Podcast: Weekly Wrap discussion on Citizens’ exit, changing dynamics

Joey Pizzolato 00:09
Hello everyone and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter and automotive lending and leasing. It’s Monday, June 12. Joey Pizzolato joined by Amanda Harris. This is our weekly wrap on what happened in auto finance for the week ending June 6, 2023. In general economic news, the Federal Open Market Committee is set to meet tomorrow and Wednesday, with all eyes on the Fed as to whether the US economy will see another benchmark interest rate increase. Generally economists and financiers expect the Fed to hold off on hikes for the first time in well over a year, but do expect one more 25 basis point increase sometime this year. In automotive news, may marked a bright spot for auto manufacturers as sales jumped amid increasing supply and incentive spending marking the 10th consecutive month of year over year gains but momentum could soon falter. seasonally adjusted annualized rate clocked in at 15 million units up 20% year over year, but down 7% From April according to the US Bureau of Economic Analysis, that’s down from an industry consensus of 15 point 3 million units. According to a research note from JP Morgan, American Honda and Volvo cars were the big winners among the seven OEMs that reported monthly sales figures of May. Honda saw 58% year over year jumped to just shy of 120,000 units and Volvo logged a 31% year over year increase to just over 60,000 units. Ford Motor Company sales meanwhile, increased 11% year over year to about 171,000 units. Hyundai Motor America notched an 8% year over year increase to 64,000 units. While Kia Motors logged 23% year over year increase to 71.5 1000 units. Subaru tallied 28% year over year increase to 54.5 1000 units and Mazda North America saw 117% year over year increase to 33,000 units. Still dampening consumer competence and high interest rates continue to put pressure on auto sales on a regional basis even as the wider industry sales posted year over year gains are top according to the Federal Reserve’s Beige Book. For Federal Reserve Banks reported increase in vehicle sales in May as three others reported falling sales the Atlanta New York and Chicago Feds reported modest increases in sales while Cleveland Dallas in the St. Louis Feds reported sales pressure. On the used vehicle side. Used vehicle values continued their downward slide in May as US car retail sales held steady sequentially but lag at last year’s levels. The Manheim us vehicle value index dipped 2.7% month over month and fell 7.6% year over year to 224.5. In part due to seasonal adjustments, according to Cox automotive on a non seasonally adjusted basis, the index decreased 1.7% month over month and 8.2% year over year. The decline marks the second sequential dip in US vehicle values this year following a 3% month over month decline in April, the rate of year over year price declines is expected to slow in the coming months since prices were low from May through November in 2022. According to Cox perhaps the biggest story last week was citizens financials exit from indirect auto lending and the changes in the auto finance market that spurred it, Amanda Harris has the details.Amanda Harris 03:40
Yes, so obviously not super surprising, because we had been reporting, you know, for about a year, at least four quarters of citizens pulling back on auto lending, again, with interest rates just as high as they have been, banks really haven’t been able to compete with, you know, some other financers who could offer more competitive rates, captives, you know, sold a lot of share, credit unions picked up a lot of share. And it really just came down to the fact that banks had to prioritize where they’re putting, you know, their capital, and putting it in assets that you know, are higher returns, they are also prioritizing relationships that they have with consumers. So areas of their business that they have stronger relationships with and lending auto hasn’t really been a huge relationship builder for banks, again, that’s, you know, through the indirect side is through their dealer partners. So they’re just, you know, an option at the dealerships. For consumers. As far as financing goes, there’s not really a strong connection there, as it would be for other products that bring them into branches and things like that. So banks are really prioritizing that relationship side, especially as there’s more scrutiny following you know, the regional bank collapses back in March or certainty of how banks are using and capital. So that’s part of it, as well as just the changes in the market, other kinds of factors that banks are considering. It’s just indirect lending in general, is changing. There’s electric vehicles, there’s now a mix between EVs and regular ice vehicles. And you know, all that kind of brings a lot of unknowns into the market. And banks aren’t as plugged in because they’re, you know, like I said, kind of more an option at the dealership, where as captains are very plugged into everything happening, and even financial companies who do a lot of auto are very plugged in as well. So there’s, you know, a couple of different factors that are driving banks to kind of reconsider where they’re putting their assets. And indirect auto just doesn’t seem to be a high priority, at least for some of them. And we could see more banks do this same type of thing either pull back further on auto lending, or leave indirect auto lending in general. And it should be noted citizens, as well as some of the other ones, mechanic banks, and Key Bank that pulled out indirect lending as well, the banks don’t have a direct auto arms. So this would be them exiting auto completely. So just to mention that and they are going to continue servicing their existing loan portfolios until they run off. So there hasn’t been any plans to sell those or anything, they’re just going to kind of stop originating new loans through dealerships. So for the dealership side, I mean, that could be it could mean Costco up because they have fewer options, as far as you know, who they’re working with, as far as banks and lenders in general. But it really comes down to how much of that business was tied to, you know, citizens in this case, or any bank that leaves those dealers just need to find another linear kind of fill that hole, I don’t really think it’s a huge thing that will happen in the industry, because I don’t think that these books were very big to begin with. So it’s not going to be a huge shake up or anything, but it is worth noting. And if more and more banks pull out, then it could potentially have a larger, wider impact in the industry and drive costs up for dealers, for lending as well. So just kind of a wait and see what happens and who else kind of makes the same decision.Joey Pizzolato 07:00
Right? And if you look at all these banks that have been pulled out, yes, they have a national footprint, but they do have regional bank mentality. Right. And it’s not surprising that, you know, given everything that’s been happening with the regional banks, and potential new reporting and capital requirements coming down from regulators that they are taking a hard look at their portfolio. It was interesting, I was talking with a source yesterday in you know, he just offhand mentioned that auto finance has the smallest margins of any finance product at banks, which explains, you know, when you have to put that capital of work and maximize your net interest margin, that, you know, auto would be the first on the chopping block. So I you know, I definitely agree with your sentiment that if anybody is going to pull back from auto would be the regionals. I certainly, you know, and I don’t think you were in insinuating this by any means, but I certainly don’t think we would see, you know, the actual the real nationals, you know, you know, pull out ever they might pump the brakes like they have been but you know, Wells Fargo Chase auto bank, America, they’re not going anywhere.Amanda Harris 08:13
No more the smaller regional banks who have a similar mindset to the ones that we’ve already seen. Pull out of indirect auto, the ones who, whose indirect auto business likely wasn’t a huge part of what they do. Anyway, so.Joey Pizzolato 08:28
Right. Well, that about does it for today’s episode. Thanks for joining us on the roadmap and be sure to follow us on LinkedIn. We will see you online and auto finance news dotnet in here next time.