Weekly Wrap: Q3 earnings predictions

Last week, new September data points in unemployment, used-vehicle values and new-vehicle sales painted a less-than-optimistic picture of what’s to come during the third-quarter earnings season as the auto finance market begins to cool, following two quarters of robust growth. The unemployment rate dropped below 5% even as job growth slowed well below economist estimates, and the Manheim Used-Vehicle Value Index hit a new record in September . New-vehicle sales, meanwhile, dropped to a 16-month low in the same reporting period to 12.2 million units. In this episode of the Weekly Wrap, Deputy Editor Amanda Harris and Editor Joey Pizzolato discuss their predictions for the forthcoming earnings season. Bank of America, Chase Auto, Truist, US Bank and Wells Fargo are scheduled to report this 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 . Joey Pizzolato 00:02 Hello everyone, and welcome to the roadmap from auto finance news since 1996, the nation's leading newsletter on automotive lending and leasing, it's Monday, October 11. And I'm Joey Pizzolato. Joining me today is Amanda Harris and this is our weekly wrap on what happened in auto finance for the week ending on October 8. Before we get started, I want to thank auto finance news advertisers, Alfa, Cox Automotive, Cedar CX, Dealertrack, defi Solutions, NCB LexisNexis, Verisk, Wolters Kluwer and Westlake Financial for their continued support. In general economic news, US job growth slowed in September as unemployment dropped to 4.8%. Non farm payrolls increased 194,000 last month compared with an upwardly revised 366,000 gain in August. September's fear is a far cry from the median projection of 500,000. Gains according to a Bloomberg survey of economic economists. Slow job growth could be seemingly a tempering of the labor of labor market recovery and complicate the Federal Reserve's decision to taper its monetary support by the end of the year. In auto, the Manheim used vehicle value index hit a new record last month rising to 2.20 4.8 and eclipsing the historical record set in May. At the same time this September new vehicle Sarge up to 2012 point 2 million units as inventory constraints came to a head. We vehicle sales have been slowing throughout the quarter as consumer demand outpaced available product available product. Us retail supply sits at about 37 days, which is just seven days below the industry standard and new vehicle inventory fell to 18 days. Normal supply for new vehicles sits usually around 23 days. Which brings us to the topic of our third quarter earnings reports which kick off Wednesday starting with JPMorgan Chase, followed by Bank of America Wells Fargo and US bank on Thursday and finishing off on Friday with truist Bank. So Amanda, let's let's talk about our predictions. What do you think is coming?Amanda Harris 02:19 Sure. Um, so obviously, with new vehicle sales slowing, I think this was September mark the fifth consecutive month of new vehicle sales slowing down. And it really was like the worst month so far. And I think about the last 16 months that we've seen for SAR and new vehicle sales. So that obviously will paint a picture going into third quarter earnings that obviously they're selling less vehicles or financing this vehicle. So origination volume is likely going to be down probably across the board. We pulled out a couple examples in our story today of some of the OEMs that we know, you know have struggled with, with vehicle sales, particularly in this month. For example, Ford, their retail sales fell about almost 21% this month, Hyundai also was down about 5% and then Toyota Motor, North America's sales dropped 22% and these are all year over year for September. So we know that that's kind of the tail end of the quarter. And we know when we go into on the financing side that's going to impact things quite a bit. So originations are likely going to be down but I do think we're we're gonna see is still be positive is the profitability side. Because even though origination volume won't be as high, we know probability right now is just sky high. Vehicle sales are still very, very elevated incentives are very few and far between if you can find any, they're typically not really used right now at all, of course, with everything going on. So do you think we'll continue seeing the profitability for for example, last quarter had their like record EBIT, earnings before taxes? You know, charge offs and delinquency rates are still not a concern for the industry, they're still wait very, very low. So I think that will continue because there's nothing really in place that should change that drastically. They may take up a little bit, because we know stimulus has ended. In a lot of ways a lot of the help that's been out there propping up consumers has ended. But no one seems super concerned that it's going to just be this high spike within the next really the rest of the year. Because there's just so many things still going on. That we're keeping them lower. So it's kind of just might just so what I think will happen are the same. But down on the origination side because of sales being to the point now where inventory is hindering them Joey Pizzolato 04:58 right? I'm in claiming to agree with you on on all accounts, I do think that some lenders, especially the ones that have a presence in the US vehicle market, like such as you know, Chase auto ally financial, we probably will still see a strong origination growth just because you know, US vehicles have been selling and they are highly competitive in those markets and with dealer networks that far surpass, you know, some of the smaller guys in the space agreed as well on the on profitability EBIT, I'm sure we'll see a small uptick in charge offs. And, or delinquencies, just as the market sort of begins to ease its way back to normal. But, again, these record use vehicle values, we've seen it in the past, they jack up recovery rates for these lenders, and that's, that's a really great balance sheet item to have. On top of that, you know, I wouldn't imagine you know, credit reserves are going to move that much if at all, um, you know, given given the current current economic environment and vehicle values being where they are still. So, we will likely won't see any kind of, you know, balance sheet expenses element, like increasing from last quarter based on based on those those metrics. So that all that all means, good news for for earnings as a whole. Right. Um, in origination side further, you know, I would, I would say that industry wide will probably see a small dip, especially some some of the some of the banks that that aren't as aggressive in the market as as some others. Amanda Harris 06:51 Yeah, we know, like criteria and all that, that means you've got moved a little bit, it's kind of back to normal. So that might impact things as well. I think it also be interesting to to see how like this whole, we've talked about a little bit like the built order, and how that kind of plays out on the financing side of things. how that might impact numbers kind of going forward. You know, I may not have a huge impact right now, because a lot of those are obviously, future orders. But I think it'll be interesting to see just what, what comes out of them talking about things going on during their earnings calls. So I imagine there may be some just interesting conversation happening just around the earnings coming out in general, not necessarily like the numbers themselves, but the conversations that we might hear. I think that'll be interesting that kind of know, where they think the industry is going and kind of giving an update on where things are, this is a good chance to kind of hear from from people we don't get a chance to talk to too often. So I'll be looking forward to seeing what they say. Joey Pizzolato 07:58 Right We usually just for sort of focus on the captives performance in earnings reports, but but this quarter especially I think you're spot on, we definitely need to listen in on on the OEMs conference calls to see what they had to say about the state of the market. And you know, if they have any, any solidified plans for the future, investors are looking for, you know, more so than they're looking at past performance. They they really want to see, you know, where the trajectory of each individual company on the heels of earnings statement. So I think it's definitely within their best interest to disclose some of those more solidly than, than they've hinted at, you know, certain public statements that they put out over the last quarter, especially Amanda Harris 08:43 as the financing funnels and stuff might not like change too, too drastically. But they might change a little bit just given everything going on with digital and all these things popping up. So it just be interesting to see like, what comes out of it and how things are connected. With all with all the new things coming out. Absolutely. Joey Pizzolato 09:04 Well, the capitalism report, believe, not next month this week, but maybe the third week of October right during Fs so we'll be on those as well as our conference coverage. Speaking of AF s. We are just two weeks away from the auto finance summit, which takes place October 27 to 29th in Las Vegas. To learn more about the 2021 event and register visit WWW dot auto finance summit calm and we look forward to seeing everyone in Vegas. As always, we want to hear from you. Please rate the roadmap on whichever platform you use to listen to the program and follow us on Twitter and LinkedIn. Thanks for joining us, and we'll see you online at auto finance news dotnet and here next time

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