Weekly Wrap: Industry pushes forward with cautious optimism

This week, the Auto Finance Summit was in full swing, and a resounding theme among executives in the industry was one of cautious optimism . Initial forecasts surrounding the fallout of the coronavirus pandemic haven’t yet come to pass, as the third quarter was marked by strong credit performance, origination volume and used-vehicle values . Still, peak credit losses are expected in 2021 , which could be problematic as lenders look to forecast the coming year amid flattening credit loss provisions. In this episode of the Weekly Wrap, JJ Hornblass and Joey Pizzolato discuss the top takeaways from the Summit and the week ending Oct. 23, and what to expect for the week to come. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; } Video Transcript: Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain . JJ Hornblass 00:00 Hi everyone and welcome. This is JJ Hornblass, your host for this episode of the roadmap from auto finance news since 1996, the nation's leading news source on automotive lending and leasing. This is our weekly wrap for what's happening in auto finance for the week of October 19 2020. I want to thank first off our advertisers for their support, and they are alpha auto IMS d fi solutions and AP is we are very appreciative of their participation. And I am today joined by Joey Pizzolato, the deputy editor of auto finance news, Joey How you doing? Doing well, Dylan? Good to see you. It is Friday, October 23 2020. This week, the presidential campaign entered its final phase remdesivir became the first COVID-19 treatment to receive FDA approval. new federal stimulus remained pending. Seems like a political fight is continuing their Goldman Sachs agreed to pay $3 billion and clawback executive pay over its role in the one MDB corruption scandal. The Justice Department filed an antitrust suit against Google. A good chunk of third quarter bank earnings are now in and the results have been better than expected. Guinness, the National beer of Ireland or at least I think it's the National Bureau of Ireland has launched its first alcohol free beer. Guinness first started brewing beer in Jones, you know the year 1776 1759. Very good, you definitely get points for effort. And finally this week, the auto finance summit took place. Let's discuss the auto finance summit. We had several sessions, obviously, and several excellent sessions, extensive participation from the industry. It was held virtually but I think overall, we can say that we're pleased with both the content and the engagement from the industry. We hope it was a valuable event for everyone. So let's just start with that. What was your general feeling? What's your general feeling about the market now that you've kind of come through the auto finance summit, Joey, and heard all the speakers? I mean, what's your general? Where are we right now in the market? And what's kind of the general expectation or feeling about the industry is strength or weakness? heading into 2021?Joey Pizzolato 03:13 Well, I would say, you know, the resounding theme was one of our quote here because people said it a lot. cautious optimism. You know, we've seen a lot of lenders with still very strong credit performance origination numbers, specifically for you know, Chase Bank and ally financial were through the roof, they posted record originations, I believe 11 billion and 9 billion respectively with some China 29.8. So it seems like, you know, car sales are picking back up, um, consumers are still making payments on their loans, payment, deferrals and loan modifications have come to an end and a lot of consumers are either current or making payments. Um, so right now, it seems like everyone is in a good place. However, it's also seems like everybody still expects that we have not seen peak charge offs just yet. And they're expecting that will end sometime in the next year, whether it be first half second half, it's still to come. So so it really seems like, you know, things weren't as bad as they is they were forecast to be in April. I think everyone's really grateful for that. Um, but still very much, you know, wanting to not get ahead of ourselves. And I thinkJJ Hornblass 04:36 there is a tendency on the part of some executives to kind of downplay the highs, and I'm, you know, under a, and as well downplay the lows. And, and I think that this market is way better today than the expectation was in April, I think you've got, I think that there is nothing short of surprise, I really think that the expectations for car sales for originations and credit performance are way better than they had expected. Agree. And, and I wouldn't even also, even from the operational standpoint, I think that first of all, you know, we know, we've written a lot about not just, you know, the, I guess, the reluctancy, to adopt digital processes. You know, look, it's not every lender, but generally there is a lot, I think that this industry is, is has has digitized to a lesser degree than some other industries. And so the whole work from home game, my, my sense is, the expectation was that this was going to be a disaster and a half. And when you've got credit performance, that's not just not as bad as they thought, but better. And the entire servicing team is operating remotely. And there were really even contingency plans to have an entire servicing team working remotely. You know, this is like, home run territory, in a sense, you know, for it for the industry. So, my, my feeling coming out of HFS, is that I think there's like a bullet dodged for a lot of lenders for a lot of lending executives, for the industry as a whole. And, and even, I mean, don't you feel like even the, the, the forecasts for 2021? We're really not, you know, if they weren't recession like, Joey Pizzolato 07:12 no, they weren't, I mean, some of the forecasts have us back in that 16 million range as soon as next year, which is, you know, really unheard of, when you think about, you know, we talked a lot about not comparing this recession to the last recession. But, you know, in some some cases you still do, and to get back to a 16 million star after the credit crisis, I believe it took five years. And to get back, now, we're looking at less than a year that that's 07:42 aggressive. Yeah. JJ Hornblass 07:43 I think that this this kind of, like, you know, outperforming the expectation, I, my feeling is, is strikes a bit of fear in the heart of lenders in the sense that, okay, we had an expectation of X, and it's, what is it x plus 20%, or something like that. And so now, when we're heading into 2021, and you've got, you know, the expectation, another expectation, and that's for peak losses, which seemed like most people felt was going to be in the first quarter beginning of second quarter, I guess. Joey Pizzolato 08:29 We're not seeing that those either yet. JJ Hornblass 08:31 Well, I'm talking about in 2021, I'd say and the first quarter of a century, so eat, but there. I think the the failure, frankly, to properly forecast the the 2020 performance, both from a, from a origination side as well as the credit performance side. I mean, I think, you know, if you're a lender going into 2021, and you're supposed to model out, you know, peak losses, you you've got to take a bit of a pause. Because you were pretty wrong, not just in 2012 I forget the pandemic dynamic. I'm talking about wrong within the pandemic that the between April and September of 2020, you know, that there was there was really a miscalculations. And so you know, who's to say that the that the forecasting in 2021, especially on peak losses is going to be on point. Joey Pizzolato 09:45 Well, I definitely agree with you, right, like, of course, it's great that the forecast so far has been wrong for 2020. Great for the market, great for lenders, but it should, it shouldn't cause a pause right for anybody in this room. Looking at 2021, and trying to forecast that out, there should be a moment of pause to say, wait a second, how accurately Can we really forecast what's happening in 2021? Right with one degree of certainty. JJ Hornblass 10:14 Right. The problem is, Joey, is that the the miscalculation can go in both directions, meaning to the upside or to the downside? And I mean, the miscalculations right now are completely to the upside. Hmm. Why, when you look at credit loss reserves, and actual credit performance right now, I think that there is like a disconnect. I think that there is a miscalculation, I think the reserving that is going on right now, probably, at least, if you look at the current state of credit, performance, is probably out of sync, meaning there is too much reserving visa v credit performance right now, and, and that has earnings implications, sure, to the upside, but you know, like everything in, in financial modeling, you kind of want your modeling to be accurate, or reasonably accurate, even to the upside has its own sort of implications were from let's say, like a investment earnings per share standpoint, you've got a disconnect, you know, your, your your valuation is, is is kind of wrongly being colored by a credit loss reserve, that is, you know, maybe too steep. Joey Pizzolato 11:54 And then on the other side of that coin, you know, if if lenders now think that they have enough put away, and they're going to start pulling back some of those reserves, and we're already seeing that in third quarter earnings, you know, provisions for credit losses, they're not increasing the same way they were in q1 and q2. So if the expectation is we're still going to see higher credit losses, we should have higher provisions to account for that. JJ Hornblass 12:20 Right, right. Yes. But I mean, I think they're already out reserving I mean, you if they're not, they weren't upping their reserves in three q. So they're already flat on reserves, but but the sorry, on four q excuse reserves into four Q, but the three q loss numbers, you know, they weren't even close, they weren't even close to what they were expecting, you know, back in two q when they when they made all these reserves. So I just, I think that it, you, you've got a, like so many things. In today's world, the degree of uncertainty just seems to amplify, even though the auto finance market is in a completely positive position right now, and well beyond what was expected. You know, back at the beginning of this terrible pandemic. Let's talk about what's going on next week, shall we? Joey Pizzolato 13:26 Yeah, more more earnings. And we have a ton more content from from auto finance summit, to push out. So we'll be playing catch up really, um, we, you know, auto finance summit this week, kind of blocked in the second week of earnings season. So so we'll definitely be playing catch up, seeing how everyone else performed in q3. JJ Hornblass 13:50 Right. And potentially, maybe a little bit of a follow up on on one of the big news stories out of the industry this week from outside of this summit, which was Key Bank deciding that it would leave the indirect auto finance business. Joey Pizzolato 14:06 Yes, that was announced on Wednesday. And they're they're leaving, you know, it was interesting. And my initial thought when I when I kind of scoped out, the news was that we have our first you know, pandemic related casualty in the auto finance industry, but really, you know, when you look at it at their, at their earnings presentation, and you listen to their CEO talk, really, it was just, you know, indirect auto being kind of like a third party third arm lending structure, apparently doesn't lend itself to their relationship model around banks. So, you know, that's just a really fancy way of saying we want to keep you in the fold and continue to sell you products and auto doesn't really indirect auto, excuse me really doesn't lend itself to that. According JJ Hornblass 14:53 to if you want my Do you want my opinion on that? Of course, I always want your opinion. Well, I don't know if you want my opinion. My opinion on that is, well, that it doesn't really make a lot of sense, because there are plenty of auto finance companies that are deeply deeply entrenched in commercial relationships with the auto industry broadly, and auto dealers specifically. And auto finance is absolutely a vehicle for relationships. It may be that they're the that their prop their relationship problem, as we might call it a key, maybe that their penetration rate on floorplan financing wasn't enough. And that didn't allow for enough of a significant a significant financial arrangement with dealers, and that started to just erode their indirect lending, and meant that they just you know, it wasn't it became a less viable business line. But auto finance doesn't allow for relationship banking. 16:08 You know, whatever. JJ Hornblass 16:10 Who am I to say, Who am I to say? Joey Pizzolato 16:13 I think that's a really good point, because there was one telling line, and I don't have it right in front of me. But really, I think what he was saying was that their yield, which I believe was around 6%, on 16:26 their auto book, Joey Pizzolato 16:27 is less than they can get in other lines of business. And I think that i don't i don't i don't i didn't look too far, but I mean, JJ Hornblass 16:35 yields or yields are definitely tied on, on, on on commercial auto finance facilities, there's no doubt about it. But the but the, but the credit performance is strong there. So, you know, that's it's not, you know, yields are not the defining criteria. NIMS are the defining criteria, you know, net interest margin, so the defining criteria, so, you know, just because you have a low yield, you know, gross yield doesn't mean that your your net, your, your net interest margin isn't worthy of your asset and liability criteria. So anyway, I want to thank everyone for joining us, Joey, and I very much appreciated your attendance. And we hope you'll visit us on the roadmap again, and rate us on on iTunes or Spotify or wherever you listen to your podcast. We certainly very much appreciate it. And of course, we want to encourage you to visit us at auto finance news dotnet, where we have all sorts of coverage from the auto finance summit and so much more. Thanks, everyone for joining us. Take care. Thank you.

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