Rising credit losses and “rapid normalization” in Capital One Auto Finance Inc.’s portfolio has caused the company to be “very vigilant” with its underwriting practices, Chief Executive Richard Fairbank said during the bank’s earnings call Tuesday.
“The auto business, after the Great Recession, was something that I don’t think we’ll see again in our lifetime, in terms of high margins and exceptional credit quality, because so many players headed for the hills and consumers were — at times — walking away from their houses and still paying their cars,” he said.
Used-car prices were at “incredible” highs then, he added. “The journey since has really been one of normalization,” where every year the margins have decreased and credit losses have increased. Auto losses are not “fully normalized” yet, but they have “inched up,” in recent quarters, he said. “It keeps outperforming, in a good way, our own expectations of that normalization, but I think there’s a little more normalization still to happen.”
CapOne boosted its provisions against loan losses in 3Q by 36% — $68 million — from the same time a year ago, citing its growth in auto loan originations, expectations that charge-offs would gradually rise, and declining used-car values, according to the earnings report. The bank’s auto originations grew 23% YoY to $6.8 billion, and net charge-off recovery rates were up to 1.85%.
