Okay, we're live. I think we'll get started.
All right.
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.
Yeah, so with that brief intro, let's just maybe get started and start with the consumer. How would you characterize the health of the non-prime consumer and in general, OneMain borrowers?
Yeah. Before I get into the consumer specifically, I always like to give a, you know, consumer health warning, that we underwrite to individual people. And so I'll give you my sense overall of the consumer. But, you know, we have applicants for, you know, our loans, 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. You know, 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 gonna make some.
I'll you know, talk about the consumer, but, you know, in some ways, we don't spend a lot of time fretting about the overall consumer, 'cause we know our credit box, and we can underwrite consumers regardless of the overall consumer economy. With that, answering your question, you know, 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, you know, 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, you know, 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 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, you know, the expenses. And so net disposable income or the cushion left over to service debt, has actually gone up, some. You also see, you know, 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's talking about with the presidential debate and everything that's happening around us is, you know, 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, you know, our sense is, while you know, the non-prime 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 two months ago. 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 2024 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?
Yeah. 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, you know, 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 two 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, you know, macro overlay to put on your underwriting, and we've kept it. It's resulted in a very tight credit box.
We've kept that overlay. We have not relaxed that at this point, even though we have not seen anything, you know, near that kind of uptick in losses. You know, the reason originations are trending in the right direction are a couple of things. 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, you know, 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 non-prime. And so we've been able to take some pricing, you know, increase prices by about a 100 basis points while we've been gaining some market share. You know, second is we continue to invest in customer experience, and so, you know, I've said a bunch of times, we actually don't manage to any growth target, 'cause I think in consumer lending, that leads you to bad results. You know, we can lend as much as we want this month. The question is, can we get paid back?
And so, you know, 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 or over time. You know, 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 three years ago, we started doing income verification through payroll providers.
There are some services where you can actually plug directly into payrolls and see what somebody's income is, instead of, you know, the old way of doing a document upload of, you know, three 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, you know, we were getting the right credit results. 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, you know, 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, you know, 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, you know, 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, 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?
Yeah. Well, we've increased prices in our personal loan product, our traditional personal loan product, about a 100 basis points over the last year. So the APRs today, on average, are over a hundred basis points. But there's a lot of variation, and it depends. You know, 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, you know, 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, you know, for the risk that 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. The back book is, you know, loans we underwrote in 2020 and 2021 that when inflation spiked in 2022 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'll 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 you know 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. On credit cards, it's currently about $460 million in receivables. The total addressable market is over $500 billion. So how has the rollout progressed compared to your initial expectations, in terms of adoption and just credit performance?
Yeah. 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 four years ago hearing how we did the rollout. So we decided to get into credit cards about four years ago. We launched formally into the market just about three years ago. What we did is we took 60,000 test accounts, and we tested, you know, 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, you know, first, we saw who took the card. Second, we looked at actual line usage, 'cause 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, you know, for especially non-prime 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're 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 any equity we put into any of our lending products. So that, by definition, tighter credit box dampened it. With those, you know, very tight credit box, we've been really happy with the rollout. You know, one is we have a pretty unique, I think, a quite unique value proposition, which is Payments Equals Progress, which is if you make six 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, you know, average $1,500-$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, you know, 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 low. 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, you know, 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, you know, 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 non-prime. We have a lot of customer overlap, and so we like it a lot.
That's helpful color. Maybe just turn to auto finance. It's currently about $2 billion in receivables, including Foursight.
Yeah.
The addressable non-prime market there is about $600 billion. Can you maybe just talk about your strategy in auto and how you actually grow it?
Yeah. Just on both these products, I think for people to understand is, you know, we're the dominant player in non-prime 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? You know, 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, the right to play? And the conversations that would happen inside our executive team and inside our board room, 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 the competitive advantage? And the two products we saw were card and auto. You know, card is a smaller dollar, a transactional product as opposed to our personal loans, which are larger episodic needs. And it's sticky. You know, 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 built about $800 million portfolio. Really good credit performance. All of our hypotheses about our competitive advantage in infrastructure and 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, kinda 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 in 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 non-prime 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, you know, what we've kind of proven in the past we build, which is a uniquely profitable business.
Got it. Just to touch on Foursight, you guys recently onboarded it. What are some of the key learnings or observations from the integration so far?
Yeah, 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 little over a $1 billion portfolio. So, you know, you take that, you add it to the portfolio we already had, and it made it a, you know, we have a $2 billion portfolio. It's a pretty manageable. I mean, look, any integration, you know, hard work, you gotta roll up your sleeves, you gotta 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 him, for us. He's an excellent, detail-oriented executive. He knows a lot about auto. Tech, they have a very scalable tech platform, which is an auto-specific tech platform. I always joke, you know, we've diligenced about 100 companies since I've been at OneMain, as potential acquisitions. We've bought two, Trim and Foursight, and they both were small, so we're pretty disciplined. You know, 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's, you know, run companies, like, "Oh, you know, the platform's not great. We could do the platform better. It's not scalable.
It's not architected right." Foursight, they're like, "Oh, it's really scalable. It's really nice architecture. It's exactly what we would do." And so we like it, and now that we own the platform, you know, we plan to, you know, 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, you know, done the things you need to do in integration to keep those folks, and they seem very happy being part of a bigger enterprise. And the cultural fit's really good. We picked up 200 people, most of them in Salt Lake, very similar to OneMain's, you know, customer focused, detail-oriented, you know, data and analytical driven. And so, you know, so far the integration's 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?
Yeah. So, you know, I like to call it cross-buy, 'cause I like to. You know, we give our customers choice in what they're gonna 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, you know, 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 you know, a card at zero cost of acquisition. About four months ago, we started that offering, where in the app we would pre-qualify some people for loans, a small sample set. Pop up, you're pre-qualified for a loan, you click on it, it's prepopulated. We give you the loan. Uptake has been tremendous.
As importantly, you know, a key metric is between application and then how many people actually pull through. Pull-through rate's been three times as high as, you know, our normal pull-through rate when somebody comes in, you know, through the website or into a branch or something else. There's no red flags with credit, but credit before we actually expand these kinds of things, we like to see six, nine months of payment behavior, so it's too early, but it's a zero 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, you know, 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. You know, we can leverage a shared infrastructure, and, you know, we have a lot of operating leverage in our business, and so as you add these new products, you don't have to, you know, add all the expenses to do so.
Got it. That's helpful color. I wanted to switch gears and talk about credit. You know, the front book's 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 last quarter. You've kind of guided that the first half of 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?
Yeah. I mean, look, nothing has changed significantly since our second quarter call. We like the direction credit's moving, and, you know, we've seen it stabilize throughout 2024 , which gives us confidence that, you know, both the consumer is getting in better shape, but more importantly, our tight underwriting is paying off, and we've turned, you know, 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 great. That's what you want. The year-to-date trends of, you know, just watching delinquency continue to go down, you know, 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. You know, the first six 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, you know, 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 frames, 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, you know, will trend down, meaning better. And also the stability of the macro. I mean, all this assumes, you know, some stability in the macro, happens. But we like. You know, as you said, we're very confident second half of the year is going to be lower. We feel good about, you know, 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 lines of trends. As it gets bigger and bigger, credit should continue to move in a positive direction.
Got it. So I'm gonna pause here and just go to the two 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 six and a half to seven, two, seven to seven and a half, three, seven and a half to eight, or four, eight to eight and a half? Looks like the majority have 45%, seven to seven and a half, and then 30%, seven and a half to eight. And we'll just go to the next one. Question two: Over the next year, would you expect your position in OMF to, one, increase, two, decrease, or three, stay the same? 39% increase, 39% stay the same, so fairly bullish. So we have.
I hit number one on that, virtually.
So we have about five to seven minutes left. I'll just open up the Q&A if there are any questions.
I don't think it's on. Yeah, you shut. So I think Ally this morning. Yeah, 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?
Yeah, 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, you know, the biggest part of our portfolio. We have two 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. You know, if you take our personal loans, and we continue to get our fair share of that market and growth, and then have two opportunities that are able to grow our 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, you know, I'm a big fan of ideas are cheap, execution is hard, and you got to execute, and so our main focus is those three products. Channels, you mentioned. You know, auto, as much of it is as a product, I think of it actually more as a new channel where we can get things, 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 licensed 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 sized to our current personal loans in the kind of $6,000-$12,000 range on average, and they're 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, you know, what I would say is, you know, we're always opportunistic when, you know, different platforms come up for sale. We'll look at things.
But generally, you know, we feel really good about the strategy, which is we do lending to the non-prime consumer, and we do it in three big markets: auto, card, and personal loans. 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 in, 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, you know, 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?
Yeah, 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, you know, 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 two years, we can make every loan we want to make, keep originating loans and growing our business, pay our people, invest in our growth.
For a wholesale funded company, it's very unique. The way we're able to do that is we have three 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, you know, active in the ABS markets. 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, you know, 18 months away.
That gives us a lot of flexibility of when and how we tap the markets. And so, you know, the way I talk about our business is we're super conservative with our balance sheet, because that's where, you know, consumer finance companies have gotten in trouble in the past, and we're not gonna have any trouble there. And our board and I are very, you know. 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.
That's great. I think we're at time, so thank you.
Thank you.