Garnet Capital Advisors Blog

Experian's recent State of the Automotive Finance Market indicates that banks and credit unions increased prime auto loans in the third quarter of 2016, while trimming their loans to subprime borrowers.

Banks increased prime auto loans in Q3 2016, while trimming subprime auto loans.

That's good news for an industry that has sometimes been accused of too much lending to subprime borrowers in the auto market. Indeed, Experian's senior director of automotive finance Melinda Zabritski observed, "For anyone making doomsday predictions about a subprime bubble in the auto industry, Q3 2016 provides a stark reality check."

A Drop in Subprime Originations

In the third quarter, both prime and superprime originations increased 2%, to constitute 57% of all loan originations.

However, subprime originations declined 4.5% year over year. They constituted just over 19% of new and used automobile loans in the quarter. Deep subprime loan originations also dropped 2.8%. They made up just 3% of all loans. For used automobiles and other vehicles, deep subprime loans fell to 5.1%. This is the lowest percentage Experian has registered since it began following the data 10 years ago.

From all lending institutions, the total auto loan balance on the nation's books hit $1.055 trillion, a record. New-vehicle loan amounts hit $30,022 on average and used-vehicle loan amounts reached $19,227 on average.

Thirty-day delinquencies for loans and leases were unchanged from the prior year's third period at 2.38%. Sixty-day delinquencies rose slightly, to 0.74% versus 0.67% in last year's third quarter.

Strengthening Auto Loans

Community banks showed more auto loans overall during the third quarter. Banks with $10 billion or less in assets made almost 2% more loans for vehicles versus the year-prior quarter, to a total of $47.8 billion, according to Sageworks data. Of that group, however, the 25 biggest vehicle lenders originated approximately 7% more loans.

Strong demand drove car loan originations.

Some banks did more than that, based purely on higher consumer demand for autos. United Bankshares, a $6 billion Charleston, WV-based bank, booked 31% more auto loans than in the third quarter of 2015 due to strong demand in its markets, according to company officials. The bank targets prime borrowers in these markets, and focuses on 15% to 20% growth yearly in auto loans.

Fifth Third Bancorp, on the other hand, executed on a plan to trim auto loans after receiving a warning from regulators about the quality of their auto loans.

Other banks are seeing strengthening quality and increasing their portfolios accordingly. Auto loans at $8.9-billion asset First Interstate, in fact, climbed 21% on the quarter. Kevin Riley, president and CEO of First Interstate, noted that the bank focused now only on prime loans, and that the robust increase occurred because there were more prime loans to book.

Experian's report also showed that credit unions underwent the biggest percentage growth in auto loans among all lender types. Credit unions' share of the market rose to 19.6% from 17.6% in the year-prior quarter. Credit unions remain the #3 source of auto loans, after banks and auto dealers.

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