Top Lenders Pull Back Auto Originations Amid High Losses
An analysis of first quarter earnings among 11 auto lenders — who together comprise one third of the overall auto finance volume — showed originations have dropped 4%, compared with the same period last year, according to Autonomous Research.
The banks include Wells Fargo Dealer Services and JPMorgan Chase, who saw the largest declines of 29% and 17%, respectively.
This is the third straight quarter Autonomous has observed a year-over-year origination decline, starting with Ally Financial Inc. and Santander Consumer USA in the first half of 2016, said Brian Foran, partner at Autonomous Research. More recently, Chase and Wells Fargo began showing decreased origination volumes in the latter part of last year, he said, addding that rising losses have been the main cause for the strategic shift.
“The two ways you’re seeing people deal with the current environment of rising losses is, 1) a lot of them are making underwriting changes that have made them a little more conservative — and therefore led to lower volumes — and that’s an effort to lower their loss rate over time,” Foran told Auto Finance News. “The other thing you’re seeing — particularly in the nonprime land — is raising the yields on new originations, so that even if losses don’t go down, they are hoping to improve their overall profitability by raising the price.”
Ally and CarMax are two examples of companies who have raised prices, he said, which increased their yields 50 basis points weighted across the credit spectrum this quarter. It’s a sign that profitability is in fact improving for lenders, but it will still take more time, he said, especially if lenders continue to change their mix away from the more profitable subprime segment, toward the less risky prime consumer.
On the other end, Santander is an example of a lender who has tightened credit requirements to improve the loss rate, Foran added.
Competition in prime loans continues to intensify, which caused SC to lose some marketshare among consumers with a Fico higher than 640, Jason Kulas, president and chief executive of Santander, said its first quarter earnings call. However, the company expanded in its nonprime portfolio to gain market share overall.
“I’d say the prime market is driven by deposit-funded institutions [that are] continuing to be very competitive in the space and that was reflected in [our] slight loss of share,” he said. “On the nonprime side, we’ve seen things maybe rationalize a little bit, but I think if you look across all of the top names, there’s probably an equal number of names that have picked up share in nonprime versus given up share.”
