Weekly Wrap: second-quarter earnings season kicks off [Video] |

This week Bank of America , Chase Auto , PNC Financial , U.S. Bank and Wells Fargo Auto all reported increases in allowances for credit losses despite a dip in delinquencies and charge-off rates, a trend the banks are largely attributing to robust deferral programs aimed to slow the economic damage wrought by COVID-19. In fact, many auto lenders have now transitioned to case-by-case deferral programs to help consumers with payments. Still, there is concern that the repossession industry may not be equipped to handle an expected increase in attempted recoveries due to the coronavirus pandemic.

In this edition of the Weekly Wrap, Joey Pizzolato and JJ Hornblass discuss news developments during the week ending July 17, and which companies will be releasing their earnings report next week.

Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the same quality networking and education as past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com . Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain .

JJ Hornblass 00:01 Hi, everyone. I'm JJ Hornblass and welcome to the Roadmap from auto finance news since 1996, the nation's leading newsletter on automotive lending and leasing. This is our weekly wrap on what's happening in auto finance for the week of July 13. Before beginning I want to thank our sponsors Alfa, defi Solutions, FiS and Auto Rec for their continuing support. So thank you to them. And I'm joined as I have been recently by Joey Pizzolato, deputy editor of auto finance news. Welcome Joey. It is Friday, July 17. this week this specter of more COVID cases and more COVID related economic troubles returned. We also saw mortgage rates dropped below three 3% unheard of historically, when there is the start of bank earning season this week for two Q and mostly positive results, all in all, considering the pandemic. And finally this week we we heard that the Fed may allow inflation to climb above 2%, which would be a remarkable turn for Fed policy. But higher credit losses loss reserves was really the big story jelly, correct, was be at a wells, JPMorgan Chase, US Bank ally all higher credit loss reserves. But interestingly, it seemed like it wasn't the case that credit performance necessarily deteriorated. So So, we heard so for example, Bank of America, their CFO, Paul dinar frio, said COVID effects on asset quality remained benign. So what is going on here? So how could credit losses remain benign? Considering the recession and unemployment rates? Joey?

Joey Pizzolato 02:25 Well, a lot of lenders are still looking at pretty pretty large deferral programs Bank of America, for example, has 1.5 billion of outstanding auto loans into fro which represents about 3% of their total auto loan portfolio. And those are definitely pushing down delinquencies, as well as charge offs.

JJ Hornblass 02:51 Now, I mean, in a book like Bank of America is as as an example. I mean, they're not running a delinquency rate of 3% in a normal, you know, expression. reactionary economy,

Joey Pizzolato 03:01 no, not even a percent.

JJ Hornblass 03:03 Right. So this is like a three X, you know, this is like a three x deterioration in credit quality. So I maybe benign might not be the right word.

Joey Pizzolato 03:15 Well, you know, um, I think at this point it is a bank of america had last quarter also maintained, you know, that a lot of a lot of the deferrals they were seeing they thought were products of convenience rather than a necessity. So, you know, people shoring up some some extra cash, you don't have to make a payment for a couple months, why not take take up that opportunity? Um, so so they have maintained that once payments ramped back up and things or at least payments get back to normal that these consumers that were in deferral will continue to just pick right back up where they left off.

JJ Hornblass 03:54 I mean, that I mean, what's your what's the likelihood that I heard that Right, that was the sort of the pitch. Well, we defer all the consumers and let them get back on their feet. And then they're all gonna just like, magically, you know, get back on payment schedule. I mean, do you how likely what what do you think Joey, what's your back?

Joey Pizzolato 04:18 So I think with 3% of your auto booking deferrals, it's really difficult to tell whether or not you know, credit quality or the effects of COVID-19 is benign or not. Um, however, you know, for investors, you know, I think you have to say that, right.

04:38 I suppose so.

JJ Hornblass 04:40 Yeah, I mean, I think, I think my sense is, it's, it's, you know, you never bet 1000 as they say, right, so you're not 100% of those deferrals are not coming back there and you know, nor they have a normative delinquency and charge off right. So So that's it. That's to be expected. But I think you've got to expect elevated losses, delinquencies, and I mean, you know, if the, if the economy continues at pace, which seems more likely considering what's going on in the south and the West, you know, maybe it would be a less advantageous result, then maybe we might seem

Joey Pizzolato 05:29 agree 100%. And, you know, with with the deferrals, there's no really an insight. A lot of auto lenders are now on a case by case basis, rather than a blanket deferral program. So, you know, until those start to Peter off, we're really not gonna be able to see the effect the real effects of kind of the pandemic in the recessionary economy, but I would when that happens, I would expect an uptick in delinquencies and perhaps even charge offs for a loan of the industry.

JJ Hornblass 06:01 Yeah, I it was interesting. I thought that was a really a really interesting story that our colleague Amanda Harris wrote this week on case by case deferrals, that seems to be a linchpin to me. Because if you can modulate the firm deferrals to a case by case and sort of slowly close that spigot, it would seem that you know, through workouts through you know, custom, you know, effective customer service, maybe you can more effectively trans transition people back to being on a, you know, a current on their loans versus versus delinquent. Tell us a little bit about the this on demand deferral, I mean, you saw that I know, like General Motors, financial and Mercedes are all pursuing this kind of on demand for me how precious Basic hasn't become now.

Joey Pizzolato 07:02 I'm on demand deferrals are pretty much do our reporting are pretty much across the board. From what we've seen any any auto lender that had a blanket deferral program over the last three months, those ended at the beginning at the end of June. So, so now it's really on a case by case basis, but to your point, I think it is really important for the industry to use that as sort of, you know, to Peter off these these blown deferral programs and get people back paying because if they just start and the deferrals and start with, um, you know, collections or you know, that servicing, I guess, pathway, you know, you're gonna see a bottleneck of of repossessions, um, potential, potentially, excuse me.

JJ Hornblass 07:51 Yeah. I mean, the, the, you know, kind of looping back to the credit provisioning and the bottom line is the bottom line there? And it's kind of the commentary is sort of secondary to that. And I think that there is, you know, I think I think the expectation has to be for, you know, severe credit deterioration going forward. But I mean, there's another result from the pandemic. We spoke with Kevin column this week, the Nissan Motor acceptance corpse CEO. And he said something interesting. He said that he told us that. And Max, they've seen since the pandemic started an increase in activity or utilization of their online tools and and they're expecting to, for that momentum to continue to grow. And they have a number of projects underway to support the growing demand for online vehicle purchasing. I think the question that I wanted to ask Q is I mean, you know, with, with car sales depress the economy and recession, he's expressing a pretty acute need to invest more, spend more in technology and online innovation. And you know, I think that that's, we felt for the last at least the last couple of years that investment in digital auto finance has probably lagged what it should be on an industry wide basis. But yeah, happy now you're faced with a more pronounced dilemma. You've got deteriorating credit quality and and heightening demand for investment. I mean, how do those things say, Joey, how do you get around that? That that kind of conundrum?

Joey Pizzolato 09:48 I think it's tough. It's really tough. I think it's a it's a tightrope that, um, you know, you have to manage credit quality and credit performance, and you know, just to kind of real quick jump Back to your previous point, you know, the increase in credit losses is really what tells the whole story despite, you know, commentary from executives, all these banks are increasing their allowance for credit losses substantially. So the expectation has to be that there is going to be a deterioration in credit performance. But looking looking to digital, we recently got a new survey of 12 Auto lenders from Lenovo and 64 4% of those lenders said that the transition to digital and online financing was a number one priority going forward. Um, how quickly that will happen, um, as a balancing act between you know, managing losses and then making investments in innovation, kind of, I think is going to be on a case by case basis. Some of the larger lenders say, you know, GM financial, with, you know, more resources, that kind have live more in the prime area there will probably have a little bit more or be able to be a little bit more nimble as opposed to some of the smaller auto lenders say in the subprime space.

JJ Hornblass 11:12 Right. It was interesting in Brian Moynihan, the CEO of Bank of America in his earnings, that was what yesterday was BMA correct Yeah. So he said during his earnings call that they really saw the benefit from an efficiency standpoint of all their digital investments sort of come to bear those those efficiencies and the benefits will sort of came to bear in the second quarter during the pandemic. And so I think that the the part that is, I think the calculus that is really crucial, is kind of balancing this, this demand for digital and and kind of factoring from an office ROI standpoint, the efficiency game. And I don't think that, you know, there's been enough of that, you know, more more diligent technology planning to allow for that, you know, you could, you could spend a lot on technology but you can also spend or efficiency efficiently and allow for more efficiencies in your in your venture that to me is going to be the key if you can, if you can do that. And even in a depressed investment environment, you can still kind of come out ahead and meet the demands, the technology demands that we're seeing.

Joey Pizzolato 12:43 Well, absolutely. And you know, one one major talking Well, not talking point but major point of conversation in the industry has always been, you know, auto lenders trying to meet the customers where they're at. So if if we're seeing from consumers and increased interest in online commerce, And even more importantly, the financing option, um, online, then you know, it would behoove lenders to to meet them there and you know, perhaps had some of the losses they're seeing in you know, depressed car sales.

JJ Hornblass 13:15 Yeah, I'm with you 100 Joey I'm with you. Alright, so Joey, what do we got going on next week?

Joey Pizzolato 13:21 Oh, more earnings more earnings. Next week we have Fifth Third Bank be following their their credit loss provisions for their auto portfolio again, check their credit performance. I would imagine you're gonna see a lot of similar headlines. Then week next week in the following week. We also will be looking into auto auto nation's f&i numbers to see how depressed car sales have affected those numbers. And on the power sport side, we'll have synchrony financial next week as well for our power sports audience,

JJ Hornblass 13:55 biggest power sports finance provider in the country, I believe correct.

Joey Pizzolato 14:00 To my understanding, yes,

JJ Hornblass 14:02 yeah, they're big, big private label powersports finance provider. Well, thanks for that. Joey. I want to remind everyone that the auto finance summit is coming October 2222. It has been declassified set of words word I don't know, digitize, I think I think digitize and digitize and it really shouldn't be an exceptional event. Joey has been spearheading our speaker invitations and some great speakers are coming. So check out auto finance summit Comm. We'd love to hear from you, of course, so please rate the roadmap on whatever platform you use to listen to your podcasts and follow us on Twitter and LinkedIn. Thanks so much for joining us on the roadmap. We'll see you online at auto finance news dotnet and thanks for being with us. We'll see you next time. Thank you.

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