Garnet Capital Advisors Blog

As auto lending activity strengthens across the country, banks have been viewing it with fresh eyes, looking to this particular activity as an opportunity where they can potentially benefit from low default rates, attractive rates, short duration and significant demand.

Auto lending rises
Outstanding auto-loan balances hit an all-time high of $924.2 billion in August, according to Equifax figures reported on by American Banker. This represented an 11 percent increase from the same time last year. During the same period, the number of auto loans outstanding climbed 6 percent to hit 65 million.

Separate data from the Federal Deposit Insurance Corp. revealed that this improvement in auto lending was also experienced at smaller banks, as organizations with less than $10 billion in assets reached $44 billion in the second quarter, 6 percent more than the same time in 2013, according to the news source. For the last six quarters, these organizations have seen their auto lending portfolios grow. 

Subprime concerns
Many banks have been pursuing this opportunity, helping them to make up for the decrease in mortgage activity, The Wall Street Journal reported. However, some have expressed concerns that banks are being too liberal in their lending practices.

A recent Federal Reserve survey showed that 25 percent of banks currently issue subprime auto loans. The October 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices asked participants to weigh in on the market conditions for their loans, as well as the standards that surround them. Contained within a special set of questions was a query asking whether the participating banks issue subprime auto loans.

Of the banks that work with customers that have a nonprime credit profile, most indicated that in the last year, they have not lowered their standards for subprime lending. In terms of their future outlook, these financial institutions predicted this situation will likely not change in the upcoming year.

Banks face steep competition
A handful of respondents reported less stringent standards for their subprime auto lending over the last year, and noted they had made this concession as a result of mounting competition. Amid these saturated market conditions, even Huntington Bancshares, which saw its auto lending enjoy a 32 percent year-over-year increase during the third quarter, is carefully monitoring pricing, American Banker reported.

Steve Steinour, president, CEO and chairman of the Columbus, Ohio-based regional bank, stated on a recent conference call that Huntington continues to be "focused on pricing discipline," according to the news source.

Banks face myriad challenges
In addition to the difficulties they face from heightened competition and concerns about credit quality, banks that issue subprime loans are encountering more stringent regulatory scrutiny, according to American Banker.

Government agencies recently sent inquiries to several major financial institutions regarding their lending practices. Santander Consumer USA announced its net charge-off ratio increased to 8.4 percent in the third quarter from 6.4 percent during the same time in 2013, the media outlet reported. The company indicated at the time that it has increased its quarterly provision for credit losses by 29 percent from the same period in 2013.

Balancing varying priorities
Amid this tough landscape, banks must balance their objective of granting loans with effective management of risk and pricing, industry experts told American Banker. Community banks in particular can leverage the growing prevalence of auto lending by employing lenders who have built up experience in the field and carving out their own unique spot in the market, mavens familiar with the sector stated.

"It can be a good business but the devil is in the details," said Terry Keating, an executive vice president for business finance provider Accord Financial, the media outlet reported. "You have to know how to underwrite."

Auto loan portfolios hold opportunity
Another way banks can profit from this burgeoning subsector is purchasing auto loan portfolios, which frequently provide attractive yields. Banks looking to enter this market should consider buying portfolios like these from seasoned lenders.

An alternate route they can take involves working with Garnet Capital Advisors, which has significant experience in this space, as well as auto loan portfolios and similar products.