OneMain Holdings Is Looking Cheap

May 24, 2022 1:23 PM ETOneMain Holdings, Inc. (OMF)13 Comments5 Likes
Andrew Cournoyer profile picture
Andrew Cournoyer
725 Followers

Summary

  • OneMain has seen strong receivables growth to power revenue and net income growth over the past few years.
  • Credit metrics have been phenomenal, but inflation, rising rates, and subprime customers may change this.
  • Either way, the bank trades at low multiples and offers a high dividend.

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Introduction

Over the past two years, the banking industry has seen very favorable tailwinds due to a strong consumer. OneMain Holdings (NYSE:OMF) is such a bank that has seen great growth and impressive metrics. But with inflation, a rising rate environment, and many subprime customers, is OneMain a good investment? With the bank trading at just 4.3x earnings, 1.7x book value, and offering a dividend of 9%, I believe the bank to be fairly valued or undervalued.

Financial History

One Main Holdings Revenue & Net Interest Income

OneMain Holdings Revenue & Net Interest Income (SEC.gov)

One Main Holdings Provision For Losses

OneMain Holdings Provision For Losses (SEC.gov)

OneMain has seen solid growth over the past five years, with net interest income and total revenue growing by 7.56% and 11.13% per year respectively. Overall, the bank is growing nicely, with average net receivables increasing by 30% in the past five years. The decline in revenue in 2020 and subsequent jump in 2021 were affected by the change in provision for losses. Provision for losses increased in 2018 and stayed steady throughout the pandemic as the bank needed more reserves to offset any expected downturn. But in 2021, the worst of the pandemic subsided, and OneMain saw provision for losses decline by 47% as the amount of reserve build-up needed to be changed.

One Main Holdings Net Income

OneMain Holdings Net Income (SEC.gov)

With OneMain's growing business, the net income has increased by 48.33% per year over the five years. Net income has fluctuated over the years due to the changes in market conditions, but the overall trend pairs with the bank's receivable growth.

Credit Metrics

One Main Holdings Credit Metrics

OneMain Holdings Credit Metrics (SEC.gov)

Looking at the credit metrics shows the bank has seen a very consistent customer base. The net charge-off rate has declined by 2.54%, while the delinquency rate has stayed very consistent. This is on par with the rest of the banking industry as a strong consumer arose after the worst of the pandemic. OneMain's total yield has increased from 1% to 1.5%, which can be seen in the increased net interest income. An interesting credit metric to watch is the allowance ratio, as it increased by over 6%. This is due to the increase in provision for losses that increased the reserve. It has decreased a few percent to around 11%, but it will be key to future financials if the bank decides to hold the ratio here or lower it back to the 5% range. Altogether, OneMain has seen successful and profitable banking operations during a tough period.

This Year So Far

So far this year OneMain has reported for Q1 2022. The bank saw net interest income grow by 5.5%, but total revenue declined by 13.5%. This is due to the increase in provision for losses by $236 million for the quarter. Therefore net income declined by 27%. Overall, the bank still grew operations, with average net receivables growing by 7.1% year-to-year. But credit metrics have started to decline. The net charge-off rate has jumped 90 basis points and the delinquency rate increased by 69 basis points. This is how the trends have started to look for the banking industry, as the consumer is starting to struggle with various economic factors. While OneMain is still seeing operational growth, it seems the change in credit metrics has concerned the bank as to increased reserves again.

Risks

As I mentioned the change in credit metrics is the norm in the industry. Consumers were strong prior due to the influx of stimulus money during the pandemic, but the economic environment has drastically changed. Inflation has increased to levels not seen in a very long time, with the last reading at an increase of 8.3%. Energy and food alone have grown by 30.3% and 9.4%. With this, the Fed has increased the funds rate by 0.75% since the last year. This is concerning for OneMain as almost 50% of their customers are subprime. If these trends continue this could prove to be very negative for the bank.

Valuation

As of writing, OneMain trades at a $42 price level. At this price, the bank has a P/E of 4.3x and a 1.7x book value. The bank also offers a 9.28% dividend yield. Taking this all together, the stock offers some very good value for growth investors and income investors alike.

Conclusion

OneMain has seen very nice operational growth over the past few years. Revenue and the bottom line have grown by 11% and 48% per year, respectively. Credit metrics have also been historically low, but this is starting to change as inflation and higher interest rates affect consumers. Therefore, there is some risk to the future performance of the bank, as 50% of customers are subprime. Even so, the stock trades at very fair levels and offers a great dividend yield.

This article was written by

Andrew Cournoyer profile picture
725 Followers
Graduate from Plymouth State UniversityB.S. Business Admin./Minor EconomicsRetail Investor Long Term (5+ years) & Value Strategy
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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