OneMain Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

OneMain Holdings is a leading consumer finance company specializing in providing personal loans, auto loans, and other credit products to underserved customers primarily in the U.S., both online and through a branch network.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

OneMain Holdings, Inc. (OMF) is a financial services holding company that offers a range of credit products, primarily personal loans (secured and unsecured) and optionally credit and related insurance products. It operates through a network of branches and also through digital lending platforms.

Revenue Distribution

OMF’s revenue is primarily derived from:

  • Interest Income: This comprises the largest portion of OMF’s revenue. It is generated from interest charged on personal loans and installment loans.
  • Net Interest Income: Net interest income is the difference between interest earned on loans and interest paid on the company’s borrowings.
  • Other Income: This includes revenues from insurance product sales, fees for services, and gains on the sale of securities.

The company’s revenue mix is characterized by a blend of secured and unsecured lending products, which allows it to target a broader segment of customers with varying credit profiles.

Several important trends shape the consumer finance industry:

  • Increased Competition: The industry is becoming increasingly competitive. Established players and new fintech entrants are vying for market share, driving down pricing and increasing acquisition costs.
  • Digital Transformation: Consumers are increasingly turning to digital channels for loans, requiring lenders to invest in online platforms and mobile-friendly applications.
  • Regulatory Scrutiny: Consumer finance companies are subject to growing scrutiny from regulators focused on consumer protection and fair lending practices. The regulatory landscape for short-term loans is becoming more intense
  • Economic Uncertainty: Economic downturns can materially affect consumer’s ability to repay loans, causing an increase in delinquencies and credit losses. Interest rate increases will also impact loan affordability, potentially lowering demand.

Competitive Landscape

OMF faces competition from a variety of players, including:

  • Traditional Banks: Many traditional banks offer personal loan products and credit lines.
  • Fintech Lenders: These digital-only lenders offer fast online loan approvals and flexible repayment terms.
  • Credit Unions: Credit Unions tend to have competitive rates and strong relationships with their members
  • Buy-Now Pay-Later Firms: These firms offer short-term, point-of-sale financing.

OMF operates in a fragmented, competitive market where pricing power is limited. Differentiating itself beyond price will be essential to long term-success.

What Makes OMF Different?

OMF differentiates itself through its:

  • Branch Network: OMF has a large network of brick-and-mortar branches across the country, which allows it to serve customers who prefer a face-to-face interaction and can also serve as a collection mechanism. Most of OMF’s competitors are internet based only.
  • Relationship Focus: OMF tries to establish a close relationship with its customers, giving them a more personalized experience compared to other lenders.
  • Focus on Underbanked Customers: OMF targets customers who may not have access to credit from traditional banks, providing an important service.

Financials

Revenue

While the company has shown growth, revenue growth rates have varied in the past few years, and overall the company’s revenue has not increased much, and this is expected to continue in the near future

  • Recent Trends: OMF reported net revenue of $3.23 billion in 2022 compared with $2.83 billion in 2021 and $2.57 billion in 2020. For the nine months ended September 30, 2023, total revenue was $2.54 billion. The revenue for the trailing twelve months is projected to be around $3.35 billion.

Margins

Interest rate increases and higher credit defaults are expected to put pressure on future margins.

  • Net Interest Margin: Net interest margin was 9.4% for 2022 and 9.6% for 2021. Interest rate increases are increasing their cost of funds and are expected to negatively affect their interest margins.
  • Net Profit Margin: Net profit margin is unstable in last couple of years. Net profit margin decreased significantly in the last quarter of 2023.

ROIC

The company’s ROIC has declined over the recent years. This is mainly due to increase in delinquencies and credit losses, and decrease in net income.

  • Recent Numbers: ROIC is estimated at ~10% based on earnings over the past 12 months.

Risks to the Moat

  • Technological Disruption: Fintech lenders with highly streamlined and digital first operations have the potential to capture market share by providing faster and more user-friendly products, which could erode OMF’s branch-based model.
  • Regulatory Changes: Increased regulatory scrutiny and changes in lending laws can increase the company’s compliance costs and also limit pricing power.
  • Economic Downturns: A major recession would significantly decrease the demand for credit while increasing credit losses and impairing revenue and margins.
  • Competition: The highly fragmented industry and competition from banks and fintech companies could put pressure on the rates that they offer to customers and cause margin erosion.
  • Customer Delinquencies and Credit Losses: A significant increase in defaults or customer delinquencies can lead to increase in credit losses and impair earnings.

Business Resilience

  • Diversified Customer Base: OMF serves a diverse range of customers and has a well established customer base which has been around for decades.
  • Proprietary Underwriting Model: OMF has built a robust scoring system which allows them to identify good credit prospects and better mitigate losses.
  • Strong Relationship With Customers: The company focuses on building relationships with its customers, increasing the stickiness of their customer base and making customers less likely to leave.

Moat Rating: 2 / 5

OneMain does exhibit some elements of a moat, namely: its large branch network, customer relationships, and focus on underbanked customers. However, intense competition, rapid technological innovation in the fin-tech industry, and economic uncertainties could weaken its competitive position. The existing moats are fragile at best. The company has some differentiation but overall fails to create strong pricing power and has shown subpar profitability over recent years. Thus, the company is given a moat rating of 2/5.

Understandability: 3 / 5

While the basic business model of OMF is simple, the specific nature of the lending products it offers and its interaction with regulators add to the complexity. For an experienced investor, understanding this may not prove too challenging, but may be less understood by a non-experienced investor. Therefore, the company gets a rating of 3/5.

Balance Sheet Health: 3 / 5

OMF’s balance sheet is a bit complex and can be understood better with further analysis of its latest annual reports which have more detailed explanations on assets and liabilities

  • Debt Levels: Debt levels are high, which means debt is around 80% of total capital (long and short term debt combined). High debt makes the company vulnerable to financial distress
  • Liquidity: Company has $1.8 billion of cash and marketable securities which is enough to cover some of its financial obligations.
  • Leverage The leverage of the company remains a challenge and needs to be reduced.

Due to high debt levels, high financial leverage, and low cash on hand, I have rated OMF balance sheet health at 3/5.

Recent Concerns and Management Commentary

  • Economic Outlook: In the recent earnings calls, management has emphasized that economic uncertainty will continue to impact their business. They have mentioned their focus on reducing debt and improving profitability in the face of economic headwinds.
  • Increase in Delinquencies and Net Charge-Offs: The most recent earnings call highlighted that, the company’s credit performance has been trending lower. Delinquencies and net charge-offs increased during the last quarter of 2023 and are expected to trend higher going forward.
  • Cost Cutting: Management is aware of pressures and has implemented several cost-cutting measures, and also focused on improving efficiency.
  • Dividend: The board of directors declared a common stock dividend of 2.70 dollar per share for the third quarter.
  • Credit Quality: Management has reiterated their commitment to stringent underwriting practices, as credit performance has degraded.
  • Acquisitions: The company has completed its acquisition of Fintech startup Trim. The financial benefits of this acquisition are currently unclear.
  • Guidance: OMF has given guidance for next year to have EPS of around 3.3 dollar.