BMO Capital Markets analyst James Fotheringham reiterated a Market Perform rating for OneMain Holdings, Inc. (NYSE:OMF) with a price target of $46.

Fotheringham remains impressed by OMF's execution: managing credit and funding risks prudently ahead of an impending economic and rate cycle (respectively).

Despite macroeconomic uncertainties, investors are receptive to OMF's improving credit (forecast loss rates to decline in 2H23E half-on-half and 2024E year-on-year), accelerating loan growth (3Q23 now expected at upper-end of recently raised 5-8% YoY full-year guidance), 13% total yield (dividends and buybacks), and strong returns (the analyst forecasts 49% RoTCE (Return on Average Tangible Common Shareholders' Equity) this year).

OMF tightened underwriting in August 2022 (earlier than peers) after low-FICO borrower delinquencies increased from inflation and stimulus expiry, the analyst notes. 

Management raised expected net loss rate assumptions by 1.6x (from 6-7% to 9-10%) while maintaining prior 20% RoTCE hurdles, Fotheringham adds. 

Tightened standards remain in place; consequently, higher quality loans will represent 65% of OMF's total portfolio by year-end (rising 7-8% per quarter). 

The analyst forecasts NCO rates to fall from 7.7% in 1H23 to 6.9% in 2H23E (tightening plus seasonality), declining further YoY in 2024E.

OMF's business is highly capital-accretive, the analyst notes.

Fotheringham forecasts almost 50% RoTCE this year. 

Management's capital priorities include loan growth (expected up 7-8% in 3Q23 despite tightened underwriting), dividends (10% yield), buybacks (3% yield), and M&A (to drive ongoing product and potential geographic diversification). 

The analyst's Core EPS estimate stands at $5.78 for FY23, $6.90 for FY24 and $7.70 for FY25.

Price Action: OMF shares closed lower by 0.86% to $39.26 on Tuesday.