chw results shud be this weekchw results shud be this wk. strange mkt/groundhog day, as yet another quarter goes by where all participants waiting for a recession that has stubbornly refused to materialize despite pockets of weakness in many areas. in stock mkt, new highs recently in steel, casinos, lodging, building materials, parts of travel and industrial machinery, peculiar…
in november 2022, ¾ of americans in poll already thot economy was already in recession ((https://www.cnn.com/2022/11/03/economy/cnn-poll-economy-sentiment/index.html). bac ceo said in barrons: “The strength of the consumer has [pushed the recession timing out]. The strength of the consumer has kept spending up, kept economic activity up. And the consumer is employed, and that has pushed it out. We went from a [forecast for a] recession starting at the end of 2022, to the first part of 2023, and now to mid-2023. And so we’ve got a mild recession: second-, third-, fourth-quarter negative, getting back to positive in second-quarter 2024.” so nobody knows.
one of the largest and most experienced sub-prime lenders (onemain with >$20 bilion book), recently said “Our 30 to 89 delinquency levels finished the quarter at 3.07%. This is in line with normal seasonal trends. We are optimistic about this continued stabilization and credit performance, following our quick pivots last year. Net charge-offs in the quarter were 6.9%, also within our expectations and were aided by good performance in our later stage collections and strong post charge-off recoveries…Regarding the macroeconomic environment as well as the non-prime consumer, we're encouraged by the continued strong employment numbers. However, elevated levels of inflation are impacting consumers, particularly those at the lower end of the credit spectrum.” share price up 55% from its november 2022 lows…
looking at the results of other lenders (cdn and us), pcls (prov for credit losses) all rose in the 4th qtr but no big step up. some weakening at the lower income brackets but nothing alarming.
the equipment leasing foundation association(elfa) has seen its confidence indicator rise in both january and february 2023, after falling for most of 2022. elfa president: ““The year gets off to a strong start with healthy new business volume in January. Business demand for equipment financing continues unabated despite uncertain and, in some cases, conflicting economic signals: inflationary pressures, rising interest rates, a hot labor market, and easing supply chain disruptions. Credit quality bears watching, as delinquencies and charge-offs creep up from historic lows.” member company vp: “Although new business volume and portfolio performance continue to be strong, uncertainty surrounding inflation and interest rates persists. This presents a bit of a dichotomy in that we see the confidence index increasing despite slight upward pressure on delinquencies and losses. This will drive continued discipline within credit and portfolio management until we see more stability and predictability in key economic indicators...”
chw abs performance reports filed in jan 2023 showed an increase in delinquencies: 2019 vintage delinq (more than 30 days late paying) has gone from 1.77% to 2.27% in past 3 months. 2020 vintage from 1.32% to 2.65%. 2021 vintage from 0.91 to 1.26. this represents just usa loans from chw.
current provisioning is allowance for credit losses (acl) are ~$50mm at sep 30/22, or 2.2% of loan book. removing rifco from the mix puts it at 1.71%, with rifco at 6.24% (since rifco is disclosed). without rifco sub-prime biz, chw sub-prime share of loan book has fallen from 37% in q4/2018 to 24% lasat qtr, and acl has fallen from 3.2% (q4/18) to 1.7% (q3/22).
suggests chw will report higher pcl to account for the higher delinquencies (which they had already commented on in Q3 md&a report). in q3 report, chw said most of funding was fixed, reducing the overall impact of rising rates. company also raised rates to customers, which would start to impact in future quarters.
was clear canada operations were much less efficient than us operations last few qtrs, so see if this trned persists. liquidity no issue as chw utilizing none of warehouse facility in us market after completing abs and paying down warehouse. when chw slows down originations, it generates meaningful cash flow since loan duration is short.
guess big question is how long does chw want to play recession waiting game and shrink its balance sheet and are we simply in a “rolling recession” where most of the delta (rate of change) around the impact of higher rates/less liquidity has already been felt in 2022 (jurien timmer, global macro head at fidelity makes this case) and we have a mild recession?
either way, still think intrinsic value at chw much higher than current sh price.