Will your new Prius save the banking industry?
The advent of the automobile started the American Century, and the muscle that came out of Detroit revved up bank coffers for decades. But most community banks throttled down their auto lending years ago. The way Toyota overpowered Chevy, the GMACs and Ford Motor Finances of the world made short work of the carriage trade at banks.
But this has been a funny recession. (Allegedly, it’s not a recession any more. Humor me. My wallet hasn’t heard the news yet.) Bank profits — and some whole banks – have collapsed under the weight of under-performing commercial and residential loans. Fee income took it on the chin from Dodd-Frank. Bankers who are fond of profit began getting worried. Where are the new opportunities?
It turns out, banking’s got a Model A feel to it these days.
When the car companies’ balance sheets wound up looking a lot like their smelting pots, they needed to find ways to generate cash beyond just asking the government for help. One quick cash generator was selling off their financing arms. But in doing so, the new owners of those companies didn’t see a lot of car sales going on. So they got involved in financing other stuff. Like houses.
And that appears to be when banks, giving up on financing houses, started turning back to making loans for automobiles.
Banking On Auto Pay
Maybe this isn’t so surprising. After all, a lot of cars today cost what a house did 20 years ago. The loans get paid back faster – and they’re a lot more likely to get paid back, period. The default rate on home loans is getting better; according to Equifax, it’s down 15 percent from last year. But car loan delinquency rates improved 35 percent. Consumers realize they can walk away from their homes. But they don’t like to, literally, walk away from their cars. So bankers are a lot surer that they’re going to collect.
That’s put them back into the car loan game. Last week, when the Federal Reserve released the latest Beige Book of economic indicators, one of the brightest spots was auto lending, with auto sales strong in many areas of the nation, but especially so in the Northeast. Earlier in August, when the Fed conducted its survey of senior loan officers, the word was that many lenders are seeing opportunity in car loans, and are relaxing their loan standards to take advantage of that market.
Experian, a credit reporting agency like Equifax, noted that outstanding auto debt hit $725 billion at the end of the second quarter. That’s a 5.9 percent increase over the same period last year, and the highest level reported since Q1 of 2009, when the economy was in the worst of its tailspin.
While bankers are waking up to the idea that car loans are profitable, quick and the collateral is easy to repossess, credit unions execs are hunkering down in their offices and muttering, “Curses!” That’s because they’ve been big wheels in auto lending throughout all this, and aren’t all that keen on having someone else figure out what a good deal it is.
Through the first quarter of this year, credit unions held about 14 percent of the nation’s outstanding auto debt in their portfolio. They owned 19 percent of loans on new cars, and about 11 percent on used ones. Some banks think credit unions are doing such a great job, they’re buying up CU auto loan portfolios. BB&T Bank confirmed in August that it did just that. Meanwhile, big banks like Bank of America and Santander (parent of Sovereign Bank) are promiscuously advancing their investments in auto loans.
Racing To Subprime
But just as lenders looked ever more askance at poor credit reports for homeowners, they’re now a lot more accepting of car buyers who have dents and dings in their credit scores. This past spring, the Professional Risk Managers’ International Association surveyed lenders on their risk tolerance for subprime lending. More than 50 percent of respondents expected the auto sector to see the largest increase in 2012. That contrasts with just 38 percent who expected the largest increase to be in credit cards, and 12 percent expected the largest increase to be in residential mortgages.
“We are clearly seeing a loosening of credit in the auto finance market, with lenders responding to increased consumer demand,” said Dr. Andrew Jennings, chief analytics officer at credit scoring agency FICO. “This is good news for car dealers and it should help the auto sector continue its recovery. However, underwriting for other types of consumer lending, particularly mortgages, is still tight. Lenders aren’t yet ready to increase their exposure for the sake of growing their mortgage portfolios.”
But they don’t seem to mind driving away with whatever profits have parked themselves at the front door.n
Vincent Michael Valvo is CEO of Agility Resources Group LLC. He can be reached at vvalvo@agilityresourcesgroup.com.
