EX-99 2 prestslides.htm MAY 16, 2001 PRESENTATION TO AFSA prestslides

 

 

 

 Household International Inc.

 

AFSA - Fixed Income Investor Conference

May 16, 2001

 

 

This presentation, in keeping with the requirements of the U.S. Securities and Exchange Commission's Regulation FD, has been filed with the Securities and Exchange Commission. Please further be advised that Regulation FD prohibits Household representatives from answering certain, specific questions during the Q&A session

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AGENDA

  • Competitive Environment and Major Businesses
  • Performance Measures
  • Frequently Asked Questions
  • Funding Outlook

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Leader in the consumer Finance Industry

  • Largest independent U.S. consumer finance company

- Serving the middle market customer for 123 years

- $97.8 billion in managed assets

- Market capitalization over $30 billion
  • Offer a broad array of consumer loan products valued by the middle class
  • Consistent earnings and receivables growth
  • Superior technology
  • Varied distribution channels make cross-selling a reality
  • Industry leading efficiency
  • Strong market position in all businesses

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Competitive Environment

  • Landscape is less, not more, competitive

- Exit of irrational players provides pricing and growth opportunities

- Credit card companies offer fewer teaser rates
  • Weakening economy drives industry consolidation
  • Ability to lead with strong brands is a competitive advantage

- HFC and Beneficial are two of the best-known names in the industry

- Partners with great brands: GM, AFL-CIO, Best Buy and others
  • Strong balance sheet provides opportunities

- Successful business that can be financed on balance sheet

- Spread lending rather than a gain on sale business model

- Ability to purchase select portfolios

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Technology is a Competitive Advantage

  • VISION system

- Pre-screened lead generation and prioritization

- Multiple product underwriting, instantaneous loan decisioning
  • Multiple distribution channels and cross-selling

- Common technology platform

- Data warehouse contains over 48 million customer relationships
  • Leading edge customer service and collection technology

- Maximizes productivity of newer employees

- Monitors the entire customer relationship and past performance
  • Established Internet capabilities

- 50 production websites

- Over $550 million in receivables originated on-line

- 12 million unique visitors in 2000
  • Technology permeates all facets of the business

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Household's Businesses

  • Consumer Lending - Over 1,400 HFC and Beneficial branches in 46 states

- Control nearly 11% of U.S. non-prime mortgage and unsecured loan market

- Branches provide platform for cross-sell opportunities and strong organic growth
  • Credit Card Services - 8th largest MasterCard/Visa issuer

- Provide full spectrum of credit card products

- True partnership approach; GM Card, Union Privilege
  • Retail Services - Second largest 3rd party provider in U.S. with 10% market share

- More than 7.5 million active customers with over 60 active merchant relationships
  • Auto Finance - A leading non-captive auto lender

- Trading coupon for better risk adjusted returns

- 90% of sales through new car dealerships
  • Mortgage Services - Purchase loans in secondary market from over 200 correspondents

- Over $14.6 billion in total loans outstanding

- Improves credit quality and product mix of Household's portfolio
  • Centralized underwriting and collections across all businesses

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AGENDA

  • Competitive Environment and Major Businesses
  • Performance Measures
  • Frequently Asked Questions
  • Funding Outlook

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2000 Operating Performance

  • A record year of performance for Household

- Net income grew 14% to $1.7 billion

- EPS increased 16% to $3.55/share
  • Return on equity relatively unchanged at 23.4%
  • Return on managed assets (ROMA) declined slightly (6bps) to 1.93% due to the continued shift in portfolio mix toward real estate secured product, higher cost of funds, and higher operating expenses reflecting additional investments in the business
  • Efficiency ratios remain "best in class" amidst increased investment, marketing and e-commerce spending
  • Credit quality improved as 2+ delinquencies decreased to 4.20% from 4.66% and chargeoffs decreased to 3.64% from 4.13%

Financial Performance

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Financial Performance

  • First quarter set another record

- Increased managed reserves by $146 million

- Continued emphasis on real estate secured originations

- Managed chargeoffs of 3.56% (annualized rate), down 44 bps from 1Q'00

- Increased spending on technology and marketing

Three Months Ended

3/31/01

3/31/00

Net Income (Millions)

$431.8

$372.9

Net Interest Margin

8.22%

8.31%

Efficiency Ratio

35.6%

36.2%

Return on Managed Assets

1.77%

1.82%

Return on Equity

21.6%

22.0%

TETMA

7.54%

6.94%

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Core Receivables

($ Millions)

 

% Change from Prior

 

3/31/01

Qtr

Year

Real Estate Secured

$38,004.8

3.7%

23.2%

MasterCard/Visa

16, 570.2

(5.8)

6.8

Other Unsecured

16,548.7

2.0

18.8

Private Label Credit Card

11,875.4

(1.0)

7.9

Auto Finance

4,800.8

5.2

41.1

Total Core Products

$87,799.9

.9%

17.5%

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Net Interest Margin & Risk Adjusted Revenue

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2+ Delinquency by Product

 

3/31/01

12/31/00

03/31/00

Real Estate Secured

2.61%

2.63%

2.99%

Auto Finance

1.79

2.55

1.52

MasterCard/Visa

3.68

3.49

3.06

Private Label

5.50

5.48

5.94

Other Unsecured

8.37

7.97

8.56

Total HI

4.25%

4.20%

4.43%

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Consumer Chargeoff Ratio by Product

 

3/31/01

12/31/00

03/31/00

Real Estate Secured

.44%

.41%

.52%

Auto Finance

5.15

5.22

5.25

MasterCard/Visa

6.27

5.83

5.69

Private Label

5.08

5.06

5.65

Other Unsecured

6.27

5.92

7.41

Total HI

3.56%

3.41%

4.00%

 

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2001 Performance Objectives

Earnings Per Share

+ 13 - 15%

Receivables Growth

+ 11 - 14%

Return on Equity

> 20%

Return on Managed Assets (approx)

1.90%

Efficiency Ratio (approx)

34%

TETMA

> 7.50%

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Agenda

  • Competitive Environment and Major Businesses
  • Performance Measures
  • Frequently Asked Questions
  • Funding Outlook

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Frequently Asked Questions

  • Economic Downturn
  • Capital Management and Ratings
  • Sub-Prime Business
  • Predatory Lending
  • Liquidity and Interest Rate Risk Management

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Economic Downturn

  • What is your most likely scenario?
  • How has Household prepared for the economic downturn?

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Likely Economic Scenario and Impacts

  • Risks of a hard landing in the U.S. have increased
  • Household has modeled both hard and soft landing scenarios:

Hard Landing

Soft Landing

GDP Growth

1.8%-2.2%

0.2-0.6%

Unemployment

4.4%-4.8%

4.2%-4.6%

CPI

2.6%-3.0%

2.4%-2.8%

  • Hard landing model incorporates modified 1990-91 severity scenario

- Consumer debt burdens higher

- Increased bankruptcy filings

- Unemployment lower
  • Real estate market is unlike 1990-91

- Expect limited number of irrationally priced real estate markets

- Household is focused on lower and more stable-priced segment
  • While losses and reserves increase, internal capital generation is expected to exceed $1 billion per year

- Strong margins

- Expect slowing asset growth

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Shift Toward Secured Receivables

  • Within real estate secured product, a movement toward first lien

1997 < 50%

1Q'01 78%
  • "Unsecured" product increasingly PHL

1997 13%

1Q'01 25%

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In Preparation for an Economic Downturn

  • Began preparing in early 2000 for inevitable economic slowdown
  • On-going upgrade of behavioral scoring models and dialer technology
  • Tightened underwriting, improved scoring tools and raised cutoff scores
  • Improved segmentation and reduced credit lines
  • Continue to add collection staff

- Over 1,200 collectors added since 9/30/00
  • Refined bankruptcy prediction models

- Although Household's bankruptcies have risen, they remain better than the industry

- (14% vs. 21% yr/yr respectively)
  • Accelerated ability to implement new strategies
  • Success favors large, sophisticated players

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Capital Management and Ratings

  • Do fixed income investors matter to an ROE-driven company?
  • What are Household's intentions regarding current ratings?
  • What are Household's acquisition and expansion plans?

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Commitment to Current Ratings

  • Size and scale of borrowing needs require constant access to capital markets
  • Excess capital generation is currently $80-90 million per month
  • Track record

- Issued $1.0 billion of common stock to purchase Transamerica Consumer Finance (June, 1997)

- Pooling of interests to merge Beneficial (June, 1998)

- $2 billion share repurchase program announced (March, 1999), $1.321 billion repurchased, $418 million issued, net repurchases are $903 million (March, 2001)
  • The focus for both Household and the rating agencies is TETMA

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Expansion and Acquisitions

  • Long-term we expect international presence to grow
  • Domestically the focus is on portfolios rather than brick and mortar
  • Disciplined approach to acquisitions

- Strategically compelling; usually involves adding customers or new leverageable skill set

- Household must be able to add value

- Target must be in an existing or complementary business line
  • Acquisitions must be priced such that fixed income and equity investors will benefit

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Sub-Prime Businesses

  • What is Household's appetite for future growth?
  • What safeguards are in place to mitigate the potential downside?

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Orchard Bank

Growth Prospects

  • Currently the market is less competitive than the prime market
  • Relative to the prime card market, customers typically place a higher value on maintaining this card and credit line
  • Expect disciplined growth over the next 2 years

Safeguards
  • Very small individual exposures (typically $300-$800 lines)
  • High utilization rates
  • Fee, not margin, driven
  • State of the art credit analytics, collection techniques and technology

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Credit Card Services - Overall

Business Mix

 

 

 

 

Portfolio

Percent of

Portfolio

Key Segments

Competition

Prime

 

 

 

GM Card

46

Super-Prime

Airline cards,

 

 

Prime

Reward cards,

 

 

 

Discover

 

 

 

 

Union Privilege

32

Prime

MBNA, Cash,

 

 

 

Check

 

 

 

 

Non-Prime

 

 

 

Household Bank

12

Near-Prime

Metris, CompuCredit,

 

 

Other

Providian,

 

 

 

Capital One

 

 

 

 

Orchard Bank

10

Sub-Prime

Providian,

 

 

 

Capital One

As of March 31, 2001

 

 

 

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Household Automotive Finance

Growth Prospects
  • Despite consolidation, industry remains fragmented with significant opportunities for strong participants
  • Moving production upscale

- Trading coupon for better risk-adjusted returns

- Better and bigger market than sub-prime
  • 90% of new production through new car dealerships

Safeguards
  • Centralized underwriting
  • Added senior risk management and operational staff
  • Tighter program parameters and increased cut-off scores
  • New production skewed toward dealer participation vs. discount
  • Risk mitigation

- Customer "satisfaction" interviews

- Accelerated repossession

- Quick disposition of collateral

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Auto Finance

 

4Q'97

4Q'00

Collateral

 

 

Odometer mileage

31,267

24,659

New vehicles

16%

29%

Loan amount

$13,039

$16,402

Wholesale value of vehicles

$10,907

$15,119

Borrower

 

 

Monthly gross income

$ 2,853

$ 3,875

Home ownership

26%

41%

Participation

0%

47%

 

 

 

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Predatory Lending

What is Household's position regarding predatory lending?

How does Household limit predatory practices?

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Predatory Lending

  • Non-prime or sub-prime lending does NOT equal predatory lending
  • We consider predatory lending unethical
  • Internal controls promote equal treatment for all customers

- Centralized underwriting

- Automated credit scoring

- All correspondent/broker product is re-underwritten by Household

- Purchasing insurance is not required for loan approval
  • Household is a cash flow lender

- Income is documented as evidence of ability to repay

- Hard equity loans not permitted

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Predatory Lending

  • Formed Household Consumer Advisory Board in February 2001

- Comprised of prominent political and academic figures

- Provides advice on lending and business principles as well as legislative initiatives

  • Historically, Household has been a leader against predatory practices

- Russell Sage Foundation

- Money Management Institute

  • Work with regulators and legislators
  • Consumer education

- Consumer Credit Counseling Services sponsor

- Provide customers money management booklets and information

- Provide financial support to various consumer education programs

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Liquidity & Interest Rate Risk Management

What steps has Household taken to limit liquidity risk?

How does Household manage interest rate risk?

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Liquidity Management

  • Liquidity management is the primary Treasury focus
  • Manage CP outstandings to ensure 100% backstop coverage

- $10 billion committed lines in place with maturities ranging from 2002-2005

- $5.6 billion term facilities

- $4.4 billion 364 day facilities

- High quality bank group with 83% rated Aa3 or better
  • Efforts continue to diversify funding through product offerings, broadening investor base and expanding geographic distribution
  • Standard analyses are utilized to measure liquidity risk

- Limit concentration of debt maturity

- Maximum Cumulative Outflow (MCO) analyze both asset and liability runoff to manage funding risk
  • Contingency funding plans are prepared quarterly forecasting worst case scenarios

- Assumes 90-day suspension of unsecured borrowing capacity

- Current position would require utilization of 52% of backstop banklines

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Liquidity Management

 

Largest Monthly

 

Cumulative

 

 

Outflow

 

12 Month Outflow

 

Limit

15%

 

 

20%

 

 

 

 

Yr. 1

Yr.2

Yr. 3

Yr. 4

Yr. 5

12/31/99

10.7%

8.1%

7.7%

5.6%

4.6%

2.1%

6/30/00

9.3%

6.5%

5.7%

2.2%

2.5%

5.8%

12/31/00

9.0%

5.0%

7.5%

5.6%

0.9%

0.9%

3/31/01

5.8%

5.6%

2.8%

(2.3%)

(7.4%)

(8.0%)

Net Cash Outflow(1)

$ 5.0

$ 4.8

$ 2.4

($ 2.0)

($ 6.4)

($ 6.9)

 

 

 

 

 

 

 

(1) $ Billion at 3/31/01)

 

 

 

 

 

 

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Interest Rate Risk Management

  • Household has a limited appetite for interest rate risk
  • Consolidated interest rate risk analyzed by business unit and legal vehicle
  • Risk management strategies are earnings neutral under FAS 133 guidelines
  • Several methods used to measure consolidated interest rate risk

- Two standard deviation interest rate shock on existing and forecasted balance sheet

- Gradual 200bp rate increase over next 12 months

(current risk is ($0.15)/share as of 2/28/01)

- Additional "what-if" analyses performed as needed
  • Prime/Libor spread monitored constantly
  • Debt issuance is the primary risk management tool
  • Swaps are utilized to adjust interest rate risk position

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Agenda

  • Competitive Environment and Major Businesses
  • Performance Measures
  • Frequently Asked Questions
  • Funding Outlook

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Balanced Funding Mix

($ Millions)

 

 

 

CP and Other Short-Term Borrowings

$9,080

12%

 

Deposits

6,643

9

 

Domestic MTNs

18,103

23

 

Euro and Other Currencies

7,810

10

 

USD Senior Underwritten Debt

16,763

22

 

Asset-Backed Securities

18,571

24

 

Total

$76,970

100%

 

At March 31, 2001 (U.S. Issuers only)

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2001 Funding Objectives

  • Goal is to expand and deepen investor base
  • Maintain current ratings
  • Maintain solid capital levels
  • Make HFC the investors' bond of choice

- Provide large, liquid benchmark transactions that are fairly priced

- Build HFC credit curve in multiple currencies

- Use dealers who provide consistent, high-quality research and secondary market support

- Periodic investor education/information
  • Develop new markets

- Retail-oriented products

- Non-dollar denominated issues

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2001 Funding Needs

  • Total senior debt needs of $11 - 13 billion

- Large, liquid fixed rate transactions approximately quarterly; $6 - 8 billion

- MTNs of $2 - 4 billion, typically floating rate, 3 years or less

- Foreign currency offerings of $1 - 2 billion

* 2 Euro benchmarks

* Samurai and Kangaroo offerings
  • Public securitization needs of $8 - 10 billion

- Involving all product classes

- Approximately 10 transactions

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Summary

  • Household has been a responsible, leading provider of credit products to working class consumers for 123 years
  • Consistent history of sustained earnings growth
  • Strong balance sheet and internal capital generation
  • Commitment to ratings
  • Superior technology
  • Most efficient operation in the industry

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Appendices (see graphs on following pages)

  • US Median Housing Prices
  • HI Core Receivable Growth
  • Retail Services
  • YTD Term Funding

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