Weekly Wrap: Auto boosts bank’s Q2 performance [Video]

This week, the Auto Finance News team took a deep dive into how the pandemic is affecting subprime lenders . Auto, however, may shine bright in the coming months. Capital One saw an increase in auto originations that helped boost the <a href="http://This week, the Auto Finance News team took a deep dive into how the pandemic is affecting subprime lenders. Auto, however may shine bright in the coming months. Capital One saw an increase in auto originations that helped boost the bank’s overall second-quarter performance, and captives gained 8 points in market share as a result of 0% APR incentive programs. However, the bank, in line with industry trends, still upped its loan loss reserves in preparation for further economic fallout brought on by the pandemic. In this edition of the Weekly Wrap, Joey Pizzolato, Amanda Harris and JJ Hornblass discuss news developments during the week ending July 24, 2020, as well as the companies that plan to release earnings reports next week.">bank’s overall second-quarter performance , and captives gained 8 points in market share as a result of 0% APR incentive programs. However, the bank, in line with industry trends, still upped its loan loss reserves in preparation for further economic fallout brought on by the pandemic. In this edition of the Weekly Wrap, Joey Pizzolato, Amanda Harris and JJ Hornblass discuss news developments during the week ending July 24, 2020, as well as the companies that plan to release earnings reports next week.

Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the same quality networking and education as past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com . Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain . JJ Hornblass 00:00 Hi, everyone. I'm JJ Hornblass and welcome to the roadmap from auto finance news since 1996, the nation's leading newsletter on automotive lending and leasing. This is our weekly wrap on what's happening in auto finance for the week of July 20, 2020. Before beginning I want to thank auto finance news advertisers, Alpha and Defi Solutions, FiOS and autorack for their continuing support, so thank you to them. And I am joined by Joey Pizzolato, deputy editor of auto finance news and newly to the team Amanda Harris is associate editor so welcome to both of you. It is Friday, July 24, 2020. This week saw not just more COVID cases and more quarantining but a return to greater filings. For unemployment insurance, there were also disturbing protests in Portland and even more disturbing reactions to those protests from federal law enforcement officers there on the automotive front. Manheim released a mid-month check on his used vehicle index for the first half of June and it looks like the used car market is heading towards his second consecutive record month. Fortunately, we are back to baseball after Coronavirus and labor uncertainties and it was good to see my Yankees starting off the abridge season with a win. We heard we saw this week the publication of our feature story Joey on subprime lenders and what has happened within the subprime lending sector since COVID hit hasn't been as bad as you would think, for subprime lenders during this time,Joey Pizzolato 02:10 a great question, and I think it's a complicated answer, but I think the if you're going to make a short answer, it would be not yet. A lot of lenders subprime lenders whose borrowers were probably the first affected or one of the first affected by the nationwide shut downs received, you know, the deferment deferments and a lot of lenders were offering as well as government stimulus packages which have helped with payment rates in that in that credit segment.JJ Hornblass 02:42 And the question I wonder about is, you know, where what does the level of the market need, where does the market need to be at in order for it to you know, this segment within auto finance kind of remain at a reasonable level? I mean, do you need to see car sales over? Is it is it 13? Is it 14? I mean, is there a sense for where this kind of, you know where the brake line is, as it were?Joey Pizzolato 03:15 I think if you if you hadn't been looking at one metric, it would be the unemployment rate. A lot of subprime prime lenders are pulling back. They're, they're tightening their credit underwriting standards, they're slowing down their originations. For example. At the end of the first quarter, consumer portfolio services said that they would slow down their originations to just keep up with the amortization of their portfolio. And they really started a second quarter earnings yesterday or Wednesday, I believe, actually. And we saw that originations dropped to I think 130 6 million down from about 250 year over a year. We are we are definitely seeing a pullback as a result of the high unemployment rate and I think once those once those numbers start to go down, then we'll start to see a little bit more. I don't want to say aggressiveness but a little bit more action from some Prime's in the in terms of originations at least. So theJJ Hornblass 04:22 among the herbs in originations right now, the the sub sector of the market that seems to be having the most success are captives. I mean, would you agree with that, and kind of what are we seeing that would lead you to say that?Joey Pizzolato 04:45 So, in terms of captives, we are seeing them take more market share? We're not quite clear on what originations look like. Ford Credit and GM Financial, for example, have their earnings reports next week. But captives have grown their market share largely due to the aggressive incentive programs, particularly those zero percent APR 70 to 84 month loans that were pushed in, I want to say may that really, really helped boost the industry in terms of new vehicles sales.JJ Hornblass 05:22 I mean, a lot of you know, like a lot of things during this whole quarantine period. You know, there's this first of all, there's this question about, you know, what's going to remain what habits will remain what happens will change back to pre COVID the pre COVID period, I can't imagine I'm going to be having dinner with my family every night again after COVID ends but you know, you never know. In this case, you know, an eight point move in market share for it, you know, it Auto is a is a big number. What what's your sense for how much of that might remain with, um, captives? And how much of that will kind of revert back to the mean? That's aJoey Pizzolato 06:17 great question. Um, you know, I would say, I would think a lot of it comes down to kind of brand loyalty. How, how are customers being treated during this, you know, Time Crisis? What How do they feel about the lender that they have their auto loan with, you know, if they if somebody took out a new loan on an F 150, let's say, and, you know, had really great servicing a really great experience, you know, they might continue to do to go with with that lender or manufacturer going forward. But on the other side of that coin, you know, these the market share was was driven by those incentives. programs and and without that robust program, you know, consumers might might decide to go elsewhere. So it's really hard to put your finger on, as you mentioned, you know, what kind of trends we're seeing will continue after we kind of dig ourselves out of this hole, and what will kind of revert back to what we're used to in the industry.JJ Hornblass 07:21 Yeah, I mean, I think that there's some, I think that there's some inherent brand value that gets created when you make an offer at a difficult economic time, that is particularly advantageous. So my feeling is is that some of this will remain I and you know, just shifts in market share just don't really happen that frequently in auto so any shift has has kind of a, you know, a notable effect, or at least it has the potential to be notable over the world. Long term so I you know it's it's a this whole period and I don't know Amanda if you agree with this but the this whole period of quarantine has has really been so remarkable that any any deviations from the norm I think deserve notice the speaking of specific lenders one lender that really is turned in counterintuitive or counter cyclical cyclical performance has been kept one. Amanda, why don't you tell us a little bit about, uh, you know, what their earnings performance show this week as it relates specifically to auto.Amanda Harris 08:52 Yeah, their, their performance is pretty interesting. So, auto really became kind of the shining star for the second Quarter, which has kind of been a trend that we've been seeing it's, you know, while other retailers really struggled. I mean, the pandemic autos kind of been one of those that maybe hasn't struggled quite as much or rebounded a little quicker than some others that we've been seeing. And a lot of that's due to, you know, used use vehicles being available. The shift to digital, a lot of you know, lenders and dealers have really upped their game as far as offering those, you know, at home deliveries and touch lists, you know, opportunities to buy cars. So I think that is kind of a bigger term we're seeing and then Capital One was kind of an example of that, where auto really09:52 and they really talked about, you know, that being kind of a driver for the overall think doing pretty well. And second quarter when maybe they wouldn't have if they didn't have that kind of driving in. And then part of what they mentioned was that, you know, digital was a big part of that there, you know, being able to offer those opportunities from home for people to shop, when they couldn't get out to a dealership or couldn't go in person really helped that in the last couple months.JJ Hornblass 10:16 And they say what what share of those originations were coming through the digital channel that they talked about thatAmanda Harris 10:24 they didn't say specifically, but they did say that they saw quite a bit of an increase in you know, digital, you know, people using their digital products and services that that was kind of driving growth for direct consumer originations in the touchless, car drive, you know, car buying experience during social distancing. So they are kind of seeing an uptick in that and then that'll probably continue, as we continue through the pandemic and cases keep going up. Lasting trend.JJ Hornblass 10:55 I mean, it seems like we can extrapolate that You know, this is pretty notable it also there was a mention of that, you know, digital engagement from auto nation in their earnings this week. So, you know, it would seem that the bright star for for the sector is on the direct lending side. I mean, is that is that a fair read of what's happening?Amanda Harris 11:27 Yeah, I think so I think we're gonna kind of see that trend play out and we'll have to see how it kind of settles, you know, as we come out of the pandemic, and if cases start going down and more people can go and person and start shopping again, we may or may not see see that kind of dip a little bit more. But I definitely think it's a trend that's going to you know, continue and I think digital we continue to grow and something that both dealers and lenders will have to kind of jump on board with providing and kind of beefing up especially in you know, the financing side and being able To do that hundred percent online, whereas traditionally that really hasn't been done up to up to the level that we're trying to kind of seeing things being pushed,JJ Hornblass 12:09 but we're still they still announced pretty significant, a pretty significant increase in their loan loss reserves. So, the, you know, significantly higher originations, you know, maybe negated on the credit on the credit performance side. I mean, is that this is Georgia to both you I mean, do you shoot, you know, to what degree are those loan loss reserves at cap one, are they is that standard for the market now, or should we, you know, are or are they greater than what would be expected? I mean, what have we seen in terms of loan loss reserves overall?Joey Pizzolato 12:57 I can jump in Well, you know, we are We're seeing additional provisions for credit losses, quarter over quarter after quarter, excuse me. And I think we'll probably continue to see that through the rest of the year at the very least, just to, you know, hedge your bet. In terms of still, we've been talking about this, I feel like four months, we still don't know how high credit losses are going to mount. You know, when stimulus packages dry up, deferrals are coming, coming out, or they're ending, excuse me again. And so we we really, I think, I think especially the lenders in the space are just making sure that they have enough capital to account for, you know, arise in in credit losses, delinquencies and charge offs.JJ Hornblass 13:49 I think one other thing that we should, we should watch is is whether that direct loan originations especially originated now Whether their performance is going to be weaker, the same or maybe better than indirect originations, if you've got a greater percentage of direct and it's coming at a very odd time, as we've said, how those those loans will perform will be something that we'll have to watch over the next couple of years. Before that, what's on on the on on on the place for next week? What coverage can we expect on auto finance news? dotnet Do you want to start Joey?Joey Pizzolato 14:39 Sure, well, like it like I mentioned, we have Ford credit and GM financial earnings as well as Harley Davidson. I'm very interesting interested to see how both GM financial and Ford credit play out as we talked about earlier, you know, how, how these incentive programs how they propped up originations, and then also kinda get a glimpse of their credit performance over the last three months, I think will be will be a good barometer for what to expect in this quarter kind of moving forward. Good. JJ Hornblass 15:12 Okay. And as a reminder to everyone, the Auto Finance Summit will be October 20 to 22. And you could check out details at auto finance summit calm and of course, you could always subscribe to auto finance news at auto finance news dotnet. Don't forget to rate the roadmap wherever you listen to your podcasts. And to follow us on Twitter and LinkedIn. I want to thank Joey and Amanda for her maiden appearance. And thank all of you for joining us on the roadmap. We'll see you online at autofinancenews.net and next time Thanks so much, everyone. Thanks

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