After several months of playing it cool in the red-hot subprime auto market, Santander Consumer USA Holdings is getting ready to once again boost production.
During a conference call Friday to discuss quarterly earnings, Santander Consumer executives said they plan once again to rev up lending to auto borrowers with blemished credit, emphasizing that they feel encouraged by positive signs in the macroeconomy, such as low unemployment and strong overall growth.
Its total auto originations fell 3% in the third quarter from a year earlier, and 9% from the previous quarter, to just under $5 billion.
Santander attributed the decline to its disciplined underwriting. The subprime auto market, of course, has been marred in recent months by risk-taking, delinquencies and worries among investors about underlying credit quality.
“As we think about the market going forward, I think our outlook is less negative than it was earlier this year,” CEO Scott Powell said in an interview prior to the call.
The company did not provide details about how much volume it expects to add. Originations for prime borrowers, with credit cores above 640, are also expected to increase, as the company looks to expand its dealer partnership with Chrysler. As of Sept. 30, the average FICO score in the company’s loan book was 605.
The strong lending projections, Powell said, underscore what’s turning into “a positive, pivotal year” for the Dallas auto lender, which has struggled in recent quarters with everything from regulatory headaches to accounting woes.
The company — a division of the Spanish banking giant Banco Santander — on Friday declared its first dividend in three years; the Federal Reserve in August lifted restrictions on its ability to distribute capital. Santander is still working through two separate Fed orders.
It also recently overhauled its executive suite. Powell was named CEO in August, replacing Jason Kulas. Powell also serves as CEO of its Boston-based holding company, Santander Holdings USA.
“Since my kids have left home — they’re old enough where they’ve left home — I can work 80 hours a week, no problem,” Powell said, lightheartedly, when asked how he splits up his time.
Earlier this month Juan Carlos Alvarez, previously corporate treasurer for the U.S. parent company, was named Santander Consumer's chief financial officer, succeeding Izzy Dawood.
Still, quarterly earnings continue to drag. The company reported profits of $199 million, or 6% less than a year earlier. Earnings per share were 55 cents, or 9 cents higher than an estimate of analysts polled by Bloomberg.
The pullback in originations weighed on net finance and interest income, which slid 10%, to $1.1 million. Credit quality improved, however, as the provision for credit losses — a closely watched metric at the company — fell 12% to $563.4 million.
Fee-based income roughly doubled to $58.9 million thanks to lower investment losses associated with a portfolio of personal loans that the company plans to sell. Client fees and servicing revenue also declined.
Operating expenses rose 5% to $297.7 million, mostly from higher compensation and other costs.
During the quarter, about 10% of the company’s quarterly provision — or $53 million — was set aside to handle losses on auto loans from the recent hurricanes, Powell said.
Santander operates a call center in Puerto Rico, which suffered extensive damage from Hurricane Maria but is now back up and running.
Powell also noted that Santander Holdings USA, the U.S. parent company, also has a full-service bank on the island.
The company has so far been unable to accurately assess the financial impact from the hurricane but plans to provide more details during the fourth quarter, he said.
“It’s going to be big,” Powell said. “Puerto Rico is going through a really challenging situation, and the banks especially in Puerto Rico are going to be very challenged."