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OneMain Holdings (OMF): A Resilient Lender Navigating Macroeconomic Headwinds
Published on September 24, 2024 | Ticker: OMF

OneMain Holdings, Inc. (NYSE: OMF) is a leading consumer finance company that provides personal loans, auto financing, and credit cards to non-prime consumers. With a strong presence across 44 states and a diversified product portfolio, OneMain has established itself as a trusted lender for customers seeking access to credit.

Business Overview

OneMain's core business revolves around providing consumer loans, which include personal loans and auto finance, as well as credit cards. The company's personal loans are non-revolving, with fixed rates and terms generally between three and six years, and are secured by automobiles, other titled collateral, or are unsecured. The auto finance segment offers secured auto financing originated through the company's dealership network, also with fixed rates and terms. Additionally, OneMain offers two credit card products, BrightWay and BrightWay+, which are designed to reward customers for responsible credit behavior.

In addition to its lending operations, OneMain's insurance subsidiaries offer customers optional credit and non-credit insurance products. This integrated business model allows the company to provide a comprehensive suite of financial solutions to its target non-prime consumer base.

Financials

For the full year 2023, OneMain reported annual net income of $641 million, annual revenue of $4.28 billion, annual operating cash flow of $2.52 billion, and annual free cash flow of $2.52 billion. These strong financial results demonstrate the company's ability to generate consistent profitability and cash flow, even in the face of macroeconomic headwinds.

In the first quarter of 2024, OneMain continued to deliver solid performance. Net income for the quarter was $155 million, or $1.29 per diluted share, down 13% from the prior-year period. This decline was primarily driven by a $27 million restructuring charge associated with the company's expense initiatives. Adjusting for this one-time item, C&I adjusted net income was $1.45 per diluted share, essentially flat compared to the first quarter of 2023.

Total revenue for the first quarter of 2024 grew 7% year-over-year to $1.17 billion, driven by a 7% increase in interest income to $1.17 billion. This revenue growth was in line with the company's full-year guidance range of 6% to 8%.

Managed receivables, which include the company's consumer loans and credit cards, reached $22 billion at the end of the first quarter, up 6% from the prior-year period. This growth was entirely organic, as it does not reflect the impact of the recently completed acquisition of Foursight Capital, a leading auto finance company.

Credit Quality and Outlook

OneMain has proactively managed its credit risk in the current macroeconomic environment, tightening underwriting standards and increasing pricing in certain segments. These actions have resulted in a 10% year-over-year decline in originations to $2.5 billion in the first quarter of 2024, as the company prioritized profitability over volume.

The company's credit performance has shown positive trends, with the 30-89 day delinquency ratio improving by 56 basis points sequentially to 2.72% at the end of the first quarter. OneMain expects net charge-offs to peak in the first half of 2024, with typical seasonal patterns thereafter. The allowance for finance receivable losses remained flat at 11.6% of net finance receivables.

Outlook

Looking ahead, OneMain provided the following guidance for 2024: - Managed receivables of approximately $24 billion, including $1 billion from the Foursight acquisition - Total revenue growth in the range of 6% to 8% - Interest expense as a percentage of average net receivables of approximately 5.2% - Consolidated net charge-offs in the range of 7.7% to 8.3%, with peak charge-offs in the first half of the year - Operating expense ratio of approximately 6.7%

Liquidity

OneMain maintains a strong liquidity position, with $831 million in cash and cash equivalents and $1.7 billion in investment securities as of March 31, 2024. The company has access to a diverse range of funding sources, including secured debt, unsecured debt, revolving conduit facilities, and credit card revolving VFN facilities.

During the first quarter of 2024, OneMain did not issue any new debt but continued to make progress on its liquidity profile. The company closed its first credit card facilities with two members of its banking group, adding $300 million in committed capacity. Additionally, the company signed an 18-month, $600 million forward flow agreement for whole loan sales with a new partner.

In terms of capital allocation, OneMain's top priority is to invest in the business to position it for ongoing success. The company grew its receivables by 6% year-over-year, with a focus on high-quality, profitable originations. OneMain also allocated capital for the acquisition of Foursight, which is expected to provide significant benefits to the company's auto finance business.

The company remains committed to a strong regular dividend, and the Board increased the dividend by 4% in the first quarter of 2024. The annual dividend is now $4.16 per share, reflecting OneMain's confidence in the capital generation of the business and its commitment to returning capital to shareholders. Share repurchases in the first quarter were modest, with the company buying back approximately 100,000 shares for $5 million.

Risks and Challenges

While OneMain has demonstrated resilience in the face of macroeconomic challenges, the company is not immune to the potential impacts of a prolonged economic downturn, rising interest rates, or increased regulatory scrutiny. The company's reliance on the non-prime consumer segment also exposes it to risks associated with changes in consumer behavior and credit quality.

Conclusion

OneMain's diversified product portfolio, disciplined underwriting, and focus on operational efficiency position the company well to navigate these headwinds. The company's strategic initiatives, including the expansion of its credit card and auto finance businesses, are expected to drive profitable growth and further strengthen its position as a leading provider of financial solutions to the non-prime consumer market.

Overall, OneMain's resilient business model, strong liquidity, and prudent capital management make it a compelling investment opportunity for investors seeking exposure to the consumer finance sector.

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