OneMain Holdings, Inc. (OMF) Earnings Call Transcript & Summary

Okay. We're live. I think we'll get started. Welcome, everyone, to the second day of the Barclays Global Financial Services Conference. My name is Terry Ma, I cover U.S. Consumer Finance here at Barclays on the equity side. I'm pleased to be joined by Doug Shulman, CEO of OneMain Financial. So welcome, Doug.

Thanks. Thanks for having me here.

Yes. So with that brief intro, let's just maybe get started and start with the consumer. How would you characterize the health of the nonprime consumer and, in general, OneMain borrowers?

Yes. Before I get into the consumer specifically, I always like to give a consumer health warning that we underwrite individual people. And so I'll give you my sense overall of the consumer, but we have applicants for our loans or our credit card products. We offer them a loan with an amount at an interest rate, and either secured by collateral or not, based on a whole set of factors: their payment history, net disposable income is the biggest, if they're employed, how long they're employed, by geography, what industry, et cetera. So I'm going to make some -- I'll talk about the consumer, but in some ways we don't spend a lot of time fretting about the overall consumer because we know our credit box, and we can underwrite consumers regardless of the overall consumer economy. With that, answering your question, in general we think the consumer has stabilized, from what we're seeing. And if you look at the macro data, income, especially of our consumer cohort -- we're not deep subprime, but we're not prime. Our average customer makes $70,000, $80,000 a year. Wages have caught up cumulatively with inflation since 2019. Wages are up a little over 25%. The basket of goods that our consumer spends money on -- think about food, housing, gas, clothing, kind of the basics -- is up a little less than that. And then if you take income has gone up about the same amount as the cost of goods, it means there's actually a bigger cushion, because income is a larger number than the expenses. And so net disposable income or the cushion left over to service debt has actually gone up some. You also see Michigan consumer confidence, like that's actually starting to turn last month, and you're starting to see some green shoots there. But there was a good journal article yesterday and it had a quote I really liked, which was: emotions are harder to adjust for inflation. And so I do think the American consumer -- this isn't new, I mean, everyone is talking about with the presidential debate and everything that's happening around us -- is eggs cost, a dozen eggs cost $1.50 in 2019 and they cost $3 now, a gallon of milk cost $2.60 in 2019, they cost $3.60 now. So people still don't like, and feel some burden even though income has caught up. What I will say is we've seen very steady credit performance. And all of the gains that we started seeing at the beginning of the year in credit have held, and so our sense is, while the nonprime consumer is still skittish because of high prices, they're actually in decent shape right now.

Got it. That's helpful. And then maybe just on the unemployment rate. We had a worse-than-expected trend 2 months ago, a slight improvement this past month. Have you seen any early signs of that impacting your borrower base?

No. Not at all. I mean our delinquency is holding right on trend where we thought it was. We haven't seen any impact. And we also have an unemployment insurance product where people can buy unemployment insurance when they buy the loans, and we have not seen any uptick in claims for that.

Got it. Okay. So maybe switching gears and touching on originations. You made several rounds of tightening since August 2022. Originations in the first half of '24 were down about 7% year-over-year. But you also indicated that you expect stronger originations in the second half. So what's driving that? And are you seeing incremental demand from borrowers? Or have you gotten more comfortable with the macro and credit performance?

Yes. I mean, look, first, we have not relaxed our underwriting to date. And maybe we're being too conservative, given that we're seeing some positive trends in credit, but we'd rather leave a little money on the table and kind of play out and just see the whole book turn first. And our underwriting, just for folks who don't follow us every day, about 2 years ago in August of 2022 we put a macro overlay on all of our underwriting assumptions that said if losses are 30% higher than we expect them to be, we would still meet our return hurdles, which is 20% return on equity. And so it's a pretty big macro overlay to put on your underwriting, and we've kept -- it's resulted in a very tight credit box. And we've kept that overlay. We have not relaxed that at this point, even though we have not seen anything near that kind of uptick in losses. The reason originations are trending in the right direction are a couple of things. And just to give the statistics, first quarter year-on-year our originations were 11% down, second quarter they were 4% down, and second half of the year they'll be up year-on-year. Still lower than previous years, but the trend is going in the right direction. One is, it's a very constructive competitive environment. A number of people who came into the field when there was hot money and a lot of money just to lend had really bad credit results, lost their funding and couldn't get funding. Some of them have come back in, but a lot have stayed out. I think during this cycle, banks have drawn a hard line at prime and have not been playing in nonprime. And so we've been able to take some pricing, increased prices by about 100 basis points while we've been gaining some market share. Second is we continue to invest in customer experience. And so I've said a bunch of times we actually don't manage to any growth target because I think in consumer lending, that leads you to bad results. I can -- we can lend as much as we want this month. The question is, can we get paid back. And so what we do is, we have excellent marketing, we have great analytics on what customers we want to go after, and then we've invested a lot in our customer experience. And so we've invested in digital. We've invested in call centers. Our branch people are trained really well. So when the customer comes in, we give them options. We treat them right. We have a reputation. A lot of people have come back to us year after year over time. We'll work with them through hard times, et cetera. And then we've done some very specific product innovation that does not relax credit. And I'll just give you an example, so you kind of get -- think of the kinds of things we do. One example is about 3 years ago, we started doing income verification through payroll providers. So there are some services where you can actually plug directly into payrolls and see what somebody's income is, instead of the old way of doing document upload of 3 recent pay stubs in the last month. But because we're conservative about underwriting, we're conservative about fraud. We wanted to make sure that this was working and that we were getting the right credit results. So we take a long time with our tests. We now have gone long enough that we've increased the population that will use this. The results are actually better credit than doing income verification on paper. I mean we use a lot of optical character recognition and AI to weed out fraud, and we have very little fraud when somebody brings in a pay stub or uploads it. But it's even better if you can plug directly into someone's payroll. By doing that, you get rid of friction, so it's a better customer experience. You get rid of customers who fall out because there's a lot of lenders out there who either don't do income verification or don't demand as much because we're rigorous in our underwriting. And so it's actually, for those customers, increased the pull-through rate, increased originations, et cetera. So we like our competitive positioning, and we're pretty pleased that we're starting to see a trend of good originations.

Got it. Maybe then just touching on pricing. You guys have talked about being able to increase pricing and the use of data science to kind of find pockets of growth. So can you maybe just expand on that? And then ultimately, when should we expect that kind of pull-through to the overall portfolio yield?

Yes. Well, we've increased prices in our personal loan product, our traditional personal loan product, about 100 basis points over the last year. So the APRs today on average are over 100 basis points. But there's a lot of variation. And it depends, when we offer you a secured loan and we secure it by the auto, it's a lower price. For some prime customers in more competitive channels, it's a lower price. We do operate in some states that have lower rate caps where the pricing, the risk-based pricing we do, we don't go into as high-risk segments. And so we've been able to take price. I think it's really important. I mean, obviously, people need to build their models, and so they need to think about what's going to be the yield, what's going to be the losses, what's going to be the OpEx, what's going to be the interest. We actually underwrite to risk-adjusted return. And so we like the pricing we're getting for the risk that's happening. I think it is hard to pinpoint when -- exactly when it's going to flow through for a couple of reasons. One is APRs are higher, but yield's a little lower because we're still working off the back book of loans that have higher delinquencies and higher losses. And the back book is loans we underwrote in 2020 and '21 that when inflation spiked in '22 didn't perform as well. And so we need to see that work its way off to get into portfolio yield. We also have been building our auto business, which has lower yields so it will drag down the overall pricing of our consumer loans, but it also has lower losses and reduces the volatility of loss, which we think is good for the business and good for investors over time. And so I think the direction of travel will not be down. Exactly when it starts moving up will depend on how quickly we put on the higher-priced assets, how much auto we put on and when the macro environment clears up for the back book or the back book just rolls off.

Got it. That makes sense. Maybe just to switch gears and turn to each of your verticals, newer ones. Credit cards, it's currently about $460 million of receivables, the total addressable market's over $500 billion. So how has the rollout progressed compared to your initial expectations in terms of adoption and just credit performance?

Yes. Look, we're pleased with the rollout. Let me just give you a sense of how we did the rollout, for those who weren't 4 years ago hearing how we did the rollout. So we decided to get into credit card about 4 years ago. We launched formally into the market just about 3 years ago. What we did is we took 60,000 test accounts and we tested a whole range of credit, including credit that we didn't think was going to perform that well, but we wanted to kind of test up to the boundaries to figure out where we should cut the box, both at the high end and low end. We tested product propositions, fee, no fee, our rewards concept, all of those kinds of things. And then we put a bunch of test cells into the market and looked at, first we saw who took the card. Second, we looked at actual line usage because you don't want to just be the card in the back of the wallet that people use when they start struggling and can't get credit elsewhere. And then third, we looked at credit. It takes a little while to get credit. We then started slowly and deliberately opening up in those test cells where we had very high conviction around adoption, line usage and, more importantly, credit. Right around that time, though, is when, especially nonprime consumers, credit kind of turned south in mid-2022. And so we just decided, even though we weren't necessarily seeing any problems with our credit card portfolio -- we are very conservative around credit -- we decided to put that 30% stress overlay on our cards. And we need to have 20% ROE as our company policy of our return on equity for all the -- any equity we put into any of our lending products. And so that, by definition, tighter credit box dampened it. With those very tight credit box, we've been really happy with the rollout. One is we have a pretty unique, I think a quite unique value proposition, which is payments equals progress, which is if you make 6 on-time payments, you can choose to either increase your line or lower your APR. If you make 24 in a row on time payments, you can go from a fee card to a no fee card. We have a no-fee card for the higher credit, better credit customers, which is average $1,500 to $2,000 line, no fee and rewards points. We have a fee card, which is average $500, $600 line with a $50 annual fee. One of the things that happened when we tightened credit and put the 30% stress overlay, a lot of people shifted to the fee card because we can underwrite a riskier customer with that card, lower line with a fee to cover some of the losses. And so we've had a very good rollout. We're taking it slow. We are continuing to expand in pockets. We built this as a digital-first product, and every CEO talks about their digital-first business. I mean, what does that mean? You activate the card with your app, you pay with your app, you make your choice about your graduations with your app, you check your account with your app. And it's -- we're having kind of 80%, 90% adoption through the app. Great customer experience, lower price point, and when we decide to accelerate cross-sell of our other products, people are spending time on the app. It's a very low cost acquisition channel. So we're quite excited about card. We're taking it slow, but over time, as you said, it's a very big market where we've got a lot of expertise in nonprime, we have a lot of customer overlap, and so we like it a lot.

That's helpful color. Maybe just to turn to Auto Finance. It's currently about $2 billion of receivables including Foursight, the addressable nonprime market there is about $600 billion. Can you maybe just talk about your strategy in auto and how you actually grow it?

Yes. Just on both these products, I think for people to understand is we're the dominant player in nonprime personal loans. We have about a $20 billion portfolio and about a $100 billion market. We made a strategic decision. We did a review in 2019 of should we just keep driving into that, what kind of growth could we have, what kind of earnings growth could we have, should we expand the portfolio, with a very disciplined view of what gives us the right to play. And the conversations that would happen inside our executive team and inside our boardroom, which I would always ask, which is, well, why should we go into that product? Why don't we just take $100 million of shareholder capital and invest in someone who does it really well already? Like what gives us a right to play? What gives us a competitive advantage? And the 2 products we saw were card and auto. Card is a smaller dollar, a transactional product as opposed to our personal loans, which are larger episodic needs, and it's sticky. You can have your card for 10 years where a loan you get and you pay off. Auto, we've been doing secured auto for 10 years. And so we had a whole infrastructure about pricing auto loans, perfecting a [ lien ] in states across the country, managing collateral if people don't pay, collection operations. And so we had some expertise. And what we did is some members of my team said, hey, we think, instead of just when you're applying for a personal loan, giving a bigger loan secured by an auto, which is our personal loan strategy, which is a unique, very valuable strategy, we've got a bunch of independent auto dealers we think we could go after and actually do our direct lending with them. And so they went out and quietly built a product that looks a lot like our secured product and build about an $800 million portfolio, really good credit performance, all of our hypotheses about our competitive advantage and infrastructure know-how played out. And so we decided it would be a product we could expand into. But to do so, we couldn't just do it with kind of side of desk, kind of like our personal loan. It would make sense to get an auto platform with an auto team that actually has been in this business a long time. At the highest level financially, we run a nationwide portfolio of consumer credit risk. And we're always balancing and toggling that risk for the highest return for our shareholders. Auto gives you a lower yield, but lower losses, lower volatility losses, lower OpEx to put against it and a really deep funding market where we have some expertise. And so the strategy to grow is pretty straightforward. We have a sales force. We'll expand dealers. We bought Foursight, so we now have franchise and independent auto dealers and a sales force who knows how to manage both of those. We'll take all of our expertise in data science and underwriting and add it to the Foursight team and continue to build out pretty unique models, which has allowed us to outperform from a credit perspective in the nonprime space. And we're doing it, just like I talked about with cards, very deliberately. 20% ROE hurdle on the loans that we make. And we'll be able to kind of flex the growth in card and auto and loan depending on the environment, the demand, in order to keep building what we've proven in the past we build, which is a uniquely profitable business.

Got it. Just -- you touched on Foursight, you guys recently onboarded it. What are some of the key learnings or observations from the integration so far?

Yes. I mean, look, it's been pretty smooth. It's -- I've characterized it as a small bolt-on transaction. We paid a little over $100 million for it. It's 200 people in Salt Lake City with about a 1 -- a little over $1 billion portfolio. And so you take that, you add it to the portfolio we already had and it made it -- we have a $2 billion portfolio. It's a pretty manageable -- I mean, look, any integration, you -- hard work, you got to roll up your sleeves, you got to pay attention to a lot of the details. But there haven't been any surprises. One of the reasons we bought Foursight, Mark Miller, who ran Foursight, is now Head of OneMain Auto. So he's running kind of the combined business for us. He's an excellent detail-oriented executive who knows a lot about auto. Tech, they have a very scalable tech platform, which is an auto-specific tech platform. I was joking, we've diligenced about 100 companies since I've been at OneMain as potential acquisitions. We've bought 2: Trim and Foursight, and they both were small. So we're pretty disciplined. We'll look at a lot, but we'll only do very specific things. My tech team always comes back -- and this will sound familiar for anyone who runs companies -- "Oh, the platform is not great. We could do the platform better. It's not scalable. It's not architected right." Foursight, they're like, "It's really scalable. It's a really nice architecture. It's exactly what we would do." And so we like it. And now that we own the platform, we plan to add on some features and build it out from there. They've got a franchise dealer sales force with relationships with franchises, and we've made sure we've done the things you need to do in integration to keep those folks and they seem very happy being part of the bigger enterprise. And the cultural fit's really good. We picked up 200 people, most of them in Salt Lake, very similar to OneMain, customer focused, detail-oriented, data and analytical driven. And so far, the integration has been going well.

Okay. That's helpful. Can you talk about cross-sell? You have, obviously, your personal loan product, you have the auto product and card. Maybe just talk about how you kind of approach cross-selling and what's the uptake so far?

Yes. So I'd like to call it cross-buy because I like to -- we give our customers choice and what they're going to take, but it's semantics. The -- our individual products, card, auto, personal loan, the unit economics and the business case has to stand on its own. And so when people brought those business cases to me and we pressure tested them, and we took them to the Board and said these are products we're going to invest in, cross-sell is upside, but we need to be able to make our return hurdles and drive capital generation regardless of cross-sell. So it's really important, because I think that's a super important discipline. I've been in companies and I was a private equity investor where everybody bets on cross-sell and then it never comes. With that said, I think the first really big opportunity and one of the strategic rationales of card is it can be a graduation product for loans, because you take a $500 line of credit or a $2,000 line of credit, we get to see their performance. We have proprietary performance data over time. We have behavioral information from the app and then we can offer in the app a card at 0 cost of acquisition. About 4 months ago we started that offering, where in the app we would prequalify some people for loans, a small sample set, pop up you're prequalified for a loan, you click on it, it's pre-populated, we give you the loan. Uptake has been tremendous. As importantly, a key metric is between application and then how many people actually pull through. Pull-through rate has been 3x as high as our normal pull-through rate when somebody comes in through the website or into a branch or something else. And there's no red flags with credit, but credit, before we actually expand these kinds of things, we like to see 6, 9 months of payment behavior. So it's too early, but it's a 0 cost of acquisition channel. Now I think we haven't done a lot -- because we launched card and then the credit environment turned -- we haven't done a lot of loan to card offers at this point. I think that's an opportunity. And then obviously, as we build our auto book, we're going to be servicing them and when we see opportunities for card and loan. And so I think there's a lot of synergies. The other synergy beyond cross-sell is just collection teams, tech teams, compliance teams. We can leverage our shared infrastructure, and we have very low -- we have a lot of operating leverage in our business. And so as you add these new products, you don't have to add all the expenses to do so.

Got it. That's helpful color. I wanted to switch gears and talk about credit. The front book is becoming a bigger part of your portfolio, it's about 76% of the book. The back book is about 43% of delinquencies as of the end of the last quarter. You've kind of guided that the first half 2024 should represent peak losses. Can you maybe just talk about credit and give any color on the direction of travel and the time frame?

Yes. I mean, look, nothing has changed significantly since our second quarter call. We like the direction credit's moving and we've seen it stabilize throughout 2024, which gives us confidence that both the consumer is getting in better shape, but more importantly, our tight underwriting is paying off, and we've turned the corner on credit. Our front book, which is our more recent underwriting that we've done after we did the tightening, is performing in line with expectations, which is right, that's what you want. The year-to-date trends of just watching delinquency continue to go down, it's seasonal. So sometimes it tweaks up and down depending on the season. But the year-to-date trends are better than what you would see in normal seasonal trends, which means that the credit tightening we're doing is starting to take hold. They'd even be better -- we talked about growth math before -- the first 6 months that a loan is on our books, delinquency is sub-1%. And our delinquency at second quarter was 2.97. And so you can see it drives it down. Because our originations are a lot lower than they were pre-pandemic, which is what we compare normal seasonal trends to that, means the denominator is lower when you get to delinquency. And so delinquencies would be quite a bit lower if it weren't for this kind of growth math dynamic. As far as time frame, it's hard to pinpoint the exact time frame. It's going to be dependent on how quickly the back book rolls off or how long the back book stays away that has elevated credit losses. The growth of our portfolio, the faster we grow the portfolio, the quicker credit will trend down, meaning better, and also the stability of the macro. I mean, all this assumes some stability in the macro happens. But we like -- as you said, we're very confident second half of the year is going to be lower. We feel good about all the things we've said about credit. And as the front book just continues -- which the front book is tight underwriting, predictable credit performing in line with trends -- as it gets bigger and bigger, credit should continue to move in a positive direction.

Got it. So I'm going to pause here and just go to the 2 quick audience polling questions that we have. Can we queue up the first one? So question one, do you expect OneMain's fiscal year 2025 net charge-offs to be in the range of: 6.5% to 7%; 2, 7% to 7.5%; 3, 7.5% to 8% or 4, 8% to 8.5%? [Voting} Looks like the majority have -- 45% 7% to 7.5% and then 30% 7.5% to 8%. And we'll just go to the next one. Question 2, over the next year, would you expect your position in OMF to: 1, increase; 2, decrease; or 3, stay the same? [Voting] 39% increase, 39% stay the same. So fairly bullish. So we have...

I hit #1 on that virtually.

Okay. So we have about 5 to 7 minutes left. I'll just open up to Q&A, if there are any questions.

I don't think it's on.

[indiscernible]

Yes. No, that surprised me. We're not seeing anything like what Ally just talked about.

Any other questions from the audience? So maybe I'll just go. So you recently acquired Foursight. And obviously, you mentioned Trim. Are there any new products, channels or geographies you're looking to get into or even any additional bolt-on acquisitions you're looking at or thinking about longer term?

Yes. I mean, look, we have a very clear plan, which is we have a dominant position in personal loans. It for the foreseeable future will be the biggest part of our portfolio. We have 2 newer products, which are actually bigger markets than personal loans, where we've got a lot of expertise, and we're going into them very deliberately. If you build -- if you take our personal loans, and we continue to get our fair share of that market and growth, and then have 2 opportunities that are able to grow -- or products -- quite quickly, we're pretty uniquely positioned in the financial service landscape, which is we're highly profitable, with a very high ROE and return on receivables, with real growth prospects ahead of us. And so I'm a big fan of ideas are cheap, execution is hard, and you got to execute. And so our main focus is those 3 products. Channels, you mentioned, auto, as much of it is as a product, I think of it actually more as a new channel where we can get -- think something that looks a lot like a personal loan, a lot like our collateralized personal loan, but through the channel of people shopping for a car. And so we will be actively building out those channels. There's a few states that Foursight doesn't operate in, and we're getting license for Foursight to operate in those. So we'll be doing some geographic expansion in auto. The other channel is we do have some small partnerships with some point-of-sale platforms that bring in lending products. We have one with a big home improvement point-of-sale platform. We have one with a dental platform. Very similar, though, to -- we do our same ability to pay underwriting, where we get your income, but we also go through your expenses and make sure you can pay. The loans are very similar size to our current personal loans, in the kind of $6,000 to $12,000 range on average, and their installment loans that pay down go onto our systems, et cetera. And so we're always looking for channel partners. We've got some power sports dealers, which is just like another secured lending for motorcycles and those kinds of things. But what I would say is we're not -- we're always opportunistic. When different platforms come up for sale, we'll look at things. But generally, we feel really good about the strategy, which is we do lending to the nonprime consumer, and we do it in 3 big markets: auto, card and personal loans. And we spend our time executing, being the best in the business around those, treating our customers well and with respect, doing it responsibly with a fair price and a good product, having a great experience either in person in one of our branches, on the phone, or digitally, and invest a lot in data science, analytics, so that both operationally and, obviously, with credit and marketing, we do better than anyone else in this space. That's our aspiration and where we're focused.

Got it. Just a few minutes left. Maybe just to wrap it up, can you touch on funding, talk about the overall liquidity profile and your funding needs over the next several years? I think your next debt maturity is in March of 2026. So how are you thinking about leverage?

Yes. Look, one of the things that I think distinguishes us and a real competitive advantage, and it's shown in this market like through the pandemic when markets froze up, and then in the last couple of years when people got spooked and couldn't get funding, we never had a funding challenge. It's because we built a, what we call, fortress balance sheet. And so we keep 24 months of liquidity on our balance sheet at any time with very conservative assumptions. And so what does that mean? That means if capital markets froze and we could not get an ABS deal off or an unsecured debt deal off, for 2 years we can make every loan we want to make, keep originating loans and growing our business, pay our people, invest in our growth. And for a wholesale-funded company, it's very unique. And the way we're able to do that is we have 3 legs of the stool of our funding program. The first is unsecured debt, with a very good rating that we work hard at maintaining with long tenured unsecured debt. Second is we're active in the ABS markets. And third is we keep $8 billion of bank lines basically on standby. Occasionally, we'll dip into them, $500 million here and there, when just in between debt issuances, depending on market conditions. That's investment in insurance for liquidity for the business. So investors never have to worry about us having a funding issue. As you mentioned, our next unsecured debt is due in March of 2026, so 18 months away. That gives us a lot of flexibility of when and how we tap the markets. And so we -- the way I talk about our business is we're super conservative with our balance sheet because that's where consumer finance companies have gotten in trouble in the past, and we're not going to have any trouble there. And our Board and I are very -- we run it like a bank-like balance sheet, even though we've chosen not to be a bank. We're quite conservative in our underwriting, and we're very innovative around customer experience, marketing, product, et cetera. And that's how we try to run our company, and that's kind of the principles we operate by.

Okay. Great. I think we're at time. So thank you.

Thank you.