CAF looks to increase penetration in nonprime

CarMax Auto Finance plans to increase its penetration rate in lower credit tiers after affordability challenges continued to hamper sales and origination volume dipped during the first quarter. Richmond, Va.-based CarMax Auto Finance (CAF) originated $2.3 billion during Q1 of its fiscal 2025, which ended May 31, down 3.2% year over year , according to the lender’s earnings release today. CAF’s total penetration rate was 45.3% in Q1 compared with 45.5% a year prior. . Tier 3 penetration, reflecting third-party lenders to whom CAF pays a fee to originate loans, was 7.5% in Q1 compared with 6.7% a year prior. . Tier 2 penetration, reflecting lenders that pay CAF a fee or have no fee paid to them, declined to 18.7% from 20.4% a year ago. “Both tiers saw less application volume year over year as lower credit customers remain challenged with affordability,” Jon Daniels , senior vice president of CarMax of CAF, said during CAF’s earnings call today. CAF issued its first nonprime asset-backed securitization (ABS) deal on June 18, a $635 million transaction, according to Finsight , which monitors securities. . CAF has been active in the auto ABS markets with prime deals since 2008, according to Finsight. CAF plans to issue separate prime and nonprime transactions moving forward to support originations growth across the spectrum, according to the earnings release. The nonprime issuance is “going to enable growth both in the lower end of the credit spectrum for us to take a larger percentage of sales, but also to expand what we do in the higher end, in what we call our higher prime segment,” Daniels said on the call. Income up 7% Growth in average managed receivables and net interest margin contributed to a 7% YoY increase in CAF’s income to $147 million, according to the earnings release. CAF’s provision for credit losses totaled $81.2 million compared with $80.9 million a year prior, while allowance for loan losses stood at $493.1 million, or 2.79% of receivables compared with 2.78% in the prior quarter . Net interest margin, representing the spread between interest and fees charged to consumers and the lender’s funding costs, rose 10 basis points YoY to 6.2% of average managed receivables. Used-vehicle retail unit sales declined 3.1% YoY to 211,132 units as affordability challenges and high interest rates deterred buyers even as prices improved, according to the earnings release. CAF bought 314,000 vehicles from consumers and dealers, a decrease of 8.6% YoY, with 279,000 cars coming from consumers, down 13.7% YoY, and 35,000 vehicles coming from dealers, up 70.8% YoY, according to the earnings release. “While [cars bought from dealers] are not as profitable as the ones we got from consumers, they're certainly more profitable than when we have to go off-site for [them]; we're encouraged by it, CarMax Chief Executive Bill Nash said during the call.” CDK attacks Consecutive cyberattacks on dealer software provider CDK Global Wednesday and Thursday had minimal impact on CAF’s operations as the company does not use CDK as its dealer management system, Nash said during the earnings call. “It's unfortunate for those dealers, because I know there are a lot of them,” he said. “The way it has an impact on us is we work with a lot of other dealers from a parts standpoint, and if their systems are down, it can slow down parts as well as impact title work…. . It's minor in the scheme of things as far as the impact on us.” Shares of CarMax [ NYSE: KMX ] were trading down 0.25% as of 2:25 p.m. . ET today to $71.18. . The company has a market capitalization of $11.2 billion. Auto Finance Summit, the premier industry event for auto lending and leasing, returns Oct. 7-9 at Wynn Las Vegas. . To learn more about the 2024 event and register, visit www. .AutoFinanceSummit.com.

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