The Spanish bank Santander is investing more effort into its U.S. operations and broadening the focus of its auto lending division, which has long focused more on subprime borrowers.
Tim Wennes, the CEO of Santander U.S., said in an interview that the company has been migrating to becoming a "full-spectrum" auto lender that serves more customers with prime or super-prime credit scores.
It's doing so by better aligning its U.S. retail bank with Santander Consumer USA, an auto lender that's built a large pool of subprime customers but has remained largely separate.
"We're doing more to integrate our auto lending activities and our banking activities," Wennes said in the interview, adding that the shift helps the company be "more competitive across a broader spectrum of FICO [credit] scores."
The shift in strategy coincides with a decision from Santander to bring its U.S. auto lending division fully under its umbrella, a marked contrast to
The Spanish bank's U.S. subsidiary, which also has a large presence in commercial real estate, was previously the majority owner of the auto-focused Santander Consumer USA. But last year, it
Santander's shift toward higher-credit-score borrowers has been underway for years but is now accelerating. What's also changing is that the auto lender is increasingly funding its loans through the U.S. retail bank's deposits, a cheaper source compared to tapping wholesale markets.
Santander Consumer has historically relied far more on bundling its auto loans into securities and selling them to investors, who demand a higher yield for their investment. But Wennes said the auto lender now has a "much better blend of deposit funding," a cheaper avenue of funding its loans that ultimately means the interest rates it offers at dealers can be lower.
Last year, about a third of Santander's auto loans were funded through bank deposits, but that figure is now on its way to half.
The shift makes sense given the "dry powder" available at Santander's retail bank through its deposits, according to Mark Narron, an analyst at Fitch Ratings. "There is some room to deploy its deposits" since they are significantly above the bank's loan totals, Narron said.
Loans to auto borrowers with higher credit scores may bring in less money since the rates they're charged are lower, Narron said. The upside is that the cost of funding those loans is cheaper, the chances of borrowers repaying their loans fully are higher and there are fewer legal risks outside the subprime space, Narron added.
"From a risk perspective, I think it's a positive story," Narron said.
Santander Consumer USA has been no stranger to regulatory troubles. In 2020, the company reached
Santander's auto lending arm is the largest subprime auto lender in the country, according to the research firm IBISWorld. But the subprime market has also gotten "very crowded" in the last few years as credit unions continue to make loans in that space and newer fintech players jump into it, said Babs Ryan, the lead analyst for digital lending at Javelin Strategy & Research.
On the other hand, competition is also heavy among lenders for the prime and super-prime customers that Santander is trying to reach.
"They were good at subprime, and I think they now have to prove out that they're competitive and can move up-market and make it work," said Narron, the Fitch analyst.
Wennes described the ongoing change in its auto loan funding sources — shifting more to deposits rather than securitizations — as a practical one. But the long-term plan is to achieve a fuller integration of its auto lending arm and the retail bank, so that Santander auto loan borrowers can more easily become retail bank customers.
"That is the future," Wennes said, adding that the bank is investing in its digital banking operations to achieve that mission.
Ryan, the Javelin Strategy & Research analyst, credited Santander for undertaking a "serious strategic high-level rethink" of its business. That includes an
The long-term plan of bringing more Santander auto customers into its bank is wise, Ryan said, as it adds more depositors and could lead to more business with those customers. But the challenge is offering a banking product that actually stands out and isn't the "same exact product" its competitors offer, Ryan added.
"Just sending somebody a mailing isn't going to do it, or sending them an email," Ryan said. "You have to have a better product today that's unique and different."
Wennes also discussed broader auto market dynamics in the interview, saying that Santander has "done some tightening" in its underwriting criteria for loans to some subprime borrowers as the economic outlook gets more uncertain.
"We are cautious, and we're watching [loan] performance and how things evolve," Wennes said. "But we still have appetite and capacity and are active in the market."
Borrower demand has slipped given the rise in interest rates and pandemic-era boom in auto prices, which have moderated in recent months but remain elevated. But Wennes said the market appears to be "normalizing and finding its footing."
He also sees long-term demand for autos going forward, pointing to a
"For the vast majority of the U.S., the car is the primary mode of transportation, and reliable and safe transportation is important for people," Wennes said.
