Recent fourth-quarter earnings from some of the biggest players in the auto finance industry paint mixed results in loan performance and origination growth.
U.S. Bank, for one, saw an uptick in delinquencies and net charge-off rates, but decreased its total provision for credit losses after building a substantial credit loss allowance during the COVID-19 economic crisis. Meanwhile, Ally Financial celebrated a significant increase in auto originations at yearend 2020, and decreased its allowance for credit losses.
Access to auto credit improved slightly in December, as auto lenders have slowed building credit loss reserves. However, credit access remains tighter year over year, and from the height of the pandemic.
Smaller players, too, contributed to the auto finance industry’s prospects amid the pandemic. Huntington Auto saw a fourth–quarter decline in U.S.-based vehicle floorplan outstandings as inventory struggles to reach last year’s levels. At Fifth Third Bank, on the other hand, auto helped offset declines in other consumer loans.
In this episode, Amanda Harris, JJ Hornblass and Joey Pizzolato discuss what recent earnings represent for the industry, and what is to come in the week ahead.
Auto Finance Innovation Summit, the premier event for technology in auto finance, returns March 16-17, 2021, as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2021 event and register, visit www.AutoFinanceInnovation.com.
Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain.
Hi, everyone. I’m JJ Hornblass and welcome to the roadmap from auto finance news since 1996, the leading news source on the automotive lending and leasing industry. This is our weekly wrap for what’s happening in auto finance as of February 2 2021. Thanks go out to auto finance, finance, news, advertisers, Exeter finance and stroke and stroke and navan for their continuing support. So thank you to to them, and so happy to be joined by Joey Pizzolato and Amanda Harris of the auto finance news team. Hi to both you. First to our general news. In general news silver futures settled an eight year high settled at an eight year high in New York on Monday, which was the work of a loosely knit group of investment speculators. Today February 2, Amazon and Google are expected to report quarterly record earnings driven by online holiday shopping.01:12
JJ Hornblass 01:12
announced that it would recall roughly 135,000 Model S vehicles over a touchscreen failure issue. A major winter storm blanketed parts of the Mid Atlantic in up to two feet of snow on Monday, delaying COVID-19 vaccinations and testing. This storm also blanketed New York. I’m in New York, I was in Central Park yesterday, it was unbelievable. The pandemic finally the pandemic has motivated people to buy life insurance. The Wall Street Journal reports life insurance applications jumped 4% in 2020. In the United States, this is the highest year over a year annual growth rate since 2001. And in auto finance, industry news, I there were several important players in the auto finance industry that released earnings in the last several days. We’re going to cover some of them during this podcast. And we’re going to start with US Bank, which saw an uptick in fourth quarter delinquencies and net charge offs. But a decrease in in its credit loss provision. What is happening at US Bank in its auto finance business?
Amanda Harris 02:52
I’ll take that one. Yeah, so like you mentioned, we did see an uptick in delinquencies and charge off rates in the fourth quarter, that was expected. Because we know that assistance program stimulus, you know, all that really propped up consumers last couple quarters since the pandemic hit. So this was definitely expected at US Bank, start seeing that go up. And of course, that could change because we know that there is some new stimulus that’s being talked about, and floated right now to really depends on you know, how much that goes, how quickly and whether that kind of propped people up again, then they may, we might see them drop off again, you know, in the coming quarters, but this was kind of unexpected uptick based on based on that. But because auto lenders really kind of, you know, felt like basically prepared for the worst, you know, hope for the best pair for the worst, they really did that when the pandemic hit. So they really upped their, you know, allowance for credit losses, you know, quiddity all that became their focus, having cash on hand. So they upped it so much, and then they didn’t actually see, you know, the decline in their credit performance to the extent that they kind of expected or prepared for. So now we’re seeing where US Bank, you know, a good example of that where they’ve kind of done enough that they don’t have to continue to kind of put aside and add to their allowance going forward. So right now this kind of pullback is basically them saying we’ve done what we need to do we think we’re in a good position to handle even further credit deterioration in the coming quarters. So the kind of level that out and we’re seeing that in other players as well. Us Bank
JJ Hornblass 04:37
is one of the most conservative when it comes to credit risk management in all of banking. I they may be the most I don’t know if we can actually measure that but they are extremely conservative. The question I would raise is, if it’s the case that they’re able to decrease their Credit loss provisions, you know, does that mean that they may, in turn, choose to use some of that available capital for more originations and maybe open up their originations just ever so slightly? In the coming months? Is there a sense that that might happen?
Amanda Harris 05:23
Um, you know, I’m not really sure if they’re doing this so much for that side of things. I think it’s more that they, you know, when it comes to the provision, it’s more like that they prepared for, you know, deterioration side of things, not so much that they might see a huge uptick in originations. But it’s more that, you know, in the second quarter, they up from the first quarter, they upped their allowance by like, 74%. So they really put a lot aside in the beginning of this. So I think it’s more that they did so much early on that now they’re, they’re kind of like leveling off to where they would kind of normally be, versus, you know, really putting a ton more size, I think it’s more just, we’ve prepared, we’re good to go If further deterioration happens. And so we don’t need to keep putting no more provision, and they’ve been doing this last couple of quarters, we’ve seen them kind of go down, I think it decreased from like 30% from last quarter where their provision was at like 635 million, and now they’re at like, 441. And then before that, it fell down a little bit too, since they added like that 74% uptick,
JJ Hornblass 06:32
like, How large is us banks, auto finance business? In outstandings.
Amanda Harris 06:37
They had, let me see if we get so they had Auto outstandings at 19. Point 7 billion which was up 1.5%. year over year. Right
JJ Hornblass 06:48
the middle of the table, as they’d say in England. English footy. And what about ally, which seemed to close out 2020 with some strong numbers of what’s happening at ally financial.
Joey Pizzolato 07:08
So yeah, I can jump in here. Ally had a really strong quarter. And actually, you know, all things considered a pretty decent year, you’re looking at 9.1 billion in originations in the fourth quarter, which is 1 billion increase year over year and the company’s best fourth quarter in the last three years. So obviously, they’re doing something right. Total originations on the year clocked in at 35 point 1 billion they terminated a lot of that to increase Auto decisioning. And the use of data analytics, same old story they, they kind of fall back on every quarter. They are kind of moving towards they’ve always been more so in the police department, but least or not least, I’m sorry, US vehicles. Yeah, they that’s taking over a little bit more of their share, I believe it’s 51% as opposed to like 39% a year ago, 49% a year ago. And their weighted average FICO is been steadily increasing all year, which is right around 690. But still below, you know, last quarters. So it’s similar similar story, um, you know, they’re seeing they’re seeing growth, growth when a lot of lenders are, you know, having a hard time and I think that just comes down to like they say, disciplined underwriting and really known known what customer they’re going for,
JJ Hornblass 08:39
and what about on the credit reserves. So, so, I would say, you know, US Bank and outlier are kind of good comparisons to each other is obviously on a FIFO basis, us, us bank is at the very highest tier in terms of credit quality, so, so what about on on reserves? So, you have US Bank, you know, kind of drastically reducing your credit loss reserves. And what about at at ally? I mean, that would be a good marker for, for lenders in a different credit band?
Joey Pizzolato 09:21
Absolutely. Absolutely. So, um, the reserve balance has decreased sequentially to 2.9 billion, but that’s still a large, large, large percentage of their portfolio. I believe that’s 3.9% of balances. As opposed to last quarter, we’re looking at about $3 billion or 4.04% of balances. So you know, not not as much movement on on the reserve as at US bank but US bank does, like you said, they are a little bit more conservative, not only in you know their reserves, but you know, who they underwrite to their prime and super prime through and through So I think that gives them a little bit more lean well way, in terms of, you know, expected credit losses and what they have to, you know, prepare for.
JJ Hornblass 10:08
I mean, allies also a much bigger lie. That’s true. So maybe we should share like their outstandings numbers like, how did they what in turn from an outstanding standpoint, how is the quarter?
Joey Pizzolato 10:22
standings? Let me find it? At 3.1 billion.
JJ Hornblass 10:28
Right. And that was that was up on a on a year over year basis. Yeah. 2.1%. Right. So that’s Nick, considering a recession. That’s a, that’s a pretty significant number.
Joey Pizzolato 10:41
Yeah, for like, over four times what US Bank is,
JJ Hornblass 10:44
right. And you’re saying most of that, that growth rate growth is coming in the US side of the business? That’s what it seems like. Right. Okay. And I know, there was also fifth, third, and Huntington came out with earnings recently. Should we just touch on those? And how they were? Did they fit between the two polar lenders of ally and US bank?
Joey Pizzolato 11:13
Yeah, sure. Um, so I think I think for third and Huntington, there, it’s a different story, because we have, you know, they’re substantially smaller in their auto portfolio, they’re also regional, but I think it gives us kind of a good metric, or a yardstick by which we can kind of measure the different ways. You know, this recession is affecting auto lender. So if you look at Fifth Third, right, they didn’t really talk a whole lot about their auto in their earnings, except for that it propped up other consumer loans, other declines and other consumer loans, which kind of gives us a feeling that, you know, there still is consumer demand for these, this particular credit product, as opposed to maybe some others. Which bodes well for the industry. And then on the Huntington side, you know, I think, what was really kind of indicative on, you know, their commercial floor plan kind of balances is the, the inventory shortage, that we’re still seeing. And, you know, they’re, they’re, I want to say they’re, they’re a floor plan outstandings, declined 27.2% year over year, which is pretty substantial, um, for, for, you know, a bank that does a decent amount of floor plans. So I think that that also points to, you know, we’re not out of the woods, for lack of a better term. I’ll fall back on that cliche again. But I think there’s still a lot of unknowns that we’re gonna have to really continue to keep our eye on. Going forward.
JJ Hornblass 12:47
Yeah, they, I mean, if, if, from a seasonal perspective, if this inventory issue isn’t rectified by the sort of main car buying season, which I guess you’d say, cast starts in late spring? Yeah. You know, that’s really going to sort of change the over the arc of industry performance for the full year.
Joey Pizzolato 13:14
Oh, absolutely. I mean, even if you just look at 2020, right, the pandemic kind of settled in, right, when that spring bounces supposed to come tax season, people use that to get current on their loans or to, you know, put a down payment on a new vehicle. We missed all that. And despite all that pent up demand, we saw in like q3, and q4, we still were way behind, you know, kind of a normal seasonal SAR.
JJ Hornblass 13:37
Right, but you’re not. I mean, it’s still it. This isn’t on the lenders, though. I mean, Amanda, right. You had that credit availability index, which showed that, you know, credit is increasingly being made available there. Isn’t that kind of constraint constraint on on lending that we saw during the height of the pandemic? I mean, it’s kind of working its way back.
Amanda Harris 14:03
Right. Yeah. And one thing lenders always telling me is, there’s always credit for first for somebody, right, somebody will loan you money. It just depends on how much you’re gonna pay for that one hearing. So, but we did see overall, a slight and like improvement and just credit access across auto loans in general. You know, now that’s kind of like the overall and then if you look a little closer to that, you can see that it really was still, you know, a mix though. So a new vehicle financing really tightened in December, which is kind of what we’ve been talking about. But in US vehicles, there was slightly loosening of credit standards. And it really also depends on the type of lender credit unions really loosen their standards by almost 1% in December, and then auto finance companies, the ones that really focus on auto, they’re the ones that kind of pulled back a little bit, and then captives definitely tightened access for auto loans. Toward the end of the year, which is kind of a little bit what we’ve been talking about with those high FICO scores and things like that, and their earnings. So all that, you know, kind of plays into this, but overall there there is, you know, credit access out there it is climbing back a little bit. But it’s still down quite a bit, you know, from where it was, I think is down like 5% year over year in December, and it’s still 4.4% tighter than in February before the pandemic hit. So it has not really come back to where it was before the crisis, kind of made everyone really pull back and reevaluate. So it’s kind of the
JJ Hornblass 15:35
one question that we could leave unanswered is if if ally has become so dominant in the used car market, how much of that those index results are sort of just center on allies used performance, or used, you know, credit availability, but we don’t need to answer that question. What is on the slate for the next few days on auto finance news?
Joey Pizzolato 16:08
Um, so today, we’ll have obviously the weekly wrap, and we have some new information on some investments from Wall Street in a refi startups. And then Today, I’ll be tackling Capital One’s earnings. We were supposed to do that last week. Got caught up. So now today, I’m playing catch up, but they’re coming, I promise.
JJ Hornblass 16:31
Okay, good. Thank you, everyone for joining us on the roadmap. We should, I want to encourage you to visit with us at auto finances dotnet and also on Twitter and LinkedIn. We’ll see you next time next time. Thanks.