OneMain Holdings: Profitable Through The Pandemic (NYSE:OMF)


Introduction

OneMain Holdings, Inc. (OMF) is one of the largest lending exclusive consumer finance companies in the United States. The company makes revenue from personal loans, credit insurance, loan servicing, and buying/selling loans. OneMain typically provides loans to subprime customers, and in 2019 subprime accounts made up 53.05% of the total. With the COVID-19 pandemic, OneMain has continued to grow its loan portfolio while fending off delinquencies and charge-offs with a borrower assistance program. OneMain is trading at a good valuation – a bit above book value at 1.45x – and could show a bounce back in price if the economy keeps trending upward.

Q1 and Q2 2020

The COVID-19 pandemic has slowed the world economy over the past nine months. In the United States, the current unemployment rate is still high at 7.9% but has improved each month since the shutdown. Common sense would assume that consumer lenders would be hit hard by this economy. But OneMain has been able to remain profitable and has posted healthy metrics.

In Q1, OneMain posted net interest income of $851 million, an increase of 18.2%. This increase in net interest income was attributable to growth in the loan portfolio. But OneMain took a hit from an increased provision for losses, which increased by 92.4% to $531 million! All banks have done is to build up reserves in line with revised loan loss projections from COVID-19. The higher provision for losses resulted in a decrease in net income by 78.95% to just $32 million or $0.24 per share.

In Q2, OneMain saw similar results. Net interest income grew 5.8% to $806 million due to continued loan portfolio growth. Again, provision for losses saw a large increase of 57.8% to $423 million. Net income was down by 54.1% to $89 million. Overall for the six months, OneMain posted net interest income of $1.657 billion, an increase of 11.8%. Provision for losses increased by 72.2% to $954 million. The result is net income of $121 million or $0.90 per share, a decrease of 65%. Although net income was down by such a large percent, it remained positive, which is very impressive, with over 50% of customers being subprime. Compare these results to a company like Capital One Financial (COF) that has posted negative earnings over the past two quarters and has a way lower percentage of subprime customers. When changing the perspective, OneMain is showing great results during a serious economic slowdown.

Important Metrics

While the bottom line took a large hit, the credit metrics stayed very solid. First off, the net yield for OneMain increased from 23.92% in 2019 to 24.16%, meaning that OneMain is making more on each loan than before, which makes sense as risk is higher now. Net charge-off rates were stable at 6.54% in Q1, 6.32% in Q2, and 6.39% for the total six months. For comparison, in the first six months in 2019, the net charge-off was 6.67%. The 30-89 day delinquency rates for the same periods were 2.25%, 1.63%, and 1.63%, and in 2019, the 30-89 day delinquency rate for the same period was 2.14%. The steady net charge-off rate and declining delinquency rates are a testament to the company’s ability to manage the economic downturn. On top of this, the efficiency ratio for the company has improved to 42.7% from 43.43%, meaning that non-interest expenses as a percent of net interest income have decreased. Altogether, OneMain seems to have done better during the pandemic than before it. Again, this is very impressive with such a high rate of subprime customers. You would expect that with a higher percentage of subprime customers, OneMain would see higher upticks within these credit metrics, but that hasn’t been the case. Much of this improvement in these metrics can be attributable to the customer assistance that OneMain has deployed.

Future Outlook

Source: OneMain Holdings Q2 Earnings Call Presentation

Like many of the credit companies I have analyzed, OneMain has provided significant customer assistance programs in the face of the COVID-19 pandemic. The program offered reduced and delayed payment options. Due to many lay-offs and high unemployment, enrollments peaked in April amidst the shutdown at 8% of total accounts. This program is what helped lower the net charge-off and delinquency rates over the first two quarters. What can be seen in the above graphic is that the situation has improved since April, with only 2.3% of accounts enrolled in the program. It is quite remarkable when you consider the amount of subprime customers OneMain lends to. Now, 85% of customers that have enrolled in the customer assistance are no longer currently enrolled. With the economy having a decent bounce back, OneMain should expect more normal results over the next half of the year. If enrollments in the borrower assistance program continue, I would expect charge-off and delinquency rates to stay steady. Also, this is a good sign that provision for losses will decrease a bit in the next few quarters. Overall, the future outlook doesn’t look as grim as it did in March.

Valuation

OneMain Holdings is currently trading around $34 per share. If I take a very conservative view and say that we can expect the same financial results for the second half of the year, OneMain would end with an EPS of $1.80. This would result in a P/E of 18.89x. Also, OneMain has a book value per share of $23.44, meaning the P/B is at 1.45x.

Conclusion

OneMain has stayed profitable during the COVID-19 pandemic, posting an EPS of $0.90 for the first half of the year. The company has managed to grow its loan portfolio while also maintaining quality credit metrics. Also, the OneMain borrower assistance program implemented has aided in keeping these metrics healthy and seems to be winding down with just 2.3% of accounts enrolled. These results are impressive for a company that provides loans to subprime customers that should pose more credit risk. Compared to other consumer loan companies, OneMain has performed better than expected and is still posting earnings. On top of this, the future outlook looks better than anyone could have expected in March. The company trades at a decent valuation, a bit above book value, and as long as the economy keeps showing an upward trend, OneMain could rebound in the stock market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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