Capital One Remains Aggressive About Auto Lending, Even As Most U.S. Banks Turn Cautious

by Trefis Team
Capital One
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The U.S. auto loan industry continued to witness strong growth over the third quarter, with total auto loans outstanding in the country scaling a record high of $1.1 trillion. But the spike in auto loan charge-offs since the beginning of this year has forced the largest U.S. banks to rein in their auto loan origination activities – resulting in the combined market share of the five largest banking players in the industry (JPMorgan Chase, Ally Financial, Wells Fargo, Capital One and Bank of America) shrinking from 26.2% a year ago to 25.3% now.

However, Capital One stands out in this list as the only bank to double down on auto lending despite deteriorating market conditions. While Capital One’s auto loan charge-off rates have been hurt over recent quarters, we believe that the bank’s expertise in the card lending industry – which also has a similar high-risk, high-return profile – should benefit its auto lending arm. Because of this, we maintain a price estimate of $96 for Capital One’s shares, which is about 10% ahead of the current market price.

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. The yellow-to-green shading across a row helps identify the overall trend in outstanding auto loans for a particular bank over this period.

The auto industry has seen a marked increase in outstanding loans in recent years, with data compiled by the Fed showing that total auto loans jumped by almost 40% in four years. While an important factor behind the growth was the steady improvement in economic conditions since 2011, the growth rate was unusually high, as auto lenders lowered their credit requirements and offered higher loan amounts for used cars at cheaper rates to attract more customers. But a sharp increase in auto delinquencies over recent quarters has resulted in growth rates slowing down. The slowdown is evident from the fact that total auto loans for these five banks have remained largely constant over this period. It should be noted that these five banks hold more than 65% of the total auto loan portfolio across all U.S. commercial banks, as banks account for only about 37% of all auto loans in the country (with the finance arms of the auto makers garnering a larger market share).

While the loan growth rates for Ally and Bank of America have been around industry levels, JPMorgan’s auto loan portfolio has largely stagnated. The steady reduction in auto loans for Wells Fargo can be attributed to the reputational hit taken by the bank from its fake account opening scandal revealed last September.

In sharp contrast, Capital One’s auto loan portfolio has swelled by more than 15% since Q3 2016. The bank continues to focus on growing its auto lending operations – a strategy that could potentially keep charge-off rates elevated in the near future if the bank does not maintain strict lending standards. 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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