Quarterly Earnings Show Signs of Tightening

Credit restrictions and underwriting practices show signs of tightening this month after lenders outlined adjustments to their portfolios based on expected normalization in the market, during third-quarter earnings calls. There are also other signs, though, pointing to the possibility of a downturn in the market.

A downturn in the market could best be characterized by consumer credit that is less reliable than expected — as evidenced by from rising delinquencies. Depreciating used-car values would put downward pressure on remarketing values, as well. For example, Hertz Global Holdings this week announced it had slashed expected profits from its car rental business, citing higher than expected vehicle depreciation. Separately, Manheim’s Used Vehicle Value Index declined 0.7% in October on a seasonally adjusted basis.

However, the Federal Reserve’s opinion survey on bank lending practices this week found that the vast majority — more than 75% — of banks have not tightened practices. Bank of America, for example, has no plans to make changes to its standards, a spokesman told AFN. 

The few banks that are making changes, are big players.

Capital One Auto Finance, for example, grew originations by 22%, yet the company remains cautious about the outlook of the cycle.

“The auto market and competitor practices remain dynamic,” Richard Fairbank, founder and chief executive of Capital One, said on the bank’s third-quarter earnings call. “While we see opportunities for growth, we remain very vigilant about competitor practices. We continue to focus on resilient originations, and we continue to expect a gradual decrease in margins and a gradual increase in charge-offs as the cycle plays out.”

Chase Auto Finance, the largest bank in auto lending according to the Big Wheels report, is also tamping down its portfolio with the decision to pull back on 84-month-plus term loans on all Fico bands, the company said in its earnings call.

“Where we are in the cycle, we see the risks of that type of lending,” Marianne Lake, chief financial officer of JPMorgan Chase, said on the call. “We continue to calibrate our underwriting, but I wouldn’t comment on seeing anything specifically.”

Ally Financial Inc., Consumer Portfolio Services, and General Motors Financial, have also been adjusting underwriting practices throughout the year. However, the shift has prominently been attributed to a greater focus on risk adjusted yield.

There is a possibility that these are all simply individual actions by companies that have little bearing on the overall state of the industry, which is the position taken by Manheim Consulting’s Chief Economist Thomas Webb.

“There have been cases where specific lenders have tightened a little bit I think it’s just sort of a normal self-regulation mechanism,” Webb said. “In terms of the banking industry as a whole, or all of auto lending as a whole, I don’t think you see a significant worry about current underwriting practices. I think they are reasonable.”