Santander's US consumer lending arm discloses accounting errors

Dive Brief:

The U.S. subsidiary of Spanish bank Santander identified a "material weakness" in the financial reporting of its consumer lending unit, resulting in an $800 million understatement of cash flows from operating activities, and an $800 million overstatement of cash flows from investing activities during the first three quarters of 2021, according to a filing Thursday.
Auto lender Santander Consumer USA miscategorized loans held for sale as investing activities rather than operating activities, according to the filing.
Although the accounting blunder did not alter the company’s net cash flow, "given the relative size of these classification errors to certain line items in the Condensed Consolidated Statements of Cash Flows, management concluded the errors are material to the financial statements taken as a whole."

Dive Insight:

The company’s plan to rectify this material weakness will be outlined in its annual report, according to the filing.

Santander Holdings USA (SHUSA) subsumed Dallas-based Santander Consumer USA Holdings only recently, paying $2.5 billion in August to acquire the remaining outstanding shares. The deal was finalized Jan. 31.

Santander Consumer USA classifies loans at origination as either held for sale (which should be classified as operating activities) or held for investment (which should be classified as investing activities).

In 2020, Santander Consumer USA established a process to identify and reclassify cash flows related to held-for-sale loans from investing activities to operating activities.

But this system failed in 2021, resulting in an "understatement of cash flows from Operating Activities and an overstatement of cash flows from Investing Activities of approximately $1.1 billion, $900 million, and $800 million for the three-month period ended March 31, the six-month period ended June 30 and the nine-month period ended September 30, 2021," according to Thursday's filing.

As a result, investors can no longer rely upon the previously issued financial statements for the affected periods. The company filed amended quarterly reports for the affected periods Thursday.

"The Company’s disclosure controls and procedures and internal control over financial reporting were not effective as of each of the Affected Periods and December 31, 2021," the filing indicated.

Shortly after Santander Holdings USA absorbed its U.S. consumer unit, the firm said in a presentation to investors on Feb. 2 that it would pivot away from home lending in the U.S., and instead focus on more profitable silos, including auto loan origination.

Santander Consumer USA announced in a press release Monday that it is expanding its partnership with automotive e-commerce platform AutoFi to develop Santander Consumer USA’s digital car buying experience.

"Our new digital product suite will connect dealers, consumers and vehicles more effectively than ever before," Santander Consumer USA CEO Mahesh Aditya said. "By personalizing and streamlining the car buying process, everyone wins. Shoppers see exactly what they can purchase, and dealers can self-service each deal to meet the needs of their customers."

Santander Consumer USA also announced it has invested in AutoFi’s latest funding round.