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Santander Consumer, Hurt by Deep Subprime, Inches Up the Credit Band

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Santander Consumer USA Holdings plans to increase lending to consumers with solid credit scores after being squeezed by higher losses on its subprime auto book.

During a presentation Thursday, executives said one of the Dallas company’s key priorities for 2017 is to increase originations through its dealer partnership with Fiat Chrysler. Most loans offered through the agreement are made to borrowers with credit scores well above Santander Consumer’s average FICO score of 632.

Executives did not provide specific origination goals for the Chrysler partnership. However, they said that an agreement to sell assets to their parent company, the Spanish banking giant Banco Santander, will allow them to boost lending to prime borrowers and better compete with big banks in the market.

The first transaction with Banco Santander is expected to take place during the first quarter, according to CEO Jason Kulas. Santander Consumer will retain the servicing rights on the loans.

“We are still in subprime, but we are a full-spectrum originator,” Kulas said, telling investors how the Chrysler deal has allowed the company expand beyond subprime lending in recent years.

Santander Consumer — one of the nation’s largest subprime auto lenders — has been in a protracted fight to overcome credit woes after its aggressive push to attract borrowers with significantly blemished credit.

During the fourth quarter, a rise in problem loans held back the improvement in the company’s bottom line. Santander Consumer swung to a $61 million profit from a $19.5 million loss a year earlier, but net chargeoffs climbed to 8.9% from 8.3%. It reported earnings per share of 17 cents, well short of the 30 cents expected by analysts.

Santander Consumer also faces a number of other challenges. For instance, it continues to make progress in addressing its accounting problems, Chief Financial Officer Izzy Dawood told investors Thursday.

The company last year was forced to restate several years of financial results after discovering problems with the way it calculated its loan-loss allowance.

During the presentation, executives said the company in the past year has moved away from lending to “deep subprime” borrowers as competition in the market intensified.

In 2016 originations to subprime borrowers with credit scores below 640 fell 30%, to $9.9 billion. Total volume — loans across the credit spectrum — fell 30%, to $12.7 billion. Meanwhile, the net chargeoff ratio for the full year fell to 7.1% from 8.5% a year earlier.

“In 2016 we made some changes, where we looked at pockets where we weren’t getting paid for the risks we were taking,” Kulas said. “We ended up booking less nonprime business.”

Asked whether the pullback from the subprime market was part of a long-term strategy, Kulas said the company is staying away from the riskiest loans, such as those with thin credit histories.

“Some of that business we won’t do at any price — that’s the thing you learn along the way,” Kulas said.

Still, he emphasized that the company simply responds to the market conditions it is presented with and bases its strategy on whether it is generating appropriate level of risk-adjusted returns.

“Most of that market migration was not a conscious decision to say that we’re going to move the business substantially upmarket,” Kulas said.

This article originally appeared in American Banker.
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