Do Auto Loan Portfolios Deserve the Kudos?

Increasingly, banks are finding good news in their auto loan portfolios, and they are talking them up. Whether that talk is merited is debatable.

Case in point is US Bancorp. During the bank's earnings call yesterday, company officials said:

Our auto loans and lease portfolios were the exception in the retail category this quarter, with early-stage delinquencies improving linked quarter as the value of used cars continues to recover. Overall, these trends in our early-stage delinquencies further support our view that the pace of deterioration in credit quality is decelerating.

My concern is that some bankers are "selling" auto loan performance as a sign of the good banking times to come, and I am not convinced that the argument is true. There are, potentially, several reasons why autos are outperforming, say, mortgages, and some of those reasons are not necessarily related to macro credit trends. I won't go so far as to say this "talk" should be stopped, but it certainly has its dangers. Or am I reading this situation the wrong way?

Tags: credit-performance, earnings, us-bancorp

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Comment by William Fowler on October 22, 2009 at 11:32am: JJ
I agree with you 100%. The Cluncker sales program was a shot in the arm and maybe responsible for this train of thought. We are now back to the real facts and only a few dealers here and their or doing well.
Bill

Comment by Bobby Lazenby on October 22, 2009 at 12:58pm: JJ, I have not seen notable improvement in our portfolio performance over the past nine months. However, that said, we have seen stabilization in our performance metrics over the same period. Liquidity from the capital markets remains the primary obstacle to growth for most consumer finance companies. While I recognize the Big 3 receive most of the press, and apparently industry rewards, they also have numerous benefits most other players in the industry do not. In some respects, non-bank consumer finance company’s challenges are significantly greater than the fortunate few. Perhaps accolades should be extended to those that are doing more with less.

BL

Comment by JJ Hornblass on October 22, 2009 at 2:31pm: Bobby,

First, you are to be commended for stabilizing Navigator's credit performance! That was no easy feat!

The question I was trying to get at was whether auto loan performance is a fair barometer for overall credit performance -- as is increasingly being claimed -- or whether the improvements in auto portfolio performance are attributable to the fine efforts put in by folks like you, your team, and others? Put another way, are we seeing an overall reversal of credit performance as expressed by autos stabilizing? My fear is that the short-term answer is no -- and, therefore, these pronouncements that stabilizing auto performance "support our view that the pace of deterioration in credit quality is decelerating" are less than accurate.

JJ

Comment by William Fowler on October 22, 2009 at 3:55pm: Notice latest news:
October 20, 2009
Loan Approvals Backsliding, Says CNW
After months of improvement, the share of auto loans being approved has begun to backslide, according to CNW Marketing Research.
Approval of all loan applications from prime shoppers reached 88.9 percent in June and rose to 91.7 percent in August. But approvals declined in September to 88.4 percent, and continued to drop in the first two weeks of October to 86.2 percent, wrote CNW’s Art Spinella.
Similar patterns of decline were seen in the near prime and subprime categories.
Excluding leases and personal loans, customers being financed through a dealership or financial institution hit a high water mark in August at 84.7 percent for prime and 71.6 percent for near prime, according to Spinella.
Subprime borrowers have seen declines in loan approvals for five consecutive months since June. More than third of the rejections can be traced to consumers who recently entered the market with poorer FICO scores and believed they could get an auto loan. However, the other two-thirds of subprime borrower rejections would have been approved in August.

Comment by JJ Hornblass on October 22, 2009 at 6:27pm: An 88.4% approval rate still seems pretty high -- and healthy -- to me.

Comment by Bobby Lazenby on October 23, 2009 at 12:05pm: While we have seen stabilization in our portfolio performance, improvement in delinquency and defaults remains the goal for most of the industry. It’s not that we are not appreciative each day we aren’t running outside to see if the sky is falling any longer. It’s that, until we begin to see true job creation, not rhetoric about jobs save, and a marked decrease in unemployment levels, I don’t expect consumer portfolio’s performance across assets numerous classes to return to historical levels.

Comment by Jeff Martin on October 23, 2009 at 12:40pm: What they may be able to make a case for is IF they tightened their credit policy over the past year as many have then presumbly it could lead to better performance over mature portfolio. Volume and tightened credit policy could potentially "mask" underlying performance.

Comment by JJ Hornblass on October 23, 2009 at 1:25pm: Jeff, I agree. The result might not be a function of improving consumer credit, just of positive results from tighter credit policies.

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