Santander Consumer USA‘s rating has been cut to neutral from positive by Susquehanna Financial Group as shifts in the lender’s portfolio dynamics make it appear that credit is worsening in the short term, SFG’s bank and auto finance analyst Jack Micenko told Auto Finance News.
The most notable change relates to SCUSA’s troubled debt restructuring methodology. “During [SCUSA’s] first-quarter earnings call, they said they are doing fewer modifications, which will make charge-offs look higher,” Micenko said. “In the long term, it’ll be positive for earnings because loans will charge off quickly, but optically, it has the effect of making charge-offs look like they are going up.”
On top of that, fewer modifications mean SCUSA is going to be “less flexible in restructuring loans for those it believes are only delaying an inevitable default,” Micenko notes. “This likely means delinquency rates will increase in the near term, but it should improve net charge-offs over time through an acceleration of the process and improvement in severity.”
Combine this strategy change with the backdrop of a potential slowdown in economic growth, and the downgrade “was the right thing to do,” Micenko added, noting SFG acts as a market-maker in shares of SCUSA.
Other aspects that contributed to the downgrade include Micenko’s analysis of SCUSA’s portfolio, which includes an increase in the dollar amount of new delinquencies in coming quarters. “This is because auto loans tend to see defaults peak about 18 months from origination, then trend down after,” Micenko explained. “While it is ultimately the ratio that matters, we do worry about what the optics of this could look like to investors, particularly given the sentiment that consumer credit has been so good for so long that it is just a matter of time before it begins to turn.”
Micenko stressed that SFG is not calling the cycle but rather highlighting that credit could become a focus.
Additionally, the Chrysler Capital sale to Fiat Chrysler Automobiles Group is no longer in the cards, which Micenko noted as a negative.
Santander Consumer USA’s stock was trading at $23.59 per share on the New York Stock Exchange at press time. The company has a market capitalization of $8.24 billion.
