Capital One Financial Corp. saw 10% year-over-year growth in auto originations in the quarter ending March 31, but volume was down 4% from the fourth quarter of 2014, according to earnings released yesterday from the McLean, Va.-based lender. The reason for the quarterly decline may be continued caution in subprime, and losing out on deals in a highly competitive market.
This caution can be expected to continue throughout 2015, according to comments from Chief Executive Richard Fairbank.
“Auto originations increased about 10% year-over-year, driven by strong auto sales and deepening relationships with our existing dealers,” Fairbank said.
But Fairbank also described the credit environment as worsening, and said his bank was showing more caution in underwriting than some rivals:
In our auto business, we’ve been experiencing normalization of both credit and returns from once-in-a-lifetime levels coming out of the great recession. Credit performance is gradually worsening in the industry, and we see slightly higher losses on newer originations. We’ve been cautious on industry underwriting and competitor practices for some time. As a result, our subprime originations have been essentially flat for nearly two years.
In the first quarter, we observed increasingly aggressive underwriting practices by some competitors, particularly in subprime. We are losing some contracts to competitors who are making more aggressive underwriting choices. And used-vehicle values remain at historically high levels. A decline in used-car prices would put pressure on our results, but we assume lower prices in our underwriting, so we remain comfortable with the resilience of the business.
Despite our heightened caution, we will continue to pursue opportunities in auto lending that are consistent with our long-standing focus on resilience including adding new relationships with well-qualified dealers and gaining greater share of prime originations with existing dealers.
During the Q&A, Fairbank reaffirmed the bank’s commitment to caution and to building its prime business:
This is not something where we’re saying, ‘Oh my gosh, you’re going to see us just pull out of this thing.’ We still believe there is selectively very good opportunity for Capital One to go get the assets that we want and continue to build — and even expand — the number of dealer relationships that we have. But we wanted to just put the Street increasingly on notice in the sense for this – that we’re very carefully watching the practices, and we’re going to make the choices that we make for resilience, and we hope that there are really, in many ways, two offsetting forces with respect to growth.
We’re clearly losing deals one customer at a time, sometimes that we might have won in the past because others have moved farther in their underwriting. On the other hand, some of the innovations we have and the really sustained success in building deeper dealer relationships, moving up through their prime relationships, and expanding dealer relationships is a force in the opposite direction that still generates growth. So the net effect of those two things will drive our results. You can see that, in general, subprime is where we have – you don’t see that much growth going on anymore, and most of it really has been in prime lately.
Capital One is the ninth-largest auto lender in the nation with about $32 billion in total outstandings, according to the Big Wheels Auto Finance Data Report.
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