ARM industry outlook culled from recent earnings calls of three publicly traded debt collection companies: Encore, Navient and PRA Group.
05/19/2023 3:30 P.M.
6 minute read
Three of the largest publicly traded debt collection companies—Encore Capital Group, Navient and PRA Group—recently held their Q1 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
“What we saw for a couple of years during the pandemic when consumers saved money or had support was unusually excess liquidity and high cash payments. I mean, the savings rate shot up. And now savings rates are actually below pre-pandemic in some ways. So, we are seeing much more normal behavior. But you’re absolutely right, the consumer is facing certain pressures. But they’re not fully there yet as [far as] a recession because inflation is there, which is new, but [the] unemployment rate is a record low.
So, all of those things combined are leading to much more normal behavior at this time. But we will, of course, be watching out for consumer behavior changes and adjusting our operations to make sure we are dealing with the consumers and addressing what their situations are now. For example, inflation is tamed down a bit and gas prices have reduced again. So that’s less of a conversation. But consumers are absolutely behaving more normally [now]. I would say that the whole excess liquidity that consumers had is gone and we are back into the normal situation now.”
-Ashish Masih, president and CEO, Encore
“While I believe that our strategy is on target and our future is bright, we do face near-term challenges in our U.S. business due to a combination of the weaker economic environment, reduced consumer liquidity and the resulting impact on cash performance and margin.”
-Vik Atal, president and CEO, PRA Group
Tax Season
“In the U.S. [we’re] not seeing any different behavior regarding tax[es] from consumers. We do track refund rates very, very closely in our operations, but we’re not seeing any kind of impact that we can attribute to taxes. Now overall, consumer behavior, as I just mentioned, is seeing a bit less cash up front and more willingness to set up payment plans, which tend to hold pretty well over time. So that’s what we’re seeing currently on the tax front and U.S. consumer front.”
-Ashish Masih, president and CEO, Encore
Credit Cards
“Industry data shows active U.S. credit card balances continue to climb, setting new records [after] hitting a trough in early 2021. Balances in quarter one of 2023 exceeded their pre-pandemic levels by 14%. Credit card delinquency and charge-off rates have also risen from their [lows] in 2021 to 2.3% and 2.6%, respectively, exiting 2022. We believe these metrics will continue to trend higher, especially in non-prime accounts.”
-Vik Atal, president and CEO, PRA Group
“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, and each month thereafter, the U.S. Federal Reserve has reported a new record level of outstandings. Additionally, banks continue to report growth in lending in first quarter financial results.”
-Ashish Masih, president and CEO, Encore
Student Loans
“Last year, we saw accelerated prepayments in our FFELP portfolio. FFELP prepayments have now fallen. The resulting slower amortization of loan premiums drove this quarter’s $10 million FFELP loan loss provision.”
-Jack Remondi, CEO, Navient
“Since November, there has been a significant decline in prepayment activity [in the Federal Education Loans segment] and we are seeing consolidation requests that are below historical levels. … Compared to the fourth quarter, self-delinquency rates decreased to 14.4% from 15.6%, and forbearance rates decreased to 16.9% from 18.1%.”
-Joe Fisher, chief financial officer, Navient
“We continue to see a slowdown in prepayment speeds in the overall portfolio as borrowers with fixed interest rates have less of an incentive to refinance in the current rate environment, which is benefiting net interest income.”
-Joe Fisher, chief financial officer, Navient
“We anticipate quarterly refi origination volume to remain at these lower levels throughout 2023 as we expect the expiration of the CARES Act to provide no meaningful impact in the current rate environment.”
-Joe Fisher, chief financial officer, Navient
Debt Buying
“In this environment, we believe higher financing costs are beginning to have a moderating effect on portfolio pricing in the U.S. as debt buyers adapt their bidding behaviors to their higher cost of capital.”
-Jonathan Clark, executive vice president and chief financial officer, Encore
“With lending by U.S. banks continuing to set new records with each passing month and charge-off rates steadily rising, we are seeing increases in volumes from existing forward-flow agreements, as well as significant additional volume being brought to market by banks and issuers. It’s clear that we have continued to transition into the portion of the consumer credit cycle in the U.S., in which portfolio purchasing becomes increasingly favorable in terms of both market supply and returns.”
-Ashish Masih, president and CEO, Encore
Collections Environment
“Given the continuing weak economic conditions, there may be some near-term pressure on cash collections, which we’re monitoring. It’s worth reminding, though, that the factors that can cause near-term collections pressure are also typically the same factors that historically have led to more portfolio supply, as consumers struggle to manage and pay down the debt.”
-Pete Graham, chief financial officer, PRA Group
“The overall collections environment in the U.S., in particular this quarter, was challenging. As I said in my prepared remarks, we normally—going back pre-pandemic—we normally would have had a strong double-digit increase Q4 to Q1, easily high-teens, if not in the high 20s percentage increase quarter-over-quarter, and that was a single-digit increase this year. And so, we’re attributing that to a softer tax season. There was a lot of public commentary around lower refunds this year.”
-Pete Graham, chief financial officer, PRA Group
The Importance of the ARM Industry
“I believe it’s helpful to reiterate the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts, which are an expected outcome of the lending business model. Our mission is to help create pathways to economic freedom for the consumers we serve by helping them resolve their past few debts. We do that by engaging consumers in honest, empathetic and respectful conversations.”
-Ashish Masih, president and CEO, Encore
“In the U.S., now that consumer behavior has normalized and portfolio supply growth is accelerating, it’s clear that we have transitioned to the next phase of the consumer credit cycle. As a result, more consumers than ever will need our support and we are ready to help them resolve their debts and restore the financial health consistent with our mission and the essential role we play in the consumer credit ecosystem.”
-Ashish Masih, president and CEO, Encore
Editor’s Note: All quotes taken from call transcripts provided by Seeking Alpha and Yahoo! Finance and were lightly edited for clarity.
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