US banks pull back from $1.2tn car loans market
Overstretched consumers raise fears of bubble in echo of subprime mortgage crisis
Big banks are throttling back from the $1.2tn US car loan market, fearing that consumers have taken on more debt than they can handle.
Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter, according to the New York Federal Reserve, up almost 70 per cent from a trough in 2010.
But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. The total slipped $1.6bn to $440bn from the fourth quarter of last year to the first of this, suggesting that banks — wary of repeating the mistakes of the subprime mortgage crisis — have been spooked by rising delinquencies and the threat of litigation.
One of the banks pulling back is Citizens Financial Group, the US’s ninth largest by assets. Bruce van Saun, chief executive, told the Financial Times he would rather steer resources into areas such as student loans. “We ran up auto for a while when there was not much else going on. Now we have growth in other areas which offer better risk-adjusted returns.”
Wells Fargo and JPMorgan Chase, the two biggest banks in the sector, saw first-quarter originations drop by double digits from the same period a year earlier. Even relatively aggressive specialists such as Capital One — which added a net $2bn to its $50bn car loan book over the first quarter — are toning down their outlook.
“We’re certainly one more notch cautious,” said Richard Scott Blackley, chief financial officer, noting bigger-than-expected falls in used car prices in the first quarter. “We think that by pulling back a little bit, we’re going to . . . maximise price over volume,” he said.
Analysts expect the car loan market to keep growing, fanned by specialist non-bank lenders which focus on borrowers with lower credit scores. But the caution of the big banks — which claim more than 30 per cent of the market — shows that many are now worrying about the consequences of looser underwriting, which has seen them stretch out terms for borrowers while pushing up loan-to-value ratios and debt-to-income ratios, in an echo of the subprime crisis.
Last last year the Office of the Comptroller of the Currency warned of rising credit risk in car loan portfolios, while airing concerns over violations of fair-lending standards. Several subprime-focused lenders have disclosed in public filings that regulators and state and federal authorities are investigating them for possible abuses.
Shares in Santander Consumer USA, the subprime car loan arm of the Spanish bank, have dropped about a fifth since the beginning of March. Ally Financial, too, has fallen almost a fifth over that period, as losses on its loans bundled into securities have been higher than expected.
Analysts expect losses to keep rising if used-car prices, already down about 8 per cent this year, continue to fall. Lower prices normally mean higher gross charge-offs, as customers default on loans that exceed the value of the car, and smaller recoveries for the lender forced to sell the vehicle.
The consequences of an car sector meltdown are unlikely to be as severe as in mortgages, a market about eight times bigger, but “there will be fallout”, said Joseph Cioffi, chair of the insolvency and creditors’ rights practice at Davis & Gilbert, a law firm. “Just because something doesn’t kill you, doesn’t mean it’s good for you.”