ARM industry outlook culled from recent earnings calls of three publicly traded debt collection companies: Encore, Navient and PRA Group.
08/15/2023 11:15 A.M.
4 minute read
Three of the largest publicly traded debt collection companies—Encore Capital Group, Navient and PRA Group—recently held their Q2 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
“Looking at publicly available economic data that we regularly share, active credit card balances, delinquency rates and charge-off rates are all continuing to climb. And based on this data and our experience, we believe that these metrics will trend even higher.”
–Pete Graham, executive vice president and chief financial officer, 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. We are now back to the steady growth in lending we’ve historically seen in the U.S. market. This growth is also evident in the second quarter financial results of U.S. banks, which continue to report increases in credit card outstandings. In addition to the upward trend in credit card outstandings, credit card delinquency rates in the U.S. have continued to rise in recent quarters and are now at or near pre-pandemic levels. This sustained increase in delinquency rates is now leading to higher charge-offs and increased supply of portfolios in the U.S. for debt buyers such as Encore.”
-Ashish Masih, president and CEO, Encore
Collections Environment
“In contrast to recent trends, pricing [is] improving across all of our markets as we renew forward flows and enter into spot transactions. We believe we have now entered an inflection point in the cycle that is translating to portfolios being purchased at higher returns.”
-Vik Atal, president and CEO, PRA Group
“Encore second quarter performance reflected normalized consumer behavior and a stable collections environment in each of our key markets. In the U.S., with lending and charge-off rates continuing to steadily increase, the growth in portfolio supply and improvements in portfolio pricing also continue.”
-Ashish Masih, president and CEO, Encore
“Keep in mind that the elevated level of collections last year was atypical and resulted in part from U.S. consumer behavior that has since normalized.”
-Jonathan Clark, EVP and CFO, Encore
“In this environment, we believe higher financing costs are having 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, EVP and CFO, Encore
Student Loans
“FFELP allowance coverage has remained relatively stable over this period. As you know, the federal government guarantees 97% or more of principal and interest on these levels. The allowance as a percent of outstanding balances reflects the federal guarantee on all but 3% of principal and interest. Net charge-offs in this portfolio over this period, a period which included pandemic forbearance and other borrower relief programs, remained low and actually declined. As borrowers have exited those programs, net charge-offs have, as expected, increased. We attribute this increase to be a catch-up of charge-offs that would have otherwise occurred during the period of the pandemic. We expect charge-off levels to return to historical levels as this catch-up cycle runs its course, absent changes in macroeconomic variables. The net charge-off trends in the consumer lending portfolio reflect similar dynamics as FFELP: decreasing charge-offs while pandemic borrower relief programs were in place, and increasing as expected as borrowers exited the pandemic relief programs.”
-Joe Fisher, executive vice president, CFO and principal accounting officer; Navient
“There was an increase in prepayment rates during the second half of last year. This was driven in large part by FFELP borrowers who consolidated into federal direct loans with the expectation that they might participate in the administration’s debt reduction proposals. You can see that prepayment activity has declined and stabilized in the first half of this year. Future prepayment levels remain uncertain under the administration’s recently announced actions and proposals on reducing student debt.”
-Joe Fisher, executive vice president, CFO and principal accounting officer, Navient
“Our experience and all of our insight into the market is that it is very much a rate-driven market. And given the fact that rates aren’t declining, but the Fed may increase them at least one more time here, we don’t see the addressable market increasing significantly because of a payment pause.”
– David L. Yowan, president and CEO, Navient
Editor’s Note: All quotes taken from call transcripts provided by Seeking Alpha and Yahoo! Finance and were lightly edited for clarity.
Remember, subscribe to ACA Daily and Member Alerts under your My ACA profile when logged in to acainternational.org to receive updates on the ACA Huddle.