The volume of consumer auto loans originated through Santander Consumer USA Holdings Inc.'s private-label Chrysler Capital platform has been lagging well below the target penetration rate established under a 10-year agreement with Fiat Chrysler Automobiles NV, and the gap widened further during the third quarter.
Santander Consumer reported in its most recent quarterly report on Form 10-Q filed Nov. 9 that Chrysler Capital's actual penetration rate in the fourth year of the agreement designating it as the automaker's preferred consumer financing provider was just 19%, down from 26% in the third year.
The target penetration rate as of April 30, which marked the end of the third year of the agreement, was 54%, including penetration rates of 40% for retail auto loans and 14% for leases. For the fourth year of the pact, the targeted penetration rate increases to 64%. Chrysler Capital exceeded the 31% target in the first year of the agreement, but fell short in the second year as its penetration rate fell to 29%. It has continued to migrate downward from there. The 19% penetration rate through the first six months of the agreement's fourth year marked a decline from 22% as of June 30.
"In the prime space, we have lost some market share to banks, and we are working on ways to address that," Santander Consumer President and CEO Jason Kulas said during a Nov. 9 conference call. The company is best known for its subprime auto finance business, but its agreement with Chrysler Capital provided it with a presence in the prime part of the credit spectrum.
Kulas said the low-interest-rate environment has allowed "non-preferred" providers of financing to Chrysler customers to be "extremely competitive." It also serves to make the subvention dollars offered by the automaker as reimbursem*nt for the difference between the market rate on auto loans and the incentivized rate less meaningful.
Chrysler Capital retail auto originations plunged to $1.89 billion in the third quarter, of which $1.03 billion consisted of loans to borrowers with FICO scores of 640 and above, from $1.73 billion in the year-earlier period. Santander Consumer's overall auto originations fell to $5.16 billion in the third quarter from $7.46 billion in the year-earlier period as the rates of decline in leases and its "core" retail auto loan business were less than that in the Chrysler Capital platform.
The Chrysler agreement, which took effect May 1, 2013, can be terminated to the extent either party fails to meet its obligations, Santander Consumer stated in the Form 10-Q.
"While we have not achieved the target penetration rates to date, Chrysler Capital continues to be a focal point of our strategy, and we continue to work with [Fiat Chrysler] to improve penetration rates," Santander Consumer said in the filing. It referenced two new pilot programs it rolled out in partnership with the automaker that include dealer rewards and subvented loans targeting nonprime borrowers.
Kulas said he believes the volume-based rewards program will "drive some incremental business and increase our share of what Chrysler originates." He also mentioned a 50% increase in dealer floorplan originations through Santander Bank NA on a year-over-year basis through the first nine months of 2016 as an "important" development in the company's relationships with Chrysler dealers.
Additionally, Kulas said Santander Consumer is finalizing a strategic agreement regarding the origination of additional prime and near-prime assets with Banco Santander SA that he said should benefit the overall relationship with Fiat Chrysler and boost Chrysler Capital's origination volumes.
"If you think about share in Chrysler going forward, the things that we are doing we think over the long term will contribute, regardless of the competitive environment we are in, to the amount of business we do," Kulas said, adding that he remains "really upbeat" about the relationship and "as committed to that business today as we've ever been" in spite of the lower origination volume and penetration rate.
"I would say from our perspective the relationship is strong, but it is also very focused," Kulas said. "On both sides, we want to do more business than we're doing today. We want to be more relevant with the universe of dealers." He added that Santander Consumer believes it can accomplish that while also getting appropriate risk-adjusted returns for the business it books.
That, Kulas said, is "nonnegotiable."
