Weekly Wrap: Q2 earnings brings recoveries on NCOs, auto book growth

Several auto lenders have benefited from positive recoveries and growth in their auto portfolios during the second quarter of 2021. Capital One , for example, logged a 0.12% recovery rate – the highest recovery rate reported so far in the second quarter. For comparison, net charge-offs at the bank stood at 0.47% last quarter and at 1.16% a year ago. Citizens One Auto Finance , too, posted a $2 million recovery in net charge-offs during the quarter, representing 0.04% of the portfolio. Both Capital One and Citizens grew their auto outstandings — by 56% year over year to $12.9 billion, and by 6.2% YoY to $12.8 billion, respectively. Meanwhile, AutoNation clocked a 49.8% YoY increase in its finance and insurance revenue to $369 million as more consumers purchase voluntary protection products, accounting for 27.8% of the retailer’s gross profits. In this episode of the Weekly Wrap, Associate Editor Amanda Harris and Editor Joey Pizzolato discuss the most recent earnings reports and what to expect in the coming week. Subscribe to The Roadmap Podcast on iTunes , Spotify , or download the episode. Auto Finance Summit, the premier industry event, returns October 27-29 in Las Vegas. The Summit continues to bring together the best and brightest in the industry year after year for unparalleled networking and professional education. To learn more about the 2021 event and register, visit www.AutoFinanceSummit.com . Video Transcript: Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain . Amanda Harris 00:02 Hello everyone and welcome to the roadmap from auto finance news since 1996, a nation's leading newsletter on automotive lending and leasing. It's Monday, July 26. I'm Amanda Harris, Associate Editor auto finance news. I'm joined today by Joey Pizzolato, editor of auto finance news. And this is our weekly wrap on what happened in auto finance for the week ending July 26 2021. As always, I want to thank auto finance news advertisers Dealertrack, defi solutions, spireon, agora data and alfa for their continuing support. First in some general economic news, us new home sales hitting unexpected dip in June, falling to the lowest since April 2020. So purchases of new single family homes fell 6.6%, which is likely indicating weakening consumer demand amid a tight supply and elevated prices, much like we've been seeing in the vehicle space as well. In the auto industry Honda Motor Company last week double down on a strategy to form strategic partnerships, and an effort to shift more aggressively to electric vehicles. Last year, Honda reached an agreement with General Motors Company to jointly develop two new Honda evs. And the chief executive officer recently said the company is open to working with others in different industries when it comes to developing software using a EV's so it's gonna have to see how that plays out. And in a move that could impact regional manufacturing of vehicles, the US and Mexico failed to resolve a dispute over trade rules for cars during a recent meeting. The conflict focuses on how to calculate the percentage of a vehicle that comes collectively from three countries. Under the US Mexico Canada agreement, which took effect last July when it replaced the North American Free Trade Agreement. Mexico together with Canada has been considering filing a formal complaint against the us under the new agreement. And then in auto finance, we've been following the second quarter earnings season. And it's already yielded some interesting trends. So this week, our team looked into Autonation, Capital One and Citizens One auto finance, the main takeaway was really a shift away from charge offs to recoveries, and a related pullback on allowance for loan losses. So for example, Capital One I'll just kind of talk a little bit about their earnings. They lost a point 12% recovery rate, which is so far been the highest recovery rate we've seen for the quarter, that remains to be seen it that will hold true, we do have more earnings to come out. But so far, that's that's the highest we've seen. And as a comparison, the net charge offs at the bank last quarter stood at point four 7%. And they are down from about one point 16% this time a year ago. So definitely a pretty big change there. And we know from last week's coverage, and we talked about this last episode, Allah financial and US Bank also posted positive recovery rates. So it's definitely a trend that we're seeing so far. Another trend is credit performance has continued to be really strong. Capital One saw a slight decrease in those about two basis points sequentially in their 30 plus day delinquencies, which sat at 3.26%. And that was largely due to historically high consumer payment rates. So consumers are, you know, paying their auto loan payments on time. We know stimulus really helps with that it still seems to be propping up people were able to save money. So they're able to kind of make those payments. So we haven't really seen too much of a fall off on that. And then with everything kind of looking pretty positive allowance for credit losses, at Kaplan accounted for 3.3% of their balances, which is down from 3.9%. Last quarter. This is put that in some perspective, for auto there originations increased 56% year over year to 12 point 9 billion and outstandings grew 7% year over year to 71 point 7 billion. So cap one pretty strong quarter. But that's kind of in line with what we've seen so far. And I know we had some other kind of similar results so dirty when talk about what we're seeing at citizens,Joey Pizzolato 04:30 of course. So you know, late, like you mentioned, one of the bigger trends that we're kind of keeping an eye on this quarter is net charge offs, and more specifically, recoveries. And we are seeing quite a number like you mentioned US Bank, ally financial citizens. I believe there was another that I'm probably forgetting right now that that is recording, recovery on net charge offs. Um, these are largely driven by two factors. Elevator use vehicle values, which we are expecting to see for, at least through the year. Well, I mean, the market can move. So we'll see how that goes. But also, like he said, lower provisions for credit losses, which, you know, as, as everyone knows, we is a balance sheet adjustment, which does help on on that recovery side. But this is an unprecedented situation, I would guess. Mostly because, I mean, I've never seen net charge offs in the positive before. So so this is a point of really great profitability in the industry. I'm not sure how long this will last, I would imagine. You know, we will see more lenders record recoveries, again, based on, you know, elevating us vehicle values, and also, you know, reduce provisions or, you know, a tape back on on those reserves. But I wouldn't imagine that this would be something we are going to see into the third quarter. As far as originations goes, No, auto is super strong right now. And again, like a year ago, view, it asked me where we would be. Now, I would have said, delinquencies were gonna spike, but they're not. And, you know, the auto industry is really recording quite significant growth. And I feel like that that might continue through the rest of the year.Amanda Harris 07:01 Great. And then we had kind of a different take from auto nation, you know, they're not obviously the same, exactly the same as some of the other ones that we covered. But what kind of stood out there and kind of what does that say about performance this quarter? Yeah.Joey Pizzolato 07:17 Um, so if you will hit auto nation. And what we're concerned with finance and insurance, you know, that revenue is continuing to grow, consumers are still flocking towards that as ticket prices increase on new vehicles as us vehicles are more expensive. Consumers are more aware that they could potentially be underwater for a majority of their loan. So you know, they are taking steps to, you know, curb that. You know, we saw Wells Fargo increased their allowance, I don't know, maybe a month ago, on what they're willing to finance for gap products. Largely that was because the price is increasing. But that doesn't seem to be the turning customers away from these products. So I would imagine, you know, f&i is going to continue to grow, which is good for lenders. Um, you know, we've seen for the last at least three quarters, the same kind of growth at shift, actually exponentially lot larger than what we're seeing in auto nation. But I think I think everyone right now is kind of reaping the benefits from pent up demand. Everyone wants cars. For some reason. I hate cars. I don't know what one you want a car.Amanda Harris 08:59 A new one anyway. Yes.Joey Pizzolato 09:01 Somebody asked me last week, or this weekend, literally. Well, what? Like, what, what? What's the American dream? I was like, not to own a car. I live somewhere even. Yes,Amanda Harris 09:14 if I live somewhere, and I can walk everywhere. I probably wouldn't be as in the market for one. You know, because they are they're expensive right now. And you have to maintain them. But there are options to like I get subscribe to one for anyone for a week. You know, I can hop in an Uber. I mean, like there there are options that involve cars without owning one. If you live somewhere, I did not live somewhere. That that would Right.Joey Pizzolato 09:38 Yeah. I mean, I'm in New York. So I can, you know, hail a cab or, you know, hop on somebody. You know, scooter? Amanda Harris 09:46 Yeah, we have a free bus system here would take me maybe down the road to Walmart. That's about it. So, you know, any more than that? Great. Well, thanks, Joe. I think Looking ahead, we do have more earnings coming up. So just some examples. We've got Asbury automotive coming up consumer portfolio services, credit acceptance Corp, Ford, Sonic automotive, we've also got a story in the works about some auto refinance space, which is a whole other can of worms kind of benefiting from everything that we talked about today. So stay tuned to read those developments. And as always, we want to hear from you. So please write the roadmap on whatever platform you use to listen to the roadmap, and follow us on Twitter and LinkedIn. Thank you for joining us today and we'll see you online auto finance news dotnet in your next time.

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