Santander Consumer USA Holdings Inc.
Q1 2019 Earnings Call Transcript

Published: 30 Apr 2019

[Operator:]

Good morning, and welcome to the Santander Consumer USA Holdings First Quarter 2019 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Evan Black, Vice President of Investor Relations. Evan, the floor is yours.

[Evan Black:]

Thanks Luke. Good morning and thank you for joining the call everyone. On the call today, we have Scott Powell, President and CEO; and JC, CFO. Before we begin, as you are aware, certain statements made today, such as projections for SC's future performance, are forward-looking statements. Actual results could be materially different from those projected. SC has no obligation to update the information presented on the call today. For further information concerning factors that could cause these results to differ, please refer to our public SEC filings. On today's call, our speakers will reference certain non-GAAP financial measures that we believe will provide useful information for investors. A reconciliation of those measures to U.S. GAAP is included in the release issued today, April 30, 2019. For those of you listening to the webcast, there are a few slides to review as well as a full presentation on the IR website. And with that, I'll turn the call over to Scott Powell.

[Scott Powell:]

Great. Thanks Evan. Good morning everybody. We will do the usual drill this morning. I'll run through the first quarter highlights before turning it over to Juan Carlos for more detailed review of the financials and then we'll come back for Q&A together. So let's start with Page 3 in the presentation and I'll hit some of the highlights. We are very happy to have a good start of the year building on our really strong progress we've made in 2018 as we continue to execute our strategy. You'll see that our net income totaled $248 million up slightly year-over-year. Earnings per share is at $0.70 per share, up 3% year-over-year and our return on assets was 2.2% and our net charge-offs were 8.6%. During the quarter, we completed our inaugural $200 million share repurchase plan. We're declaring $0.20 dividend for the first quarter and looking ahead, we expect to continue to work towards a more efficient capital base, working towards higher levels of distributions versus the prior year. We'll have more details on our third quarter 2019 to our second quarter 2020 capital actions inline with the timing from prior years. We'll be doing that in June of this year. Our strategy is continued focus on dealer experience and pricing and that led to a strong start of the year with an increase across all loan channels with a bit of softness in leases. Our total originations for the quarter were up $7 billion, up 10% while maintaining our pricing discipline. On Chrysler, our quarterly penetration rate was 31%, which compares to 28% a year ago. Our origination numbers also include $1 billion of volume through the SBNA flow program, which we're very happy about. And regarding originations, one item I'll highlight is our improved efficiency around how we handle in-house contract inventory and data to fund those contracts. Compared to last year, we've seen a significant reduction in inventory levels as well as an improvement in average days the fund contracts across channels. Thanks, goes to our funding and credit teams for driving these results. This is an important step, a step forward in improving our dealer experience. On funding, our ABS platforms continue to demonstrate strong investor demand with $2.9 billion in loan ABS in the first quarter. And in April we did $1.2 billion in lease ABS, which is the third transaction from this newer lease shelf. Importantly on credits our 30 to 59 day delinquency ratio decreased 50 basis points year-over-year and our 59 day plus delinquency ratio decreased 20 basis points year-over-year. As I said, net charge-offs were 8.6%, which was up 30 basis points compared to a year ago. Recoveries remained strong. Our auction plus recovery rate was almost 56%, which is up 90 basis points year-on-year. And again, importantly, our TDR balances continue to decrease they were $450 million lower compared to the prior quarter. Like everybody else out there, we're keeping a very close watch on all the macroeconomic and consumer trends. I think you all know that job creation, consumer confidence, GDP all remain very strong, so we remain pretty optimistic about the current state of the economy and the consumer, and also going forward. Our new vehicle sales this quarter were pretty flat to down a little bit, but used car vehicle prices remained strong depending upon which industry you want to look at, they were up kind of a range of 1% to 7% quarter-on-quarter. The experts in the industry think, for the full year used car prices could be down a little bit compared to last year. Lastly, we'll continue to optimize our current relationships while also pursuing new opportunities in the market, which you feel leverage our strength and scale. We are focused on doing what's best for our customers, employees and shareholders everyone. And so with that I'll turn it over to Juan Carlos.

[Juan Carlos:]

Thanks Scott. Good morning everyone. Let's turn to Slide 4 for some key economic indicators that influence our originations in credit performance. So building on what Scott has said, the overall microeconomic environment remains supportive of our business, consumer confidence remains high and unemployment levels continue to be at historic lows. So while we're going through a prolonged economic expansion that might warrant some caution, these macroeconomic factors continue to point to a resilient consumer lending environment. With Q1 now behind us, industry experts are forecasting only a moderate decrease in new vehicles sales for 2019 which is again indicative of a stable market. On the slide 5, there are a few key factors that influence our loss severity and credit performance. Our auction recovery rate, which represents all auto related recoveries from the auction lanes, is 50% up from 46.8% during the prior year quarter. Our recovery rate, which includes nonmetal proceeds, bankruptcy and deficiency sales, was 55.9% in the quarter, compared to 55% the same quarter last year. Additionally, non-prime industry securitization data including net loss and delinquency trends have remained stable compared to last year. Turning to slide 6, origination trends, on rates we've had a good start to the year. Core loan originations increased 14% in the quarter compared to the prior year quarter. Chrysler Capital loan originations increased 23%, they've been strong – we've seen strong growth across both prime and non-prime. In particular, we expect the SBNA platform to be steady around $1 billion per quarter for the rest of the year. In our prior call, we highlighted the importance of tax refunds for non-prime originations, by the end of the first quarter average refunds per individual were almost inline with the same period last year, our total refund dollars were down approximately $6 billion. We'll continue to monitor it during Q2. Switching to lease originations, volume decreased 6% versus Q1 last year. We're expecting stronger lease originations during the quarter, but we have a better outlook for the rest of the year. Looking ahead, we must remain disciplined with respect to the risk return profile of our non-prime originations and we also expect to continue to support FCA prime loans with our SBNA program while maintaining a strong presence in lease. Turning to Slide 7, our average quarterly FCA penetration rate for the quarter was 31% from 28% in the prior year quarter. We continue to optimize our full-spectrum lending and servicing platform across loans, leases, floorplan and third-party servicing. Dealer floorplan balances decreased quarter-over-quarter as dealers ramped up their floorplan utilization in Q4. Going forward, we do expect dealer floorplan balances to continue to trend upwards. Their floorplan relationship brings value to both SBNA and SC as the assets are both at the SBNA and part of our overall FCA offering. During coming quarters, we aim to build on the progress made in 2018 by remaining focused on optimizing our relationship, continue to drive improvement in FCA dealer satisfaction scores and refocusing our efforts on loyalty programs, collaborating with FCA to drive another strong year of sales. Turning to Slide 8, the serviced for others platform generated $24 million in servicing fee income this quarter. In addition to those servicing fees, $6 million of SBNA origination fees show up in our fees commissions in other line item. During the quarter, we added $1 billion in originations to the SFO platform via our agreement with Santander Bank. Despite this addition, we saw our overall SFO balance strength down slightly as our SFO book based out faster than our retained 10

[Scott Powell:]

Great. Thanks Juan Carlos. So just in summary, we are looking ahead to the rest of 2019. Our priorities are the same priorities we have on last quarter. We made significant progress, fine-tuning our pricing for risk models and improving our operational processes, which led to another solid quarter on originations. Continuing into 2019, we've also been very focused on enhancing our dealer experience and on capital as I said before, we remain very focused on working towards a more efficient capital base and working towards higher distributions. And lastly, as I said before, we continue to push to operate on large financial institutions standards. So with that said, let me go back to Luke, our operator for questions. Luke?

[Operator:]

Hello. We will now open up the call for questions. [Operator Instructions] We will take our first question from Steven Kwok with KBW. Please go ahead.

[Steven Kwok:]

Right. Thanks for taking my question. So the first one I had was just if you could provide any updates around the Chrysler Capital relationship. And then my follow-up question is just related to credit trends, if you're seeing anything on the consumer side, the health of the consumer, anything that once calling out. Thanks.

[Scott Powell:]

Yes, great. Thanks Steven. So on Chrysler, our talks continue. As we said in last quarter, they continue to be constructive and positive, focused on optimizing the existing contract that we have in place. And they have mentioned last time that those discussions have moved away from the sale of Chrysler Capital to Chrysler, which I think that's the status. Yes, on the credit trends. We're all very focused on looking for signs of change in the credit environment, depending upon which source you look at, some people have pointed to some changes in credit card delinquency trends. With respect to the auto space, we don't really see an impact, there's a lot of focus on tax returns and it's true, the dollars of tax returns are down a little bit 3% and the average tax return is down a little bit too. But we don't see the impact of that on our payment rates or delinquency rates. So as I said in last quarter, our radar is fully switched on and we look at a lot of detailed information around vintage performance, payment rates, roll rates, we look across the industry we track what our competitors report. It seems like most of our competitors in the auto space are reporting lower delinquency and losses. So I think the short answer to the credit environment is, we remain very positive, especially with the macroeconomic backdrop we have. So nothing negative to report, but we're – like I said the radar is fully switched on.

[Steven Kwok:]

Great. Thanks for taking my questions.

[Scott Powell:]

Welcome.

[Operator:]

We will now take our next question from Jack Micenko with SIG. Please go ahead.

[Jack Micenko:]

Good morning. I wanted to just talk through some of the credit trends, maybe prospectively your growth portfolio again and with that comes a seasoning affect, I know you talked about sort of a mid-eights SEO rate going forward, but how do we think about, you know your reserve ratios are down, your allowances are down about 11%. Does that – I know it’s an output not an input, but how do we think about the seasoning of some of this growth working its way through the portfolio as it relates to the absolute level allowance and provisioning beyond 2Q?

[Juan Carlos:]

Yes, so maybe first, a word on the allowance ratio, so you see that is down to 11%. That is largely – the drop in the allowance ratio is largely driven by the lower TDR balances, which as we saw earlier have continued to come down even more than we might have anticipated. If you look at the non-TDR component, that allowance ratio is actually fairly steady okay? So we feel good about – obviously about that level of reserves. So with regards to the credit in how those and how those get seasoned, I think we've talked about in the past about our 2017 vintage rate and what we expected out of it, it's really performing the way we've talked, discussed here in prior calls where it's coming in between the 2015 and 2016 vintage that's continued to be the case. And we are starting to see the 2018 vintage come through because of the lower levels of modifications that we alluded to earlier. The losses on the 2018 might be somewhat higher on the early part, but overtime, once again we expect it to come down between the 2015 and 2016 vintage, so in that sense we feel good about the trend in our vintages and the related allowance ratio.

[Jack Micenko:]

Okay. And then when I look at a couple of different spots in the slide deck, it shows little more acceleration in above 545 FICO origination in portfolio and a little bit slower growth may be below 540[ph]. Obviously there's some SBNA flow impact that I'd assume, but is that also part of a broader strategic decision Scott a couple of times in the prepared comments you spoke about, continuing to refine the risk pricing model. I'm just curious if that strategic or is that mix change that we're seeing is just the influence of the higher quality SBNA flow business?

[Scott Powell:]

Yes, I mean there's a couple of things going on there, but to the first point, there's no change in strategy with respect to how we're thinking about the underlying mix in our portfolio. The incremental loans you see in the upper tier is really part of that flow program we have with SBNA where some of the assets fall outside of their credit buybacks that they've put in place because they define the underwriting criteria for those loans and so it's just a reflection of that. No change in strategy here at all across the credit spectrum.

[Jack Micenko:]

Okay.

[Juan Carlos:]

That's particularly the case as we've transitioned from the group for agreement to the SBNA platform.

[Jack Micenko:]

Got it. Thanks.

[Scott Powell:]

You bet.

[Operator:]

Our next question comes from Moshe Orenbuch with Crédit Suisse. Please go ahead.

[Moshe Orenbuch:]

Great, thanks. Why don't you come back to the TDRs because the decline was pretty impressive, but you mentioned that not using some of those modifications could pressure charge-offs, does it also – I mean obviously kind of get rid of the TDRs, I assume there's some charge-off component in that as well. So could you talk about the impacts of that on the measures that we see externally?

[Juan Carlos:]

Yes. I think, let me take a shot Moshe, if I don't get answered your question completely. The impact of fewer[ph]modifications, really does just what you said, which has a negative impact on gross charge-offs because essentially what it does on a vintage basis, it accelerates some of the accounts would have charged-off later, right. Because we didn't modify them, they are going to charge-off sooner. So it changes the shape a little bit of the vintage curve. We incur losses quicker and then those losses normalize over the course of that vintage curve. So yes, it has the effect of a higher charge-offs in the short term, positive impact on delinquency levels and then that directly impact on TDR balances.

[Scott Powell:]

Lower influence into TDRs.

[Juan Carlos:]

Yes, lower influence into TDRs because we are not modifying the accounts.

[Moshe Orenbuch:]

Right. I guess I also was just asking that some of the TDRs that are resolved are resolved through charge-off and I'm assuming that, both of those are happening at the same time probably add to it a bit.

[Juan Carlos:]

Well, I mean they would follow a normal course, actually the TDR population has performed actually a little bit better. It's a bit more seasoned, but I think what's most important here is the fact that those lower inflows, they could change the trend that we were expecting in prior quarters where we talked about TDR balances stabilizing right around this time because of the dynamics that Scott just walked us through. We could see this downward trend a bit longer.

[Scott Powell:]

Yes. And I think Moshe your question, the amount of charge-offs coming from the TDR population is going down. Even though we've got a larger 2018 vintage coming through, so that'll drive higher charge-offs while those – one is going down, the other one is trending up.

[Moshe Orenbuch:]

Thanks a lot. Yes. And can you just – you mentioned some things about the lease performance in terms of growth being little bit kind of softer. What are the factors that could cause that to change? Like what maybe kind of flush that out a little bit.

[Scott Powell:]

Yes, I think just per se, percentage of our market share was relatively stable and as a percentage of our financing lease was down. So it's just a softer quarter, in terms of the percentage of lease financing. Looking ahead, we're starting to see a little bit better traction whether its weather related or anything else, we're starting to see better traction early in the second quarter.

[Moshe Orenbuch:]

Got it. Thank you.

[Operator:]

Our next question comes from John Hecht with Jefferies. Please go ahead.

[John Hecht:]

Thanks guys. I'm just curious, it sounds like is there a tactical or strategic plan to engage in fewer TDRs or what's the reason for having less TDR migrated the accumulation run the 2018 vintage?

[Scott Powell:]

Yes. The way I would describe it John is, we are always – so there are fewer TDRs coming through because remember we had a pretty bad hurricane season in 2017, which kind of elevated the number of TDRs in 2017 that didn't really occur in last year. And then we are constantly looking at optimizing our policy around assessing the consumer's ability and willingness to pay at the time we do modifications. And so – as we are more conservative with respect to that and do a better job with that, that has an impact on reducing modifications, which then has the direct effect of reducing the TDR – influence the TDRs.

[John Hecht:]

Okay. And second question, understanding that you may be limited in what you could talk about with respect to capital plans. So maybe can you remind us what your target CET1 ratio be, and frame any kind of expectations for how long you'd want to get there and how you balance dividends versus repurchases in that regard?

[Scott Powell:]

Yes, I think, in terms of – it hasn’t changed compared to what we've presented in prior quarters, our capital target remains at 12.5% and we're higher than that. And what we've said in prior call is that, our objective is to continue to move closer to that internally set target and we'll do that through a combination of capital actions and we just hope to do better to improve on the amount of capital [indiscernible] compared to what we did last year. Chrysler’s, you can imagine we look to set, but we will consider to be in a appropriate dividend payer ratio then consider where the stock is trading and everything else that should go into considering the mix between dividends and buybacks.

[John Hecht:]

Great. Thanks guys.

[Scott Powell:]

Welcome.

[Operator:]

Our next question comes from Rick Shane with JP Morgan. Please go ahead.

[Rick Shane:]

Good morning guys. Thanks for taking my questions. I wanted to circle back on the TDR issue as well. I'm curious, one of the challenges with TDRs is it creates an accounting distortion. I'm curious if the decision that you guys have made is based on the TDR programs, the economics of the TDR programs not performing the way that you would have expected and the reason I ask is because I suspect under CECIL, some of that accounting distortion will actually go away. So I'm curious if going forward, perhaps it's a program you will consider a little bit more aggressively again?

[Juan Carlos:]

No. Well, yes, I guess maybe I'll kick off. So you can clean up after me. Yes. In CECIL everything will be kind of essentially at lifetime losses depending upon which category it falls in. So I think some of that distortion goes away because of it. But to your comment about how conservative or not conservative with respect to modifications, we don't really see it that way. It's not something we dial up and dial down, it's more about getting more precise, about identifying people that are most likely to re-perform once we modify their loans. And so we're constantly looking for ways to improve that. Sometimes we exclude certain segments, sometimes we include certain segments based on our own analytics and historical performance. So there is a federal regulation that requires that we assess borrower's ability and willingness to pay on time a loan and that's kind of what we're very focused on is making sure we're doing that. And we don't really have flexibility beyond our own learnings with respect to what is actually going to perform and meet those requirements.

[Rick Shane:]

Yes. Just look at it, I think it's a powerful tool for you guys to help consumers. And so it's basically narrowly – it sounds like you're narrowing where that is available.

[Scott Powell:]

Yes. And that's exact – not necessarily, we have narrowed it over time. Yes. But to your point it is very important, we want to help everybody, we can help. We want to help consumers that have had some kind of a temporary income disruption get back on track. And then the last thing we want to do is be in a position where we have to repost somebody's car and charge-off the account. If the person has the ability and demonstrates their willingness to repay and that's why we want to make sure we're doing the right thing for consumers. And also live up to the federal regulation, federal regulatory requirements around, ensuring that we have done the proper work around assessing consumer has the ability just to repay. That answer your question I hope?

[Rick Shane:]

It does. And again, part of it is we're just trying to figure out the difference between the economics and the accounting gear and how much that's driven the behavior and just whether that'll shift and you very much answered that question. Thank you.

[Scott Powell:]

Okay, great. You're welcome.

[Operator:]

Our next question comes from Betsy Graseck with Morgan Stanley. Please go ahead.

[Betsy Graseck:]

Hi. Good morning.

[Scott Powell:]

Hi Good morning.

[Betsy Graseck:]

A couple of questions on leases. JC, I think during the prepared remarks, did I hear you right? Did you say that you had thought that leases would have come in better in 1Q?

[Juan Carlos:]

Yes. Yes, they were down 6% year-on-year, we expect that to originate more than that.

[Betsy Graseck:]

Can you give us a sense as to what happened in the quarter and why you think that, that will pick up as we go through the rest of the year?

[Juan Carlos:]

Yes, I think like I said, it's just a matter of the mix, right. We saw as a percentage of financings, the amount of lease was down. I mean they went to two loans, as we look ahead we've seen a bit of normalization in early Q2 and that should normalize to make sure, probably stabilized a little bit as we look ahead. So there's no specific amount. We're coming from pretty high levels of lease growth year-on-year, but we should be able to originate more in coming quarters.

[Betsy Graseck:]

So when you think about the asset growth in total, did that hit what you were expecting in 1Q?

[Juan Carlos:]

Yes, it's not far from what we were expecting.

[Betsy Graseck:]

And then as we think forward on the leases, I would think that the used car prices and the strength there would help your customer base, I'm just wondering if that's an accurate statement or not.

[Scott Powell:]

Yes, well I think that in general it does, because the cars are worth more when they come-off of lease. So yes, it certainly helps. We adjust those residual values based on future expectations, so we're constantly looking forward based on expected values at the time the lease ends. So there's kind of – I call it a natural shock absorbers that adjusts over time. So if the future says the value of used cars will be strong then, some of that gets baked into the leases that we are having today.

[Betsy Graseck:]

Yes, that's what I was wondering, that, would it be more attractive for folks who do leases as that occurs over the next quarter or two?

[Scott Powell:]

I don't know that if that will certain attractive for our consumer now.

[Betsy Graseck:]

Okay. And then just on the NIM side, I know in the guidance as you mentioned, Q-on-Q 0% to 2% up. And you highlighted for the full year, you might be able to hit the mid singles, but that's going to be a function of your ability to maybe mixed shift your funding costs lower. Did I hear you right? Maybe you could talk through what kind of drivers or leverage you have on the funding side a little bit more in depth.

[Scott Powell:]

Yes. So I think probably two opposing forces, one is being able to take advantage of what has been – I think you and others brought it up last quarter how the lower rate environment should benefit us for the rest of the year. It does seem to be materializing, right. We now have a more optimistic outlook and even commentary from the Fed that would tell us that we can expect at least swap rates to be at lower levels than originally anticipated for the full year, so that's a positive. And then the other opposing force here will be in terms of average balances, right. Making sure that originations in average balances keep up for the rest of the year. So thinking about the low rate environment. Yes.

[Betsy Graseck:]

Yes. Okay. So anything on like funding side, swap side, would you go longer duration on the funding or shorter duration I think there that you can share with us?

[Scott Powell:]

No. So think about it more this way. We are benefiting from the lower swap rates as we securitize. That's really when we really materialize this lower rate environment one month LIBOR, this has been really move that much that impacts more our warehouse lines. So, no, the term of our funding of our ABSs go with the assets and we already – if you remember last year, we already extended our unsecured borrowings the fair amount. Okay. So that part is already taken care of. It's really just continuing to securitize, in line with our – keeping with our originations, in line with our funding plan. And then if FED wants to throw cut their way in forward LIBOR, that will be great, but we're not commenting on that now.

[Betsy Graseck:]

Yes. Okay. Alright, thank you.

[Operator:]

We will now take our next question from Mark DeVries with Barclays. Please go ahead.

[Mark DeVries:]

Yes. Thanks. Morning. I know Scott, you indicated that the slightly lower average tax refunds and larger aggregate year-over-year decline is impacting payment rates, but I think Juan Carlos indicated during his prepared remarks, it's something you're watching closely. Is it more for the potential impacted both loan demands and also may be used car prices, that you're kind of monitoring that issue?

[Scott Powell:]

Yes, it's a – first of all when you look at the stats that the IRS publishes, they just publish them in total, right. So, if you look at the dollars, it's obviously dollar amount and that's down 3%, which is still – that 3% is still a lot of dollars. Right? And so, and then when you look at the average tax refund, it doesn't look like it's off that much. I think the season to-date rumor is the average refund is $55 less than before. But that's obviously a big pool. And what we don't know is how that stratifies across the credit spectrum, right? So, in parts of our business, near from the subprime, deep subprime, I'm not exactly sure what the tax return change looks like year-over-year. And so that's why we've been – our risk people have done a lot of analytics around, do we see any impact on flow rate. People caring their delinquency status, they are 60 days delinquent early paying themselves, 30 days delinquent they’re paying themselves the current, so we put a lot of work into analyzing the payment patterns inside the delinquency buckets and we haven't seen anything so far, so it doesn't look like it's materializing there. I think the place on the demand side where it has an impact is on new car sales more than anything, because you see the seasonal correlation with tax returns as they come back less so with used cars. Yes, keep in mind the used car market is two and a half times the size of the new car market.

[Mark DeVries:]

Okay, got it, that's helpful. Yes, it does. And then second question, your auction plus recovery rate had a 600 basis point delta year-on-year, greater that was down from what it was 1Q of last year, but it had been almost flat in the last two quarters. Just trying to understand what drove that to wipe me out again in that spread and kind of what we should expect going forward?

[Scott Powell:]

Yes. So the mechanics of the all-in recovery rate that really bakes in. It will vary from time to time also depending on time of the year. So it's hard to measure that delta consistently if you will. I think what's important here is the – yes, it's impacted things like timing of debt sales came through that delta, so the auction only recovery rate. The black line shows you the trends of what's happening at the auction, and then the delta to the blue dots can be impacted by these more uneven events. Sales were up year-on-year.

[Mark DeVries:]

Okay. The uneven event you referred to was more the timing of debt sales?

[Scott Powell:]

It’s one-off, yes, that's a significant one, yes.

[Mark DeVries:]

Okay. And how does that timing normally work?

[Scott Powell:]

We make decisions on – depending on the size of the target pool, we also refined our analysis. We've been actually doing a good job of that refining our analysis as to which pools might make sense to actually hang on to and continue to service for a longer period of time if we believe we can extract more value or going ahead and actually performing a debt sale at any point in time. So it's not a scheduled sale throughout the year.

[Mark DeVries:]

Got It. Thank you.

[Scott Powell:]

You are welcome.

[Operator:]

We will now take our next question from Arren Cyganovich with Citi. Please go ahead.

[Arren Cyganovich:]

Thanks. Your penetration rates obviously improved quite a bit from the past couple of years, but it's kind of leveled off in the low 30s area. Is that, where you want it to be? Do you expect that that could potentially increase over time or do you think this is kind of the new expectation going forward?

[Scott Powell:]

We continue to work really hard on increasing our penetration rate with our partner. And we have talked every – almost every day. We worked very closely with them on what they want to do in the market, from month to month and how they're going to do it. And as their preferred lender – we're working hard to help them sell cars. And so yes, we would love to see it go up. There's a lot of things that things that need to fall in place to drive that. So we are working really hard on it and we've always got the floor on all this is making sure we're getting paid for the risks that we're taking and then we've got the right profitability given that we operate across the full credit spectrum. So, yes, it's a careful balancing act, but yes, we would love to keep them driving up that penetration rate and helping Chrysler sell more Jeeps and Rams and I love the new gladiator personally. So, it’s on my shopping list.

[Arren Cyganovich:]

And then on the capital return, are you able to say whether or not you would expect to have a total payout ratio that’d be north of 100% of your earnings?

[Juan Carlos:]

We haven’t guided to that, so won't do that. I think what we've discussed in the past is always reminding you that we have to fit within choose us capital plan, okay, and that continues to be the case this year. And that 100% payout ratio is what has been a, let's call it a rule of thumb for some competitors. I think I'll just repeat what Scott said earlier what I think I mentioned as well, we want to continue to improve our capital distributions, get closer to that internal capitol target of 12.5%. There is no set time to do that, but we definitely continue to make significant progress towards it.

[Arren Cyganovich:]

Okay. Just I guess touching on your last point there about the SHUSA ownership I think in the 10-K, it’s something about, if you get to 80% and that creates some benefits, frees up some room I guess for capital. Is there any way for them to increase their stake to 80% currently? Or is it just going to be from over time as you're buying back more your stocks as their position will increase?

[Juan Carlos:]

Yeah, everything that we were speaking here today and what we managed to have the capital actions that we do here at SC. And what we showed in the 10-K is the potential benefit that SHUSA Santander could get if we – if we cross that threshold of 80%, but what we can see obviously is the capital actions that we can – in regards to whether it’s buybacks…

[Arren Cyganovich:]

Are they limited it although in terms of buying back – they’re buying more of your shares?

[Juan Carlos:]

We have to ask SHUSA, I know that.

[Arren Cyganovich:]

Where the CEO is actually on the call?

[Scott Powell:]

Yeah, but I'm wearing my SC hat today.

[Arren Cyganovich:]

Okay, okay. Got it. All right, thanks – but I mean…

[Scott Powell:]

I don’t think we can't comment on that one. And the…

[Arren Cyganovich:]

Right…

[Scott Powell:]

I mean SC through the buyback program that we conducted last year, right, it was – the initial inaugural $200 million. Obviously, that increases SHUSA’s percentage ownership of SC. So that's one way of going about it. But our focus is on SC’s capital expenditures.

[Arren Cyganovich:]

All right – okay, all right, thank you.

[Operator:]

Our next question comes from Chris Donat with Sandler O’Neill. Please go ahead.

[Chris Donat:]

Good morning. Thanks for taking my question. I wanted to ask one about the competitive landscape because we – we look at what some other bank CEOs and CFOs have said on earnings calls. It seems like in general it's the competitive landscapes actually have eased up a bit particularly on the bank side. But I'm wondering if that reflects maybe – because most banks are more focused on prime loans that it's a little different part of the market and also capital one did have some comments about the competitive intensity increasing. So – and if you can just give a sense of where you think the competitive landscape has shifted recently or has shifted?

[Juan Carlos:]

Yeah, we saw that. I think I might have read the same commentary that you did from our peers. I think it was a mixed bag for us in the markets or in the space that we operate. The environment has been consistently competitive or whether it's for market share in the different channels is might be up or down slightly, but there is no significant impact either. So that's how we would describe it just consistently competitive.

[Scott Powell:]

I would just add that if the auto finance market is super efficient, right, because almost every transaction goes out for auction at different price points. And so, it doesn't surprise me. That's when people feel like competition dial up a little bit, but to one Carlos’ point, this is always very, very competitive and I would say we haven't seen significant moves in or out across any of the segments in the markets. It's been steadily, very steadily competitive.

[Chris Donat:]

Okay. And then just – yeah…

[Scott Powell:]

Sorry.

[Chris Donat:]

Okay, thanks for that. And then just as we think about capital ratios and what might happen in the future, any thoughts on CECL and impact from that? And I recognize we’ve got again phase in and things like that, but just anything you expect seasonal?

[Scott Powell:]

So, repeat what we said in the last quarter. We continue to make our preparations, especially running in parallel this summer. And so, right now, the preliminary analysis would indicate that we – CECL’s – you mentioned that the transition period, et cetera, but it shouldn’t let's say getting the way of our capital planning. Okay, everything that we said to – in response to the earlier question. So we feel obviously good about the implementation of CECL with regards to our capital base. I think there’s still, as you probably know, this year’s stress tests at HCR doesn’t include the implementation of CECL and it want for some time that is obvious that we will start looking at how – when CECL is rollout, we should think about our capital targets. Okay? But that’s still analysis that is ongoing, and we don’t have a definitive answer yet.

[Chris Donat:]

Okay. Thanks JC.

[Operator:]

And our last question comes from Vincent Caintic with Stephens. Please go ahead.

[Vincent Caintic:]

Hey, thanks. Good morning. Just two quick ones. So the recovery rate has been a fairly strong, just kind of wondering if you have an update on how you’re thinking about used car prices. So, I think in the past you were thinking about 1% down some of the other lenders and looking at more like 5% down. Just kind of wondering your thoughts there.

[Scott Powell:]

Yes. I would bet on flat myself. Yes, I think, that the used car, I mean the new car side is, car prices are hitting kind of all time highs. And it makes you used cars look much more attractive. We’ve seen that trend happening for awhile. Again, there’s a whole host of folks that report used car values and if you look across all those people that report, the first quarter is up anywhere from 1%, I think the 7% in the first quarter. I don’t – I personally don’t see anything changing that dramatically the other way. The economy is strong, consumer is strong, if some tariffs get rolled out that could have a bit of an adverse impact on new car sales too. So, I don’t – I wouldn’t – take enough, you’re me for forecast, I’d say flattish for the rest of the year, all in maybe some upside.

[Vincent Caintic:]

Okay. That’s really helpful. And last one, so the mix between leases and loans, so the – and a little bit of the softness in the leases. I’m just wondering if there was any change to OEM support that maybe might have driven that and anything you can see in say second quarter going forward that might change that that mix going forward? Thanks.

[Juan Carlos:]

Could be, but we always work with our partners on, as Scott said, finding new ways and to continue to whether it’s sell more vehicles and then get the right risk adjusted returns for what we book, whether it’s alone or at least. So, we’ll continue to work about the west with FCA and, or other brands.

[Vincent Caintic:]

Okay. Got it. Thanks very much.

[Operator:]

There are no further questions at this time. I’ll now turn the call over to Scott Powell for final comments.

[Scott Powell:]

Great. Well, thank you all for joining the call. We appreciate you taking the time to dial in and listen and ask questions. As always our Investor Relations team is available if you have follow-up questions. Thanks again for joining the call. And have a good day. Thanks.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.