Cap One holds $2B for losses as dealer volume falls 45%

Capital One Financial Corp. has set aside $2.1 billion in reserve for its auto portfolio amid a 45% year-over-year decline in weekly dealer originations in the first half of April, Chief Executive Richard Fairbank said during the bank’s first-quarter earnings call Thursday.

Allowance for losses increased $600 million for auto during the first quarter. The bank’s auto originations increased 23% YoY to $7.6 billion. The total auto portfolio also increased, up 9% YoY to $61 billion. Auto delinquencies 30 days past due improved as well, down 49 basis points to 5.29% of the portfolio. However, net charge-offs increased 7 bps to 1.15% of the portfolio.

Capital One’s auto book mainly experienced growth, but by the end of the first quarter and trickling into Q2, weekly dealer applications and originations volume had started to deteriorate, Fairbank noted.

In fact, weekly dealer applications were down an average of about 35% YoY in the second half of March, and down about 25% YoY in the first half of April. Additionally, weekly dealer originations were down an average of about 25% YoY in the second half of March, and down about 45% YoY in the first half of April.

Firmwide, Capital One’s total credit reserves clocked in at $14.3 billion. The adoption of CECL increased the McLean, Va.-based bank’s allowance by $2.8 billion as of Jan. 1. The bank’s firmwide allowance build increased $3.6 billion due to the impact of the COVID-19 pandemic. Capital One joins Ally Financial and Bank of America as the latest bank to leverage regulators’ option to defer regulatory capital impact of CECL until 2022.

Still, the bank’s total liquidity reserves increased 3% YoY, totaling $105.9 billion as of March 31,  including $24.9 billion in cash and cash equivalent balance. This cash is expected to cover 10 years of wholesale funding maturity, the bank noted.

As for deferrals, Fairbank said 9% of customers have received assistance, representing 11% of balances. He added that while it is “striking” how much higher requests are on the auto side, it is not necessarily surprising.

“We have found, in fact, across our businesses you can see that the size of the payment amount is a key driver of the number of requests that we get,” Fairbank said. “And of course, auto payments are typically much higher than credit card minimum payments.”

He continued, “The other reason, of course, is that in auto the stakes are higher for the customer. They’re very motivated to make sure that they can keep their car.”

Capital One Financial Corp.’s stock [NYSE: COF] was trading up 3.54% at $54.57 per share at 12:33 pm ET. The bank’s market cap is $24.9 billion.