Bank of America Corp. showed marked deterioration in its auto finance portfolio last quarter, as the Charlotte, N.C., increased its allowance for losses for the unit.
Net charge-offs in the unit increased $195 million to $1.2 billion as the loss ratio remained flat at 5.03%, but up 100 basis points excluding Merrill Lynch. BofA increased its allowance for credit losses to cover 5.40% of its loans. Specifically, the Dealer Finance portfolio of $40.1 billion had a 26 basis point increase in loss rate to 2.78%. The auto portfolio of $26.7 billion , meanwhile, had a 46 bps increase in loss rate to 2.48% — that’s a big number. It should be noted that this portfolio includes auto originations, auto purchased loan portfolios and marine/RV.
The one bright spot were 30-day-plus delinquencies, which decreased 61 basis points to 4.16% of loans, although they were up 24 bps excluding Merrill Lynch. Ken Lewis, the bank’s CEO, said seasonality has something to do with this.
Credit Unions, who have been the most willing to lend during this credit crunch, are also experiencing dramatic differences in the performance of their indirect portfolios versus direct. Not a good sign for those putting all their eggs in the CU basket.
John, I think there is some expectation that credit unions won’t see the kind of credit deterioration banks and finance companies have seen because CUs have that common bond thing. But by and large, credit unions are also less rigorous about their underwriting, so the two factors cancel — which means CUs also are facing a tough credit environment.
J.J., What CU executives have been sharing with me is that the common bond thing sort of goes out the window with indirect loan customers who were not previous members. You are correct that the CU’s are seeing much better portfolio performance from indirect customers who were previous members, but it is the non-member that just deposited $5 in a savings account to join and get the loan that is much more likely to become delinquent or default. Possibly as a result, the NCUA is starting to crack down on lax membership requirements.
If the credit unions do not have experienced indirect credit lenders on staff, they will be burned.
Perhaps they could hire some from banks exiting the business.
Alas, the loans may already have been underwritten.