Banks Also Finding Weakness in Auto Lending

Auto loan originations fell in the second quarter for three of the nation’s largest banks, showing credit unions are not alone in their pain.

Ally Financial, JPMorgan Chase and Wells Fargo originated $24.3 billion in auto loans in the second quarter, down 10.7% from a year earlier:

• JPMorgan Chase & Co. of New York originated $10.8 billion in auto loans in the second quarter, down 10% from a year earlier. CFO Jeremy Barnum said the drop was “coming off strong originations from a year ago, while continuing to maintain healthy margins.”
• Wells Fargo & Company of San Francisco originated $3.7 billion, down 22.9% from a year earlier. CFO Michael P. Santomassimo said lower originations reflected the bank’s earlier actions to tighten credit, which in turn drove balances in its auto portfolio down 14% from a year earlier.
• Ally Financial Inc. of Detroit originated $9.8 billion in auto loans in the second quarter, down 5.8% from a year earlier.

But Ally CFO Russ Hutchinson said the profitability of its auto loans had improved.

“Robust application volume enabled us to sustain pricing while originating 44% of our retail auto loan volume in our highest credit tier,” Hutchinson said. “Average FICO of 712 is up from prior periods and the highest in over a decade.”

The NCUA doesn’t report the value of credit union auto originations. But Experian’s latest Automotive Finance Report for the first quarter showed captives have been capturing a larger share in the past year of the number of car loans — some from banks, but mostly from credit unions.

For credit unions, the only way to get a sense of the loss in originations is by tracking balances using the Monthly Credit Union Estimates released by America’s Credit Unions. Even in weak months, balances normally rise, but credit union auto portfolios shrank month-to-month from December through March. A cheering trend was no significant change from March to April and a 0.1% gain in May.

How credit unions fared in the second quarter will begin to be seen by the public more fully by month’s end when the NCUA will be posting second-quarter Call Reports.

Meanwhile, for credit unions eager for insight from a bank CEO on its success in auto lending, check out the earnings call for Ally Financial. The company was GM’s captive for 90 years before being spun off as a bank in 2009. In the second quarter, only $1.1 billion of its $9.8 billion in originations came from new GM cars. Michael Rhodes became its CEO on April 29.

“The transformation from captive auto finance company primarily supporting OEM new vehicle sales to the largest bank auto finance provider in the country has been deliberate and remarkable,” Rhodes said. “An experienced collection organization gives us the confidence to underwrite across the credit spectrum and through the cycle. And we’ve made significant investments to modernize our technology platform, including the core operating system of the auto finance business, and ongoing investments in data and analytics.”

He continued, “We have grown dealers and applications, resulting in a robust application funnel from which we source origination volume. We offer quick decision times to dealer, a skilled team to evaluate and rework transactions where appropriate and options for a dealer when a credit doesn’t fit our risk appetite.”