Q1 2015 U.S. Banking Review: Outstanding Automobile Loans

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Capital One Financial

A recently released report by the research firm Experian showed that the average length of automobile loans in the country increased to a record high over the first quarter of the year. [1] The fact that the average term for a new-vehicle loan handed out over the period was 67 months highlights the increasingly relaxed lending terms being offered by auto lenders. In fact, the lenient loan criteria coupled with a sharp increase in sub-prime auto lending has seen the industry grow in size from around $700 billion in mid-2010 to just under $970 billion now. ((Household Debt and Credit Report, FRBNY Website)) Notably, several banks and non-bank auto lenders have been under scrutiny by the U.S. Department of Justice (DoJ) since late last year for handing out increasingly higher volumes of subprime auto loans since 2007. [2]

In this article, we explore the size of the auto loan portfolio for the country’s largest auto lenders – Ally Financial, Wells Fargo (NYSE:WFC), Capital One (NYSE:COF) and JPMorgan Chase (NYSE:JPM) – over the last few quarters.

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The auto industry has seen a marked increase in outstanding loans in recent years, with data compiled by the Federal Reserve Bank of New York (FRBNY) showing that total auto loans have jumped from $702 billion at the end of Q2 2010 to $968 billion in Q1 2015 – a 38% jump in under five years. [3] While an important factor behind the growth has been the steady improvement in economic conditions since 2011, the data also shows unusually high growth rates over the last six quarters. Auto lenders have lowered their credit requirements and are offering higher loan amounts for used cars, while cutting loan interest rates to attract more customers, which has helped drive the spurt over recent quarters. [3]

The table below captures the changes in outstanding auto loans since Q3 2013 for banks with the largest share in the auto industry.

(in $ billion) Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
Ally Financial 56.5 56.4 56.8 58.1 58.7 56.6 57.4
Wells Fargo 49.7 50.8 52.6 54.1 55.2 55.7 56.3
JPMorgan Chase 50.8 52.8 53.0 53.0 52.8 54.5 55.5
Capital One 30.8 31.9 33.1 34.8 36.3 37.8 38.9
Industry Total 845.0 863.0 875.0 905.0 934.0 953.0 968.0

The sharp increase in consumer auto loans for these banks over the last few quarters is visible from the table above. However, there is a considerable difference in the actual rate of growth for each bank over the period. While Ally has seen the smallest growth in its auto loan portfolio, Capital One has seen these loans grow by over $8 billion. This represents an extremely strong 26% growth rate in auto loans for Capital One over a period where the industry grew by less than 15%. It should be noted that the impact of loans originated by a bank in a period on the outstanding loan balance is negated to a large extent by loan payments and charge-offs. This is why Capital One has seen the largest increase in loans over recent quarters despite ranking behind Ally and Wells Fargo in terms of originations.

The banks have pushed for a larger share of the auto lending industry in recent years – often relaxing their lending criteria to cash in on the growing market even as the prolonged low interest rate environment puts pressure on their interest revenues. This is evidenced from the fact that U.S. commercial banks held $361 billion in auto loans at the end of Q1 2015 – more than 37% of the total auto loans outstanding. [4] While used car loans are a lucrative option for banks, these loans have a higher chance of going bad – a situation made worse by the increase in subprime lending in the auto industry.

The chart below captures the average outstanding balance of Capital One’s retail loan portfolio and primarily includes student loans and auto loans (direct and indirect), as well as some other retail loans. You can see how a steady increase in retail loans can boost Capital One’s share price by making changes here.

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Notes:
  1. U.S. car and truck loans reach longest on record – Experian, Reuters, Jun 1 2015 []
  2. U.S. consumers turn to auto loans at a record rate, Reuters, Sep 3 2014 []
  3. Quarterly Report on Household Debt and Credit (May 2015), FRBNY Website [] []
  4. Assets and Liabilities of Commercial Banks in the U.S. (H.8), Federal Reserve Website []