Banks offload auto debt as deposits shrink

Banks offloaded auto debt in the second quarter as deposit activity slowed and financiers got more stringent on how they allocate capital to fund new loans. Deposits at U.S. commercial banks totaled $17.2 trillion in Q2, down 2.3% sequentially and 4.6% year over year, according to Federal Reserve data. In the second quarter of 2022, deposits at U.S. commercial banks began to decline at a rate not seen in 50 years of tracking, a trend that continues, according to the Fed. Banks are turning to the secondary market to sell off consumer loan debt, including auto, in response to the dip in deposits and market conditions that banks haven’t faced in decades, Nathan Stovall , director of financial institutions research at S&P Global , told Auto Finance News . “Banks have not had to operate in this world where they're losing deposits. Not only are there real dynamics of ‘I need to have funding to fund that loan,’ but it also goes against the way that they operate as a risk manager,” he said. “It's worrisome. It's harder to ballpark, it's harder to manage your balance sheet in that environment. We don't have a lot of historical reference for it. A quick way to get ahead of it is to get smaller.” Bank of America , for one, is preparing its first auto asset-backed securities deal since 2012, a $1.2 billion transaction backed by new and used prime auto loans, according to a July 20 Fitch Ratings presale report of the deal. The bank’s outstanding auto portfolio rose 1.1% sequentially and 4.9% YoY to $53.3 billion in the second quarter, according to its earnings supplement. Bank of America’s total deposits landed at $1.9 trillion in Q2, a decrease of 1.7% quarter over quarter and 5.4% YoY, according to the bank’s July 18 earnings presentation. “It speaks to shrinkage; the smaller you are, the less capital you need,” S&P’s Stovall said. “If you're facing deposit outflows, the smaller you are, the better it is. As a lender, you take money in primarily through deposits and lend it out at a higher rate. If you have fewer deposits, then you need cash or you have to pull back on growth.” [caption id="attachment_58331700" align="aligncenter" width="1920"] © Can Stock Photo / kentoh [/caption] U.S. Bank , too, securitized $4.7 billion in auto loans across three transactions in the second quarter to “more effectively position the balance sheet for profitable growth and optimized returns,” Terry Dolan , vice chair and chief financial officer, said during last week’s earnings call. The bank’s auto outstandings fell 32.8% QoQ and 51.7% YoY to $11.5 billion, according to the earnings supplement. Ally Financial issued an auto ABS deal totaling $813.82 million on July 11, while Citizens Financial Group priced its auto ABS deal on June 23 at $1.5 billion as the bank runs off its auto book after exiting indirect auto lending in June , according to Finsight , which monitors securities. Ally’s auto loan and lease outstandings were essentially flat sequentially but grew 4.3% YoY to $94.2 billion . Requirement changes loom Some banks could face higher capital requirements in the next year following the Fed’s stress test results published on June 28. “On the regulatory front, we're preparing for increased capital and liquidity across the industry,” Ally Chief Executive Jeffrey Brown said during the bank’s July 19 earnings call. “We're well positioned from a liquidity standpoint, and we're building capital to prepare for these expected changes. There's a lot of focus on near-term pressures and potential for increased regulation.” Banks are prioritizing high-margin assets as they look to maintain liquidity and funding health, S&P’s Stovall said, noting that the result has been tightening credit and a pullback in lending by some. Auto outstandings decreased on a YoY basis at Capital One , Chase Auto , Fifth Third , Huntington , PNC Financial , Truist and Wells Fargo Auto in Q2.

“Thus far, particularly the big [banks] are managing fine; if they are seeing deposit outflows, they’re modest,” Stovall said. “The regional banks are going to feel more pressure and they're going to have to bolster their liquidity with higher-cost funding. “It’s still mostly an earnings issue, but where that comes into the credit piece is if your funding is more fleeting or more expensive,” he said. “We're getting closer to a point where banks are going to be thinking harder about every incremental dollar that they allocate toward new loans.” Auto Finance Summit, the premier industry event for auto lending and leasing, returns October 29-31 at the Bellagio Las Vegas. To learn more about the 2023 event and register, visit autofinance.live / afs / .

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