Earlier this week, the Federal Reserve released its Beige Book report, an eight-times-a-year, word-on-the-economic-street report on the state of the U.S. economy. The Beige Book is not a quantitative look, but rather what amounts to economic scuttlebutt — and, as a result, offers an early warning of future economic trends.
What was interesting about the Beige Book released last Monday is that it revealed a subtle divergence in banking fortunes. While auto lending appears to be regionally strong, and in some cases extremely strong, the overall banking market seems to be less so. Consider the report from the Federal Reserve Bank of San Francisco:
Overall loan demand increased moderately since the previous reporting period. Contacts cited stronger demand for auto loans, credit card loans, and small business refinance loans. Vigorous competition among lenders engendered very favorable loan terms for the highest-quality borrowers. Net interest margins remained narrow, and shrank further for some banks. Some contacts reported that, in their area as a whole, the profitability of community banks declined during the reporting period.
So, to read between the lines, lending — and auto lending, in particular — is going well in San Francisco, yet banking profitability is on the decline. The stubborn resistance of lending rates to expand is one reason for that. The yield on a 10-year Treasury note today is 2.308%, down on the year. That’s not going to light up the P&L.
Auto finance has not been immune to lackluster money rates. The year-over-year increase in a prime, 48-month, new-car loan rate: 18 basis points. Again, nothing great there.
Yet, when you consider the credit landscape, auto remains a bright spot. The Federal Reserve districts of San Francisco, Atlanta, Chicago, and Richmond, Va., this week all cited particularly strong auto lending.
To me, this implies a continuing advancement of interest in auto lending. The core performance numbers in auto lending remain within acceptable bounds. The Experian industry data also released this week shows cracks in the auto lending facade, such as growth in the share of new-vehicle loans in the 73-to-84-month range of almost 24% last quarter compared with the previous year. But I don’t see these cracks as minor.
What is more problematic will be the longer-term implications of this gravitation to auto lending. The lack of yield elsewhere in banking’s product appears as though it will set higher-than-reasonable expectations for returns on auto loans — despite what every industry executive will tell you. Truth is, they (I, too) may not even realize or fully understand the degree to which a 2 point increase in average credit scores on used vehicle loans, as was recorded last quarter, mean to overall auto finance credit risk.
As we head into 2015, there seems to be a subtle change in the auto lending environment, and I point to this divergence between auto lending and overall banking performance. I would expect changes to come in the handful of basis points, but, in the end, that could add up to the detriment of us all.Like This Post