ARM industry outlook culled from recent earnings calls of three publicly traded debt collection companies: Encore, Navient and PRA Group.
11/16/2023 9:45 A.M.
5.5 minute read
Three of the largest publicly traded debt collection companies—Encore Capital Group, Navient and PRA Group—recently held their Q3 2023 earnings calls. As public companies with required market disclosures, their earnings calls offer an opportunity to glean macro-insights on the collections world and the economy in general.
Here is a quick overview of some insights from the calls that speak to larger accounts receivable management industry trends.
Economic Notes & Consumer Behavior
“Changes to consumer behavior during the pandemic led to unusually low credit card balances and below-average charge-offs, which in turn resulted in a reduced level of portfolio sales by banks. However, since early 2021, outstandings have been rising. Revolving credit in the U.S. surpassed pre-pandemic levels in early 2022. Each month thereafter, the U.S. Federal Reserve has reported a new record level of outstandings, reflecting the steady growth in lending we have historically seen in the U.S. market. The same normalizing consumer behavior that has driven increased demand for consumer credit in the U.S. and lending growth by banks has also led to growing charge-offs.”
– Ashish Masih, president and CEO, Encore
“Since bottoming out in late 2021, the credit card charge-off rate in the U.S. has been steadily rising and is now approaching pre-pandemic levels. U.S. consumer credit card delinquencies, a leading indicator of future charge-offs, have also continued to rise and are now above pre-pandemic levels. With both lending and the charge-off rate growing simultaneously in the U.S., we’re seeing continued strong growth in U.S. market supply and improving pricing. As a result, we expect 2023 to be a record year for portfolio sales by U.S. banks and credit card issuers. “
– Ashish Masih, president and CEO, Encore
“There has been a lot of discussion in the news lately regarding pressure on the consumer. We have seen limited evidence to date that such pressure is impacting our U.S. customers. Year to date, we’ve exceeded our cash collection expectations, particularly in our older vintages. In Europe, we have seen that the cost of living is having some impact on consumers in a few of our markets. In these markets, we have observed fewer, large one-time payments. However, the proportion of customers paying us has remained stable, so we think that this will cause a timing delay instead of an overall reduction in cash collections. It’s worth noting that the other markets are still performing well, and that Europe as a whole has consistently exceeded our internal expectations. In both markets, it is our experience that economic downturns and increased pressure on the consumer have historically led to a more charge-offs and portfolio supply that more than offset the impact to cash collections.”
– Rakesh Sehgal, executive vice president and chief financial officer, PRA Group
Collections Environment
“The continued growth in U.S. portfolio supply driven by credit card lending growth and rising charge-off rates has led to improved portfolio pricing and returns.”
– Ashish Masih, president and CEO, Encore
“From my very first week as CEO, I have encouraged and challenged our team to re-evaluate and enhance our operational effectiveness. They have responded superbly. Over the past six months, we have identified, tested, and begun rolling out a wide range of cash-generating initiatives, both large and small, to address our performance in the U.S.
Some of these initiatives include enhancements to our legal collection activities where we are identifying new information sources to optimize the value and decision-making processes across this important channel. We are also leveraging additional third-party resources to bolster and accelerate our post-judgment customer interactions. Both sets of initiatives have identified significant opportunities that are now migrating into execution mode. Similar efforts have been made within our U.S. call center operations with correspondingly encouraging opportunities. We implemented a wide range of operational strategy enhancements starting in the second quarter, expanded these in the third quarter, and are rolling out further initiatives in the fourth.
These changes are driving increased customer contact rates and more effective customer interactions, leading to a growth in payment plans and U.S. cash collections performance that has modestly outperformed our internal expectations over the past six months. Due to the timeline between the actions being taken and the impact on cash generation, particularly within the legal channel but also extending into the call center, the effect of these initiatives and enhancements are only minimally reflected in our year-to-date results.”
– Vikram Atal, president and CEO, PRA Group
“We are highly encouraged by the U.S. market with investment levels increasing for the fourth consecutive quarter. As volumes and pricing continue to increase, this should have a positive impact on portfolio income, which demonstrates the significant opportunity ahead of us as we move further into the credit cycle.”
– Rakesh Sehgal, executive vice president and chief financial officer, PRA Group
Student Loans
“Our refi originations during the quarter were $178 million, bringing our year-to-date total to $456 million. As we’ve discussed previously, the addressable market in refi is driven primarily by interest rates. While we experienced a modest increase in interest in refinancing from federal borrowers as the government payment resumption date approached, we continue to view the opportunity in refi originations to remain more limited than in prior years until rates declined significantly.”
– David Yowan, president, CEO & director, Navient Corp.
“We are seeing a slowdown in prepayment speeds in our private education refinance portfolio as borrowers with fixed interest rates have less of an incentive to refinance in the current higher rate environment. The resulting increase in the expected life of loans and its impact on loan premium amortization benefited the consumer lending NIM by $10 million for 21 basis points in the quarter.”
– Joe Fisher, executive vice president, CFO and principal accounting officer, Navient Corp.
“There are a number of opportunities in place today for borrowers to consolidate to the direct loan program. And if you are a distressed borrower or someone who is struggling to make a payment, you should be looking at those programs hard, and you should be taking advantage of those and either contacting us or picking up the phone when we call you with these solutions. So, I still encourage those borrowers to look at these solutions and what makes sense for them. But at this point, we’re just not seeing it in the activity in our portfolio.”
– Joe Fisher, executive vice president, CFO and principal accounting officer, Navient Corp.
Editor’s Note: All quotes taken from call transcripts provided by Yahoo! Finance and lightly edited for clarity.
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