Although TCF Bank was reticent to admit there were credit performance problems in its auto portfolio, the combination of low yields and a high volume of charge-offs ultimately drove the lender out of the business, said David Chiaverini, equity research analyst of mid-cap banks for Wedbush Securities.
“[TCF] mentioned that credit quality is coming in-line with its expectations, however, when we look at the progression of net charge-offs on its auto portfolio, it’s been getting progressively worse on a year-over-year basis,” Chiaverini told Auto Finance News.
“That loss rate pretty much was eating into the revenues.” The company reported a yield of 5.1% to 5.2% in its auto portfolio during the third quarter, and net charge-offs had a rate of 1.1%, he added. “That right there takes 20% of your revenue off the table,” he said. “Then that business itself was running at a high efficiency ratio –— meaning it’s not very efficient — so they spend a lot to generate that revenue. It wasn’t a good use of capital for TCF.”
Earlier this year, TCF switched to an originate-to-hold from an originate-to-sell strategy, which was expected to raise charge-offs, a spokesman told Auto Finance News.
“We also expected the yields on the portfolio to go up more than charge-offs, which also happened,” he said. “But, ultimately, even with that higher risk-adjusted yield, we still determined that other uses of the capital will generate a higher rate of return.”
The credit quality issue was compounded by TCF’s decision earlier this year to expand down spectrum into near-prime borrowers, Chiaverini added. “[It wasn’t] necessarily subprime, but in my opinion there were some subprime loans in there,” Chiaverini said. “After they put those loans in the portfolio the average Fico went from being in the mid-730s to 20 points lower. That contributed to some of the deterioration in the portfolio, but even without that, the trends were showing some weakening in the credit metrics.”
