Big banks are pulling back sharply from auto loans, which is contributing to lower car sales and raising fears that the recession is getting worse.
Wells Fargo WFC 1.03%
& Co., one of America’s largest auto lenders, reported a 29% drop in first-quarter auto loan issuance last month from a year earlier. The drop, the largest for the San Francisco-based bank in at least five years, was part of a common refrain in quarterly announcements from lenders, including JP Morgan Chase & Co.,
Allied financial Inc.
and Santander Consumer USA Holdings Inc.
Bankers’ caution is increasingly reflected in car sales, which were worse than expected for April on Tuesday. The declines are mostly occurring in loans to riskier borrowers, especially those with low credit ratings, where lending has been building up for years.
âA very accommodating financial environment had been in place for some time,â said Bruce Clark, chief automotive analyst and senior vice president at Moody’s Investors Service..
âWhat you are seeing right now is a setback and the resulting pressure on unit vehicle sales. “
Some banks, including regional Fifth Third Bancorp and Citizens Financial Group Inc.,
are starting to pull out of higher quality âprimeâ auto loans as new risks emerge. âIt’s an overheated industry,â said Greg Carmichael, managing director of Fifth Third. âThe auto industry just isn’t that attractive right now. “
Some predicted that the market would calm down after record new car sales in 2015 and 2016. But banks are also posting higher losses on overdue car loans, as more borrowers are in arrears. and the decline in the value of used cars.
When lenders repossess the cars, they resell the vehicles and use the proceeds to recover as much of the outstanding balance as possible. Falling values ââmean lenders are getting a smaller share of those balances. Lenders who repossess cars tied to securitized blue chip auto loans in 2015 recoup about 51% of overdue loan balances on average, compared to 56% for 2014 loans and 65% for 2011 loans, according to S&P Global Ratings.
“There is a more cautious tone in the industry,” Christopher Halmy, chief financial officer of Ally Financial, said during the bank’s earnings call last week. Ally also warned of the auto market in March, when he lowered his growth expectations for the year. The comments contrast with Ally CEO Jeffrey Brown’s statement last summer that he was “bullish” on auto loans and that the bank had no reason to worry about the loans it was on. ‘origin.
The slowdown in loan volumes marks a turnaround for the auto loan industry, where loan origination has grown steadily in recent years. It also calls into question the end of the uptrend in auto loans.
Auto loans are among the fastest growing categories of consumer loans since the last recession. Banks and other lenders began ramping up deals about seven years ago in search of more income as the mortgage market collapsed.
As competition increased, lenders relaxed underwriting standards by courting borrowers with lower credit scores and extending loan repayment periods. Small non-bank lenders have also embarked on the venture, relying on the bond market as an outlet to sell their loans.
But the increase in losses has sapped the enthusiasm of some banks. Annualized net losses on securitized subprime auto loans rose to more than 10% at the end of last year, the highest level since February 2009, according to Fitch Ratings. The figure fell back to 9% in March, but it was the highest loss for that month since at least 2001.
The deterioration in performance is occurring despite unemployment which remains low. It may continue to worsen, even if the work image remains bright. In December, Fitch lowered its performance outlook for subprime auto securitized loans for 2017, even though it does not anticipate a broader economic recession.
Wells Fargo has said it expects its auto portfolio to shrink in size this year. Ally has expanded into other lending, including mortgages and credit cards, as it tries to branch out beyond automobiles. Citizens said during his earnings call that he had recently stopped buying auto loans from Santander Consumer as part of Providence Bank, RI’s strategy to reduce its portfolio of auto loans. Santander Consumer, a subsidiary of the Spanish bank Banco Santander HER,
reduced its loans. The company reported a 21% drop in auto loan origination in the first quarter from a year earlier, following a 20% drop for all of 2016.
âWe’re seeingâ¦ some decline in origination volume across the market,â said Amy Martin, chief analyst for auto loan securitizations at S&P Global Ratings. “It’s a function of those companies seeing the impact of their liberalized credit standards.”
In recent years, auto sales have relied heavily on easy credit flow. Now, subprime borrowers have fewer loan options and face higher interest rates. This is felt at dealerships, especially with used cars.
“We’re in the early stages,” said Kevin Barker, senior equity analyst at investment bank Piper Jaffray. âLess credit will reduce the additional demand for vehicles. “
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