HDFS Losses Inch Up Due to ‘Normalized’ Subprime Performance


Harley-Davidson Financial Services (HDFS) reported its retail credit losses had inched up around 2% — 42 basis points — in the first quarter of 2016 versus the same time a year prior, the company announced.

“The increase was a result of higher losses on loans in oil-dependent areas, normalizing subprime performance, and lower used-bike values at auction,” Harley-Davidson Inc.’s Chief Financial Officer John Olin said during an earnings call on Tuesday. “During the quarter, HDFS continued to maintain a strong liquidity position and contributed strong profitability to the company.”

Also, 30-day delinquencies were up around 3% at the end of 1Q — 24 basis points higher than the same quarter last year. “The delinquency rate was up particularly in oil-dependent areas,” Olin said, but “despite the increase, [overall] delinquency remained at low levels.”

Subprime has represented between 15% and 25% of the captive’s origination mix, Olin said. “Subprime is a fantastic business for us. We have tremendous returns on it and sell a lot of incremental motorcycles, and we are seeing subprime normalize a little bit. But the fact of the matter is, for the last seven years, subprime has not behaved like subprime. It has performed extremely well and we have priced our models for more of a normalized subprime performance, and we are starting to see more of a normalization which we’ve talked about in the last several quarters.”

HDFS predicts its credit losses to stabilize in the coming months, according to Olin. “We’re just starting to approach average levels of credit losses, so we feel very good about where we’re at,” but “we expect HDFS income to be down modestly because of rising credit losses and higher interest expense,” he added.

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