Shares of Santander Consumer USA Holdings Inc. (SC - Free Report) gained nearly 14% following the company’s third-quarter 2016 earnings release. Earnings per share of 59 cents outpaced the Zacks Consensus Estimate of 55 cents. However, the bottom line declined 10.6% from the year-ago quarter tally of 66 cents per share.
Increase in total finance and other interest income and lower provisions primarily contributed to the earnings beat. However, rise in expenses acted as a headwind.
Net income stood at $213.5 million, down 9.7% from the prior-year quarter. It must be noted that during the third quarter, the company recorded a one-time tax benefit of $11 million, or $0.03 per share.
Revenues Down, Expenses Up
Total revenue amounted to $1.2 billion, down 12.3% year over year. The decline was mainly due to decrease in all components of revenue, like net finance and other interest income, profit sharing and total other income.
Net finance and other interest income totaled $1.2 billion, down 3% year over year. The decline was primarily due to a shift in credit mix, resulting from disciplined underwriting standards, and higher cost of funds, led by expansion in spreads and benchmark rates.
Operating expenses rose 8.8% year over year to $284.4 million. Higher repossession activity and higher headcount led to the rise.
As of Sep 30, 2016, net finance receivables, loans and leases stood at $34.7 billion, up 6.1% year over year, chiefly led by an increase in lease assets. Further, total originations of $5.1 billion plunged 32.2% compared with the prior-year figure.
Mixed Credit Quality
Santander Consumer’s credit quality represented a mixed bag in the quarter. Provision for credit losses decreased 15.7% year over year to $610 million. Also, total net charge-offs ratio decreased from 13.8% to 8.3% for the quarter ended Sep 30, 2016.
However, end-of-period delinquency ratio was 4.6%, up from 3.8% in the year-ago period.
Capital and Profitability Ratios
As of Sep 30, 2016, Santander Consumer’s Common Equity Tier 1 capital ratio came in at 13.1%, rising from 11.5% as of Sep 30, 2015.
Return on average assets inched down to 2.2% as of Sep 30, 2016 from 2.6% as of Sep 30, 2015. Also, return on average equity was down to 17.1% in the reported quarter from 22.2% recorded in the year-ago quarter.
We believe that with the improvement in disposable income and consumer spending, Santander Consumer will benefit from rise in auto finance. Also, a decline in provision for loan losses will aid bottom-line growth.
Currently, Santander Consumer carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Performance of Other Companies
Capital One Financial Corporation’s (COF - Free Report) third-quarter 2016 adjusted earnings of $2.03 per share surpassed the Zacks Consensus Estimate of $1.94. However, it compared unfavorably with the year-ago quarter’s adjusted earnings of $2.10.
Continued improvement in net interest income and non-interest income were the primary reasons for the better-than-expected results. This was partially offset by a rise in expenses and higher provision for credit losses.
Sallie Mae (SLM - Free Report) reported core earnings of 12 cents per share, outpacing the Zacks Consensus Estimate by a penny. Also, the bottom line improved 20% year over year.
Results were driven by increased net interest income as well as non-interest income. Continued rise in private education loan originations was among the tailwinds. However, these positives were partially offset by higher expenses and a significant rise in provisions.
Ally Financial Inc.’s (ALLY - Free Report) third-quarter 2016 adjusted earnings of 56 cents per share lagged the Zacks Consensus Estimate of 59 cents. However, the figure improved 9.8% from the prior-year quarter.
Lower-than-expected results were primarily due to escalated expenses and provisions for loan losses. Further, deteriorated credit quality and capital ratios added to the woes. Nonetheless, improved net revenues were on the positive side.
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