Capital One’s Auto Lending Push Will Hurt If Industry Conditions Deteriorate

by Trefis Team
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JPMorgan Chase, Ally Financial, Wells Fargo, Capital One and Bank of America are the banks with the largest presence in the auto lending industry – together holding a little more than 25% of all outstanding auto loans in the country. However, taking into consideration the fact that banks account for less than 37% of all auto loans in the country (with the finance arms of the auto makers garnering a larger market share), these banks hold almost 70% of the total auto loan portfolio across U.S. commercial banks.

Auto_QA_Loans_17Q1

The figure for each bank is as reported in their latest quarterly earnings disclosures. Bank of America combines its auto lending portfolio with other specialty loans in its quarterly reports, so the figure here is taken from its latest call report as filed with the FDIC here. The total portfolio of auto loans by all commercial banks in the U.S. is from weekly data compiled by the Federal Reserve, accessible here. The total auto loans outstanding in the country are taken from the website of the Federal Reserve Bank of St. Louis here.

Auto_QA_LoansChange_17Q1

There has been a battle for the top spot between JPMorgan and Ally over recent quarters, as these two banks have alternated having the largest auto lending portfolio over the last four quarters. While JPMorgan inched ahead in Q2 2016 and Q4 2016, Ally was positioned at #1 in Q3 2016 and Q1 2017. Notably, both banks have seen their auto loans grow by just over 4% year-on-year – in line with the growth reported across U.S. commercial banks.

This is where Capital One stands out among these lenders, with a growth figure in excess of 16% over the same period. This is well ahead of the 7% growth in the total industry. While strong growth in demand for auto loans since 2010 has resulted in banks ramping up their auto lending units considerably over the years, there has also been a sharp increase in sub-prime auto lending. As the first quarter of the year is seasonally a slow period in terms of loan growth, Capital One’s notable jump in auto lending over Q1 2017 is indicative of relaxed lending standards. While auto loan charge-off rates at Capital One are around industry average, we believe that the ongoing normalization in loan charge-off rates across the industry will lead to heavy loan losses for Capital One on its lower-quality auto loans.

The chart below shows Capital One’s total auto lending portfolio over the years and our forecast for the metric. You can see how changes to this figure affects our price estimate for the bank by modifying the forecast.

See full Trefis analysis for Wells Fargo | JPMorganCapital One | Bank of America

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