Q2 2015 U.S. Banking Review: Outstanding Automobile Loans

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The aggressive growth policy adopted by auto lenders over recent years coupled with the brisk pace of growth in the country’s economy continues to boost the auto lending industry, with data compiled by the Federal Reserve Bank of New York (FRBNY) showing that outstanding auto loans breached the $1-trillion mark for the first time ever in Q2 2015. [1] Around $119 billion worth of auto loan were originated for the quarter – the highest in 10 years. While auto lenders have substantially relaxed loan requirements since early 2011, the industry has also seen a sharp increase in subprime auto lending. Both these factors have helped the industry swell by almost 50% over the last five years. ((Household Debt and Credit Report, FRBNY Website))

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 witnessed unusually high growth rates over the last seven quarters, primarily due to lower credit requirements from auto lenders as well as from the higher levels of loans offered for used cars. While lenders have also cut loan interest rates over recent years, the fact that the net average interest rate for new as well as used car loans has edged higher over recent quarters indicates a notable increase in the proportion of subprime auto loans. [2] In fact, 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.

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 Q2 2015
Ally Financial 56.5 56.4 56.8 58.1 58.7 56.6 57.4 60.8
Wells Fargo 49.7 50.8 52.6 54.1 55.2 55.7 56.3 57.8
JPMorgan Chase 50.8 52.8 53.0 53.0 52.8 54.5 55.5 56.3
Capital One 30.8 31.9 33.1 34.8 36.3 37.8 38.9 40.0
Industry Total 845 863 875 905 934 953 968 1,006

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 ($4.3 billion), Capital One has seen these loans grow by $9.2 billion. This represents an extremely strong 30% growth rate in auto loans for Capital One over a period where the industry grew by 19%. 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 $370 billion in auto loans at the end of Q2 2015 – 37% of the total auto loans outstanding. [3] While used car loans are a lucrative option for banks, these loans generally 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. Auto Loans Race Ahead, Foreclosures Plunge, and Overall Household Debt Remains Flat, FRBNY Press Releases, Aug 18 2015 []
  2. Gap Between New And Used Vehicle Payments Widens To Reach An All-Time High, Experian Press Releases, Aug 27 2015 []
  3. Assets and Liabilities of Commercial Banks in the U.S. (H.8), Federal Reserve Website []