This week, second-quarter earnings wrapped up on a positive note with presentations from GM Financial, Santander Consumer USA and Harley-Davidson. An Auto Finance News analysis also found that Carvana took the top spot in auto finance ad spending during the coronavirus-dominated quarter.
In this edition of the Weekly Wrap, Joey Pizzolato, Amanda Harris and JJ Hornblass discuss these news developments during the week ending July 31, 2020, as well as the companies planning to release earnings reports next week.
Hi everyone and welcome to the Roadmap from Auto Finance news since 1996, the nation’s leading newsletter on automotive lending and leasing. I’m JJ Hornblass and I’m pleased to welcome you. This is our weekly wrap on what’s happening in auto finance for the week of July 27 2020. Before I begin, I want to thank auto finance news advertisers, Alfa, defi Solutions FiOS and Autorack for their continuing support, and so thank you very much for them. To them. I am joined by Joey Pizzolato, auto deputy editor of auto finance news. Hi, Joey. And Amanda Harris, Associate Editor of auto finance news. So welcome, Amanda. It is Friday, July 31 2020. This week was marked by the stunning GDP numbers for two cute just absolutely stunning Gross Domestic Product shrank 9.5% in the second quarter, compared to the first that’s a drop. That equals an annualized rate of 32.9%. That is the steepest annualized decline in quarterly records in quarterly GDP, dating back to 1947. Well before my time, personal spending, which makes up about two thirds of GDP slumped in annual at an annualized rate of 34.6%. Nearly the most on record. The GDP for the auto industry for the second quarter, actually won’t be released until the end of September. But auto historically accounts for nearly 3% of US GDP GDP. VP. So I think it’s fair to say that this number is not going to be good, either. There was some positive. There were some positive numbers for the week. And I think though, you know, let’s start with the positives from GM financial, although they that maybe they’re not so positive when we get into them, but let’s just talk about that. So, there was it seemed to me a sense of relief in the two q deferral numbers from GM financial last quarter. Tell us a little bit about those numbers. Joey. And let’s start with let’s start there. Joey, tell tell us a little bit about gmF numbers.Joey Pizzolato 02:47
Sure, you know, I mean, every week I’ve been feeling like a broken record saying, you know, we gotta wait, we got to wait and see we got to wait and see how bad things are gonna get but I think with GM financial, we’re kind of getting a preview on you know, maybe The upside of all this, um, the the key takeaway from GM financials earnings as I saw it was, you know, they have an 80% payment rate on accounts in deferral as of July 26. To put that number in the context about 127,000 accounts have been put in deferral between March 17 and June 30. And that’s about 6.7% of their managed portfolio. So, this is good news, I think consumers are making their payments, even, you know, in deferral or right when they come out of deferral. So, that’s good. I think that that’s a that’s a positive trajectory for the industry. As you noted, um, you know, it’s not fantastic, however, because you know, looking forward in the second half of the year, GM financial does expect their net charge offs to to sit between, I want to say two and a half percent. Which is in line, I think with ally financials forecasts as well. So potentially, we could see that by the end of the year.JJ Hornblass 04:08
Alright, so I’m going to play the other side of this coin Charlie. So they still have another 50 to 100 basis points of net loss is coming. That is a significant number. Maybe not for their subprime book, but from for their prime book. And, you know, I guess the question I’m asking them question I am, I mean, isn’t 80% pay up rate really that good? The 80% pass rate implies Well, obviously 20% are not current 20% and, and that seems like a big number. When you know, you consider historical subprime charge our friends, right? I mean, you know, in there, I mean, gmF is really a nonprime process. I’m shop generally prime non primeJoey Pizzolato 05:05
JJ Hornblass 05:06
right but I think the majority of their their portfolio is is kind of, you know, off spectrum.
So is 20% now you know, not is that really good.
Joey Pizzolato 05:21
So I will say we did break break that that leftover 20% down a little further 6% of those people had a due date that was after that July I’m sorry, the July and date in the 14%. They said we’re at least one day late on their payments. So, to answer your question 14% of beings late on their payments that’s still really high. I think it kind of just depends on if you want to if you want to look forward and be optimistic. 80% that’s good or, you know, but you know, in in a in and of itself 14% is not a good delinquency rate to have, but even on on accounts in deferral,
JJ Hornblass 06:14
right, so Amanda, there were, what about the numbers out of Santander? Let’s do a little comparing contrast. What’s your sense for tell us about the numbers out there? And, you know, how are they comparing against other lenders? You know, you know, for numbers for the second quarter.
Amanda Harris 06:37
Yeah, so kind of similar to what we’re just talking about with GM. So, they also had, you know, payment extension programs and they’re continuing to do them but they’re doing them on more of a request basis. Now, some of those newer 60 day program so a little bit shorter than maybe some other ones that we’ve been seeing. But of those about 60% have at least made a Payment while they’re in the deferral program, about 20% have asked for another extension, so an additional 60 days when they are coming out of that initial one, and then about 20%. So a little higher, that have not either made a payment or have not requested another extension. So they’re pretty much considered inactive at this time. They still have time to you know, to ask for another extension or to make a payment. So it’s really not, we’re just kind of had to see how that will play out as far as if those accounts will become current or if they will end up being moved to the next year delinquency and eventually to a charge off within the next couple of months since they are two month programs. So it looks like that, you know, they’re starting to see a climb back up, but it’s it’s still not really where they probably want it to be. Since that 20% is still pretty high. I mean, was there
JJ Hornblass 07:53
Did you know was there with a positive effect number or is it you know, Did you get a sense for whether it was above expectation below expectation? I mean, what was the sense that you got Amanda?
Amanda Harris 08:07
So, you know, taking with a grain of salt and it was on an earnings call and they’re wanting to kind of play up any kind of positive they can right now, they were pretty positive about that, that 60% number that, you know, even though they’re in referrals, they are making a payment to kind of play that up a bit. And they seem like that was a little bit above their expectation, as far as you know, the accounts that are at least starting to become more current and may come off of those deferral programs and not ask for another extension.
JJ Hornblass 08:37
What about the earnings at Harley that were announced this week? There was a line from the CEO, who said that a total rewire is required at Harley. This doesn’t anytime I think about a total rewire I think, a really painful process what’s going on in Harley?
Amanda Harris 09:08
So the rewire is really the changes that are going to see the rest of this year as a lead up to a brand new five year strategic plan. They’re calling the hardwire kind of playing on their their terms a little bit. So basically, they did not have, you know, a great quarter. They haven’t had a great quarter and you know, a few last few to be expected with everything going on. But part of it is that they are seeing higher demand in certain areas and for certain excu models and things like that for certain markets. And so they’re wanting to kind of shift to focus on those higher performing and with higher potential markets and bike models. So they’re kind of pulling back on production about 30% that they will reduce the models are going to be offering as well as kind of shifting their focus to markets they feel have a lot of potential. do well in. So that’s really the start of it will happen this year with the rewire. And then we’ll see the rest of how that plays out in the actual five year plan. They didn’t release a lot of specifics. So a lot of that still kind of to come as far as the details. But that’s really what the main drivers of it are.
JJ Hornblass 10:20
You get a sense for for these models that are kind of, you know, doing better than others at Harley, did you get a sense for the degree to which financing offers are driving those or was is this just more kind of models specific? Not necessarily related to the offers behind them?
Amanda Harris 10:44
Yeah, I think it’s a mix. You know, they want to they’re looking at what was is obviously selling well, but they did see originations decline this quarter as well. I think it’s a mix of just trying to align all the business with the reality. is the term they use the realities of the business. So with demand, you know, with people wanting to maybe go a certain route, they’re still pretty strong and financing Harley Davidson motorcycles. So they still have like, kind of the leading grip on financing their own, you know, brand, right? Yes, I think that’s still strong. I think it’s more just about wanting to kind of streamline everything, and really focus in on the markets that they think will do well, in the future. And part of that, of course, is finances and wanting to kind of scale back and get better results than they have been seen. Sure.
JJ Hornblass 11:36
So let’s talk about the demand side of things a little bit. Maybe Joe, you can talk to what we found in our reporting on auto finance, advertising spending.
Joey Pizzolato 11:50
dollar. Sure, definitely. Um, so you know, this this this story was kind of born out of, you know, plain old curiosity. Personally, you know, I’ve been watching a lot more TV lately, since there’s nothing to do no one to see. But, you know, I noticed constantly and maybe it has to do with my browsing history. Right, but carvana commercials were popping up all the time. So I was curious, you know? Or, and, you know, we talked about it as a team, right. And we were curious, who’s spending the most money? Um, you know, to promote financing offers, right, you know, we’ve seen OEMs push incentives, but you know, what are what are their captives doing to kind of get that message out there even further. So what we found was carvana outspends. By almost double every other commercial, finance related commercial that we that we looked at, um, rough figures, their first promotion was had a $20.7 million spin. And just to put that number into context, right, the next closest spend was from Toyota And it was called today tomorrow, tomorrow Toyota promise and that came in in $11.9 billion. The third largest spend was only 7.5 million. So carvanha is, is really doubling down on their advertising to kind of, you know, increase their market share, I would say.
JJ Hornblass 13:22
It was interesting that well, first of all, it was interesting to spend numbers. You know, there were there were certainly healthy, you know, kind of coming back to that GDP number. You would think that maybe that wouldn’t have been the case but it was actually the opposite. I mean, obviously carvanha is pushing a kind of, you know, visit list visit lists, car buying experience, but most of this spending I GM Toyota as examples, buttress by offers as being Kind of central to the advertising pitch? I mean, would you expect in and to what degree are you expecting that going forward? Or do you think that, you know, if the market starts to turn, they’ll go, you know, the OEMs will go back to kind of more product rather than financing oriented offers?
Joey Pizzolato 14:24
Um, that’s a great question. You know, my initial thought would be, you know, kind of once once the market kind of turns that, you know, we’ll go back to the tried and true kind of method that we’re used to, but I do think, you know, it’s, I don’t think it’s a coincidence that you know, we’re seeing marketing, advertising dollars spent on to push those financing offers out because that is been proven, you know, in May and in June to get people to buy cars.
JJ Hornblass 14:56
I wonder whether the V resonance behind the Ford Bronco, you know, kind of rerelease offering, has has been as, as strong as it’s been, because of the fact that most of the other offers that are available now are not product related. I mean, it is I think it has been, you know, kind of through May, June, I May, June, July, I think it was really the only product centric offering that was in the market. I mean, I may be wrong, but I mean that that’s kind of my impression, and, you know, certainly I think the brand awareness for the bronco has been very strong, probably stronger than Ford anticipated. Although they’re introducing the whole line of Bronco, so maybe they maybe they know more than I do. So, but that’s it. That’s an interesting I mean, I wonder whether You know, you know, I think, I think product coming back as a cent as a cent, you know, a center offering will be. I think that that will be a sign of a kind of a shift in market and maybe a shift in market demand.
Joey Pizzolato 16:16
I agree 100%. I mean, if you even look at, you know, the Ford Mustang Mach II, you know, it’s, there was a definite reason that they decided to name their all electric SUV, a Mustang and I think it has to do with that brand awareness. And, you know, a Mustang is a household name across all of America.
JJ Hornblass 16:35
Sure. I would agree with you.
JJ Hornblass 16:38
Yeah. All right. So next week, what do you what do you have in store for us, Joey and Amanda.
Joey Pizzolato 16:48
So, um, Amanda, you want to take this one or should I
Amanda Harris 16:54
think I can, um, so we’ve got more earnings, you know, coming up. So earnings earnings and word
JJ Hornblass 17:03
carvana. Next week that should be interesting to see whether all that adspend paid off for them.
Joey Pizzolato 17:09
Amanda Harris 17:11
Definitely. We’ve got credit acceptance court coming up. And we, you know, just looking at earnings and really seeing how things are gonna play out in the next couple of months will be really interesting.
JJ Hornblass 17:24
Okay, thanks. Next weekend’s
Joey Pizzolato 17:26
is is the tail end of our earnings season. So for anybody that’s tired of reading earnings, which I don’t know why you would be, but the end is near. I promise,
JJ Hornblass 17:34
Joey, you’re not one of those people, obviously.
Joey Pizzolato 17:37
JJ Hornblass 17:40
Okay, as a reminder to everyone, the auto finance summit will be October 2022. So we’re very much excited for that auto finance summit calm is the URL to register for the virtual event. And don’t forget to rate the roadmap wherever you listen to your podcasts. Be sure to follow auto finance news on Twitter and LinkedIn and certainly to visit with us at auto finance news dotnet. Thanks for joining us on the roadmap, and we’ll see you next time. Thanks, everyone. Thank you.