Ally Financial Beats Wells Fargo, Originates The Most Retail Auto Loans In Q3

Wells Fargo (NYSE:WFC) dropped to second on the list of the country’s largest auto lenders last quarter, with the banking giant giving way to Ally Financial after holding the top spot in terms of origination volumes for each quarter since early 2013. ^[1] The third quarter of the year was the best period for the auto loan industry in terms of fresh originations since Q3 2005, with lenders handing out $105 billion in loans for the period – a 4% sequential improvement and an 8% growth year-on-year. ((Household Debt and Credit Report, FRBNY Website)) Ally Financial is already the country’s largest auto lender in terms of total outstanding auto loans, with the lender reporting $58.7 billion in loans at the end of Q3 2014, compared to a figure of $55.2 billion for Wells Fargo. The recent spurt in auto loans has been fueled by an increase in used car loans, and Ally Financial seems to have made the most of the situation.

The other banks that have a sizable share in the auto loan industry are Capital One (NYSE:COF) and JPMorgan Chase (NYSE:JPM). Notably, several banks and non-bank auto lenders have been under scrutiny by the U.S. Department of Justice (DoJ) over recent months for handing out increasingly higher volumes of subprime auto loans since 2007. ^[2]

We maintain a $54 price estimate for Wells Fargo’s stock, which is slightly below the current market price.

See our full analysis for Wells Fargo

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 $934 billion in Q3 2014 – a 33% increase in just over four years. ^[2] 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 four quarters, as auto loans have grown by more than 10% since Q3 2013. 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 of the auto industry.

The largely increasing trend in consumer auto loans for these banks over the last four quarters is visible from the chart above. However, there is a considerable difference in the actual rate of growth for each bank over the period. While JPMorgan has seen the smallest growth in its auto loan portfolio of $2 billion (4% growth year-on-year), both Wells Fargo and Capital One have seen these loans grow by $5.5 billion. This represents an extremely strong 18% growth rate in auto loans for Capital One, and an 11% jump for Wells Fargo over a period where the industry grew by 10.5%. 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 Q3 despite ranking behind Ally and Wells Fargo in terms of originations for the period.

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. While used cars loans are a lucrative option for banks, with interest rates averaging 8.5% in Q3 2014, 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 Wells Fargo’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 Wells Fargo’s share price by making changes here.

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1. Ally Financial overtakes Wells Fargo as top U.S. auto lender, Reuters, Dec 1 2014 [↩]
2. U.S. consumers turn to auto loans at a record rate, Reuters, Sep 3 2014 [↩] [↩]
3. ref:2 [↩]