The tide is shifting in auto loan finance with large banks taking market share away from captive finance companies linked to auto makers, according to a recent report from Experian.
Auto sales in the U.S. are one of the fastest growing consumer borrowing segments since 2012, growing 10.2% between 2012 and 2013. Experian reports banks held $290 billion in outstanding auto loans for the first quarter of 2014 while captive financing companies had $221 billion. The study shows that year-over-year bank loan balances have increased 13.8% while captive loan balances rose just 4%.
Large banks are being drawn into the auto lending space for several reasons. Demand is hot and yields – more money from higher interest rates – are improving as credit quality stays marred.
BANKS TAKING SHARE
Arvest Bank, the largest in the state, reports its auto loans increased more than 13% since 2011. The bank said the rise in business reflects its frequent and aggressive loan sales promotions. Other area banks actively marketing auto loans include Simmons Bank and First Security.
"As a community bank, we try to meet the needs of our customer base. With auto loans, Centennial Bank continues to have demand, but that demand shifted several years ago to existing customers that want to work with their relationship banker. When large finance companies (many times related to the auto manufacturer) entered with 0% rate and numerous incentives to facilitate the purchase, auto loan demand for community banks declined,“ said Blake Holzhauer, regional chief lending officer for Centennial Bank.
These Arkansas-based banks must now compete with giants like Wells Fargo, Capital One, Chase and Ally who also are aggressively adding to their auto loan portfolios.
In the first quarter, Wells Fargo said it originated $7.8 billion in auto loans, a 15% increase from the same period a year earlier. The gains cemented Wells Fargo as one of the nation’s largest auto lenders. Wells Fargo tops the list for used car loans and recently expanded its offering into the subprime arena. Wells Fargo executives said in their recent earnings call that despite their growth, the credit quality of its loans hasn’t slipped.
Chase and Ally Bank also each increased their market share from a year ago. Chase ranks No. 2 with 4.77% of the market, while Ally has 4.65%. These shares rank ahead of Toyota Finance (4.09%), Ford Motor Credit (3.38%) and Honda Finance (3.16%) of the retail auto loans made in the last year.
CREDIT QUALITY WATCH
Experian reports that all credit classes from deep subprime to super prime grew loans year over year. The biggest increases were found at top and bottom of the credit spectrum, with non-prime or average credit borrowers in the middle and growing the least at 0.3% from a year ago.
Analysts believe big banks are chasing the higher yields in the auto loan market, particularly subprime.
“I don’t have any question that this rising growth in auto loans is tied to declining credit quality,” said Joshua Rosner, a managing director at research firm Graham Fisher & Company. “That is where the borrowers are.”
That said, borrower delinquency rates are improving. The Experian report shows that 30-day auto loan delinquencies were down 7.1% at the banks, 3.9% lower at captive finance companies and down 2.3% at credit unions.
Repossession also declined in the first quarter for banks, captive finance companies and credit unions. But independent finance companies saw a spike in repossessions, up 69% from a year ago.
Buy here, pay here, car dealer America’s Car-Mart felt that sting, saying that its customers were being lured away from big banks and other investors who have entered the subprime auto space in the past year looking for higher yields. Car-Mart CEO Hank Henderson said they had customers turning their cars back into the lot where they bought them because they financed other vehicles with big bank offers for terms much longer than Car-Mart’s average 24 months.
Shares of Bentonville-based Car-Mart (NASDAQ: CRMT) are off recent highs as a result of market concern about losing financing revenue. The shares were trading almost 2% lower in Thursday afternoon trading after a Wednesday close of $40.17. During the past 52 weeks the share price has ranged from a $47.93 high to a $39.34 low.
SMALLER BANKS ON THE SIDELINE
Smaller community banks like Signature Bank and Legacy National said they have not seen an increase in consumer auto loans over the past year.
Don Gibson, CEO of Legacy National, said his bank does not aggressively market auto loans to consumers and tends to focus more on business and commercial lending. That doesn’t mean the bank won’t make auto loans for its customers, it’s just not the core business.
Gary Head, CEO of Signature Bank, said farm loans in south central Arkansas and business loans in Northwest Arkansas are its bread and butter. But it does do some home equity lines of credit where customers take that money purchase a car, which allows them to deduct the interest. Head said the smaller banks are mostly on the sidelines of the auto lending boom.
“We have not written more car loans in the past year, but when our customers want to purchase a vehicle we make them a loan. They can take a check to the dealership and negotiate their price with less pressure,” Head said.