can close the transaction?” Donat said.

Still, the average credit scores of Santander’s borrowers have not changed significantly over the past year. About half of all borrowers had FICO scores below 600, according to the company.

Unlike traditional banks, which typically focus on prime auto loans, Santander Consumer quickly adjusts its prices and modifies its terms to get the best returns in lending to subprime borrowers.

“It’s normal for them to adjust,” Donat said. “Part of what's going on here is they are just getting a tailwind from the economy.”

The quarterly results provided some much-needed good news at an otherwise uncertain time for the subprime auto lender.

Santander is in talks with Fiat Chrysler to sell its stake in a lending partnership known as Chrysler Capital. The automaker said last month that it planned to establish its own captive lending unit.

But the timing and status of Fiat Chrysler's plans is unclear. Mike Manley, who previously headed the company’s Jeep and Ram divisions, was suddenly named CEO over the weekend because of the deteriorating health of Sergio Marchionne, the car maker's legendary leader; Marchionne died Wednesday.

On the Santander Consumer call, Powell offered his condolences and said he had no updates to share on the status of the Chrysler Capital discussions.

During the quarter, Chrysler Capital originations jumped 51% to $2.7 billion.

Notably, Santander Consumer's penetration rate within Fiat Chrysler dealers had been a sticking point between the two companies. Under the partnership agreement, Santander had been expected to originate 65% of loans made through auto dealers.

That figure stood at 32% as of June 30, up from 20% a year earlier.

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