Podcast: ‘Weekly Wrap’ on Q2 bank earnings

Joey Pizzolato 0:09
Hello, everyone, and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter in automotive lending and leasing. It’s Monday, July 24. And I’m Joey Pizzolato, joined by Amanda Harris and Riley Wolfbauer. This is our weekly wrap on what happened in auto finance for the weekend in July 21 2023. In general economic news, the Federal Open Market Committee is set to meet this week, economists expect another 25 basis point increase, which will bring the Feds target funds rate to 5.25% to 5.50%. In auto finance, consumers are increasingly getting turned down for auto loans. According to the Federal Reserve. Lenders are rejecting auto loan applications at a rate of 14.1%, which is up from 9.1%. A year ago, the auto application rejection rate more it’s the first time that auto that the auto rejection rate has outpaced auto application volume since the survey began in 2013. That trend was reflected in second quarter earnings last week, which continued with nine banks reporting. Riley, what happened with the banks on banks auto portfolios last summer?

Riley Wolfbauer 1:20
Yeah, so as you just said, with auto loan application, rejections rising, I think it would come as a surprise to no one that seven of the nine banks that reported last week saw outstanding shrink. While we had to saw standings rise, the two that saw an increase in outstandings. On a year over year basis were ally and Bank of America. Ally was up 4.3% year over year Bank of America was up 4.2%. Although both saw rise and outstandings. Both had decreases and originations on a year over year basis. One thing to note, that’s interesting. Capital One their outstandings were down 5% year over year, but their originations were up 15% quarter over quarter. So the reason why that’s interesting to know is because of the last four quarters, Capital One had been purposely pulling back and it looks like they are upping their auto lending a little bit which is normal because as we’ve all known, we’ve had multiple banks pulling back this quarter and last quarter. This quarter, we had US Bank and truest both pull back a little bit and auto lending. They’re trying to more prioritize higher margin lines of business. And then Fifth Third also pulled back last week. They pull or sorry, last month, they pulled back in non core states west of the Mississippi, except for Texas. As far as credit performance goes, delinquencies and charge offs began to normalize. Only one bank saw a decrease in net charge offs and that’s PNC. But all the other eight banks saw rise in delinquencies and charge offs. US Bank to note is the only one that saw a substantial increase in net charge offs, they saw 143 basis points sequential increase 158 basis points year over year increased to 1.69%. If you look at the ratios of their books, most of them are sitting around like the one and a half to 2% range for NCOs. And the high believe the highest at the moment is Ally or sorry, not ally truest 2.13%. And then looking further at their allowance for credit losses as expected. delinquencies and then coos rising, you’ll see allowance for credit losses rising PNC, as I said before, they’re the only one to see net charge offs decrease. So in turn, their allowance for credit losses also decreased a little bit. But everybody else across the board increasing. I think they’re pretty much just getting putting themselves in a position for the possibility of credit performance to continue worsening in the coming quarters.

Joey Pizzolato 4:14
Right. And Amanda, you had a great story today about what’s driving the underlying drivers for being pulled banks pulling back what’s going on there?

Amanda Harris 4:24
Sure. So there’s a couple of things. As already mentioned, we’ve seen banks intentionally pull back and auto specifically, because Auto is not a high margin business, not very relationship focused for banks, that’s part of the reason. But banks themselves are also preparing for quite a few things in the market that they really haven’t had to deal with in a long time. So the biggest thing that’s happening is that deposit activity has slowed down and I’m talking about like, slow down for the first time in decades. So that’s setting up banks to really have this deposit, you know, slow down that they really haven’t seen I mean, in decades, so they’re really trying to figure out how best to weather that. So, for example, US commercial banks deposits were about 17 trillion in the second quarter, which is down 4.6%, year over year, 2.3% sequentially. And that marks the first time, we really are seeing like these really big declines. So if you go back to second quarter 2022, is when it really started, you started seeing them kind of dip down deposits level, and that good tracking goes back 50 years, and we really haven’t seen any big dips like this until now, where it’s just kind of consistently going down, there’s really no one to say exactly how long it’s going to last. But banks are preparing for that. So that’s part of why they’re offloading consumer debt specifically. And we’re seeing this happen in auto, because for banks consumer, and especially auto lending debt, you know, again, it’s not really tied to high margin assets. So they’re kind of having to prioritize where they’re putting their capital, which means they need to offload some of their funds in order to free up more capital to do new loans. So they’re having to be more kind of like more picky less about where to kind of put their capital for lending, and consumers not really a big area for them. So we are seeing this uptick, in, you know, the offloading this consumer debt on the secondary market. And the reason banks are going there is because I mean, we all know, we’ve talked about auto ABS being, you know, very strong performance historically, there’s also, you know, right now, it’s really not high costs in order to go on secondary market. So it’s another avenue for banks to offload consumer debt quickly. So we are seeing multiple banks do this Bank of America has a deal in the works, presale just came out. Um, so I looked at it this morning, about 1.2 billion is what it is tracking for, obviously, it hasn’t closed yet. But that’s what what is kind of estimated on the pre sale report. And those are all new and use prime auto loans, and as their first auto a ABS securities deal since 2012. So that kind of gives you a little bit of an idea that this is really something new. And it just goes toward banks want to offload this consumer debt, because they also want to try to be smaller, because there are higher capital requirements in in talks right now with the federal dollar stress test. So obviously, it benefits them to have less capital to deal with it, those ratios change, you know, they want to offload some of this capital on the secondary market that can be smaller, they’ll have less, you know, to kind of mitigate and move around to meet those requirements, if they can get some smaller now. So that helps in quite a few different ways. And again, the capital markets just an easy way to offload consumer debt quickly, especially with auto because there’s always investors who want to invest in auto abs, so it’s very easy for them to you know, sell off, especially, you know, prime auto loans, those are going to perform really well there’s going to convert any problem for them to offload those kind of quickly, and get the capital of the need to lend in the other areas that they are, you know, prioritizing. So a couple of things happening there. You know, I’m sure we’re gonna see more activity. You know, there were other banks that securitize US Bank, Allah, financial citizens did citizens a little bit different because they are leaving auto altogether. So of course, they’re getting rid of all their auto book. And that is another way they’re doing that. But yeah, as we see requirements come through. And I will say these are not coming next month, we’re talking about it could be within a year, it could take, you know, six to 18 months, just to close out their proposal, you know, comment period, I’ve been told. So we’re really not talking about right away, but banks are preparing for, you know, increases to the capital requirements increases to the liquidity they have to have on hand. They’re building up their liquidity. We talked about, you know, they’re building up their allowance rates, like they’re preparing for credit performance to weekend but they’re also just preparing for this is the weird market for banks in general. And you know, they haven’t had to deal with some of the challenges that they are now in a really long time. So things are going to be probably wonky for banks, especially regional smaller banks for for a while, so we’ll keep a close eye on

Joey Pizzolato 9:02
it. Great thanks. Khurana Tesla auto nation Finance also reported last week. Here’s the numbers Carvanha is loan sales in the second quarter outpaced origination, volume and drove drove up finance gross profit per unit as the automotive retailer restructured its unsecured debt to his largest bondholders originations clocked in at 1.5 billion down 24% year over year, but up 7% On this sequential basis. Principal loan sales during the quarter came in at 1.9 3 billion. According to their earnings supplement. Khurana also finalized the debt swap with its major creditors that will allow payment in kind interest for two years and push out maturities due in 2025 and 2027 to 2028. Payment and planning allows interest to be paid to investors in equity or additional securities instead of cash. The restructuring represents about 90% of the principal balance owed and should reduce the company’s debt by 1.2 billion. According to Carvana. Tesla finance leasing penetration ticked up on a year over year basis in the second quarter as leasing revenue fell and production outpaced deliveries. Tesla’s operating lease assets landed at 5.9 billion, an increase of 8.4% sequentially and 24.1% year over year. According to Tesla’s earnings report, Tesla delivered just over 466,000 vehicles in q2 4.7 of which were leased by Tesla finance down from 5.3 in q1 but up from 3.6% year over year on our nation’s automation finances loan penetration increase in automation storefronts during the second quarter and while finance and insurance revenue ticked up and new vehicle sales increased automation finance previously CAG financial originating 20% of its loans and automation USA stores during June. Growth and penetration is facilitating the lenders shift to quote high tier credit customers Chief Financial Officer John lower sin AutoNation acquired CMG financial in the second quarter of 2022 for 85 million. Ford credit GM Financial Harley Davidson financial services and the rest of the publicly traded automotive retailers are set to report this week. That about does it for today’s episode. Thanks for joining us on the roadmap and be sure to follow us on Twitter and LinkedIn. We will see you online at auto finance news.net in here next time

Joey Pizzolato 0:09
Hello, everyone, and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter in automotive lending and leasing. It’s Monday, July 24. And I’m Joey Pizzolato, joined by Amanda Harris and Riley Wolfbauer. This is our weekly wrap on what happened in auto finance for the weekend in July 21 2023. In general economic news, the Federal Open Market Committee is set to meet this week, economists expect another 25 basis point increase, which will bring the Feds target funds rate to 5.25% to 5.50%. In auto finance, consumers are increasingly getting turned down for auto loans. According to the Federal Reserve. Lenders are rejecting auto loan applications at a rate of 14.1%, which is up from 9.1%. A year ago, the auto application rejection rate more it’s the first time that auto that the auto rejection rate has outpaced auto application volume since the survey began in 2013. That trend was reflected in second quarter earnings last week, which continued with nine banks reporting. Riley, what happened with the banks on banks auto portfolios last summer?

Riley Wolfbauer 1:20
Yeah, so as you just said, with auto loan application, rejections rising, I think it would come as a surprise to no one that seven of the nine banks that reported last week saw outstanding shrink. While we had to saw standings rise, the two that saw an increase in outstandings. On a year over year basis were ally and Bank of America. Ally was up 4.3% year over year Bank of America was up 4.2%. Although both saw rise and outstandings. Both had decreases and originations on a year over year basis. One thing to note, that’s interesting. Capital One their outstandings were down 5% year over year, but their originations were up 15% quarter over quarter. So the reason why that’s interesting to know is because of the last four quarters, Capital One had been purposely pulling back and it looks like they are upping their auto lending a little bit which is normal because as we’ve all known, we’ve had multiple banks pulling back this quarter and last quarter. This quarter, we had US Bank and truest both pull back a little bit and auto lending. They’re trying to more prioritize higher margin lines of business. And then Fifth Third also pulled back last week. They pull or sorry, last month, they pulled back in non core states west of the Mississippi, except for Texas. As far as credit performance goes, delinquencies and charge offs began to normalize. Only one bank saw a decrease in net charge offs and that’s PNC. But all the other eight banks saw rise in delinquencies and charge offs. US Bank to note is the only one that saw a substantial increase in net charge offs, they saw 143 basis points sequential increase 158 basis points year over year increased to 1.69%. If you look at the ratios of their books, most of them are sitting around like the one and a half to 2% range for NCOs. And the high believe the highest at the moment is Ally or sorry, not ally truest 2.13%. And then looking further at their allowance for credit losses as expected. delinquencies and then coos rising, you’ll see allowance for credit losses rising PNC, as I said before, they’re the only one to see net charge offs decrease. So in turn, their allowance for credit losses also decreased a little bit. But everybody else across the board increasing. I think they’re pretty much just getting putting themselves in a position for the possibility of credit performance to continue worsening in the coming quarters.

Joey Pizzolato 4:14
Right. And Amanda, you had a great story today about what’s driving the underlying drivers for being pulled banks pulling back what’s going on there?

Amanda Harris 4:24
Sure. So there’s a couple of things. As already mentioned, we’ve seen banks intentionally pull back and auto specifically, because Auto is not a high margin business, not very relationship focused for banks, that’s part of the reason. But banks themselves are also preparing for quite a few things in the market that they really haven’t had to deal with in a long time. So the biggest thing that’s happening is that deposit activity has slowed down and I’m talking about like, slow down for the first time in decades. So that’s setting up banks to really have this deposit, you know, slow down that they really haven’t seen I mean, in decades, so they’re really trying to figure out how best to weather that. So, for example, US commercial banks deposits were about 17 trillion in the second quarter, which is down 4.6%, year over year, 2.3% sequentially. And that marks the first time, we really are seeing like these really big declines. So if you go back to second quarter 2022, is when it really started, you started seeing them kind of dip down deposits level, and that good tracking goes back 50 years, and we really haven’t seen any big dips like this until now, where it’s just kind of consistently going down, there’s really no one to say exactly how long it’s going to last. But banks are preparing for that. So that’s part of why they’re offloading consumer debt specifically. And we’re seeing this happen in auto, because for banks consumer, and especially auto lending debt, you know, again, it’s not really tied to high margin assets. So they’re kind of having to prioritize where they’re putting their capital, which means they need to offload some of their funds in order to free up more capital to do new loans. So they’re having to be more kind of like more picky less about where to kind of put their capital for lending, and consumers not really a big area for them. So we are seeing this uptick, in, you know, the offloading this consumer debt on the secondary market. And the reason banks are going there is because I mean, we all know, we’ve talked about auto ABS being, you know, very strong performance historically, there’s also, you know, right now, it’s really not high costs in order to go on secondary market. So it’s another avenue for banks to offload consumer debt quickly. So we are seeing multiple banks do this Bank of America has a deal in the works, presale just came out. Um, so I looked at it this morning, about 1.2 billion is what it is tracking for, obviously, it hasn’t closed yet. But that’s what what is kind of estimated on the pre sale report. And those are all new and use prime auto loans, and as their first auto a ABS securities deal since 2012. So that kind of gives you a little bit of an idea that this is really something new. And it just goes toward banks want to offload this consumer debt, because they also want to try to be smaller, because there are higher capital requirements in in talks right now with the federal dollar stress test. So obviously, it benefits them to have less capital to deal with it, those ratios change, you know, they want to offload some of this capital on the secondary market that can be smaller, they’ll have less, you know, to kind of mitigate and move around to meet those requirements, if they can get some smaller now. So that helps in quite a few different ways. And again, the capital markets just an easy way to offload consumer debt quickly, especially with auto because there’s always investors who want to invest in auto abs, so it’s very easy for them to you know, sell off, especially, you know, prime auto loans, those are going to perform really well there’s going to convert any problem for them to offload those kind of quickly, and get the capital of the need to lend in the other areas that they are, you know, prioritizing. So a couple of things happening there. You know, I’m sure we’re gonna see more activity. You know, there were other banks that securitize US Bank, Allah, financial citizens did citizens a little bit different because they are leaving auto altogether. So of course, they’re getting rid of all their auto book. And that is another way they’re doing that. But yeah, as we see requirements come through. And I will say these are not coming next month, we’re talking about it could be within a year, it could take, you know, six to 18 months, just to close out their proposal, you know, comment period, I’ve been told. So we’re really not talking about right away, but banks are preparing for, you know, increases to the capital requirements increases to the liquidity they have to have on hand. They’re building up their liquidity. We talked about, you know, they’re building up their allowance rates, like they’re preparing for credit performance to weekend but they’re also just preparing for this is the weird market for banks in general. And you know, they haven’t had to deal with some of the challenges that they are now in a really long time. So things are going to be probably wonky for banks, especially regional smaller banks for for a while, so we’ll keep a close eye on

Joey Pizzolato 9:02
it. Great thanks. Khurana Tesla auto nation Finance also reported last week. Here’s the numbers Carvanha is loan sales in the second quarter outpaced origination, volume and drove drove up finance gross profit per unit as the automotive retailer restructured its unsecured debt to his largest bondholders originations clocked in at 1.5 billion down 24% year over year, but up 7% On this sequential basis. Principal loan sales during the quarter came in at 1.9 3 billion. According to their earnings supplement. Khurana also finalized the debt swap with its major creditors that will allow payment in kind interest for two years and push out maturities due in 2025 and 2027 to 2028. Payment and planning allows interest to be paid to investors in equity or additional securities instead of cash. The restructuring represents about 90% of the principal balance owed and should reduce the company’s debt by 1.2 billion. According to Carvana. Tesla finance leasing penetration ticked up on a year over year basis in the second quarter as leasing revenue fell and production outpaced deliveries. Tesla’s operating lease assets landed at 5.9 billion, an increase of 8.4% sequentially and 24.1% year over year. According to Tesla’s earnings report, Tesla delivered just over 466,000 vehicles in q2 4.7 of which were leased by Tesla finance down from 5.3 in q1 but up from 3.6% year over year on our nation’s automation finances loan penetration increase in automation storefronts during the second quarter and while finance and insurance revenue ticked up and new vehicle sales increased automation finance previously CAG financial originating 20% of its loans and automation USA stores during June. Growth and penetration is facilitating the lenders shift to quote high tier credit customers Chief Financial Officer John lower sin AutoNation acquired CMG financial in the second quarter of 2022 for 85 million. Ford credit GM Financial Harley Davidson financial services and the rest of the publicly traded automotive retailers are set to report this week. That about does it for today’s episode. Thanks for joining us on the roadmap and be sure to follow us on Twitter and LinkedIn. We will see you online at auto finance news.net in here next time