CarMax Auto Finance (CAF) closed out the fourth quarter and fiscal year 2021 with $188.2 million in income, a 68.2% year-over-year surge thanks to reduced provisions for credit losses, increased net interest margin, and an increase in managed loan receivables.
For the quarter ending Feb. 28, CAF’s net originations clocked in at $1.8 billion, nearly flat YoY compared with the same reporting period last year, bringing its managed portfolio to $13.7 billion, a 1.9% increase. CAF penetration rate inched up 30 basis points YoY to 47.0%, according to the company’s earnings supplement.
The lender decreased its provision for loan losses to $4.6 million for the quarter, down from $53 million in the same reporting period last year, bringing its total allowance for credit losses to $411.1 million, or 2.97% of managed finance receivables, senior vice president of CAF Jon Daniels said during the company’s earnings call this morning. Allowance for credit losses (ACL) as a percentage of finance receivables has been trending down for the last three quarters, he said, reflecting strong consumer payments activity. For example, ACL clocked in at 3.17% of its portfolio in November 2020.
Net interest margin, which represents the spread between interest and fees charged to consumers and the lender’s funding costs, also increased 60 bps to 6.4% of average managed receivables due to low benchmark interest rates.
Meanwhile, CAF amended the arrangements with its third-party lending partners at the start of the fourth quarter, Daniels said.
Under the new structure, CarMax will increase its Tier 2 participation fee to $400 from $300 and reduce its Tier 3 discount to $750 from $1,000. The retailer will seek to ramp up its Tier 3 volume target to 10.0% by the end of May, Daniels said. Previously, CAF kept approximately 5.0% of the Tier 3 volume, with the discounts aimed at enabling financing for consumers that “would otherwise not be able to purchase a vehicle from CarMax.”
“If this structure had been in place for the entirety of FY ’21, and penetration rates remain the same, it would have resulted in annual savings of approximately $30 million or $40 on a per unit basis,” Daniels said.
CarMax will also acquire the remaining shares of Edmunds, an automotive information company, for a purchase price that implies an enterprise value of $404 million. That deal is expected to close in June. CarMax first invested $50 million to acquire a minority stake in the company back in January 2020.
Shares of CarMax [NYSE: KMX] were trading down 7.13% to $123.31 at market close today. The company has a market capitalization of $20.04 billion.
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