The announcement this week that TCF Bank will shutter its indirect auto finance unit, Gateway One Lending & Finance LLC, caps a year that has been volatile for mid-sized regional banks, according to Peter Winter, analyst at Wedbush Securities.
“Most banks are surprised how long the credit cycle has lasted for the [mid-tier] bank group,” Winter told Auto Finance News. “Most will tell you that they expect credit costs to start moving upward, and the thought is that there is more downside risk than upside potential.”
TCF’s decision to exit was not based on a “perceived change” in credit quality, said Craig Dahl, the bank’s chairman and chief executive. However, net charge-offs increased 60% year over year to $9.2 million in the third quarter, according to the bank’s earnings report.
Rising losses are one of the reasons mid-sized banks are pulling back. Regions Bank, for one, is in the midst of a $500 million portfolio runoff this year after ending a partnerships with an undisclosed third-party loan provider. Portfolio declines are expected to continue through mid-2019 to the tune of another $1.5 billion, according to Winter.
Citizens Financial Group Inc. and Fifth Third Bank are also pulling back. “The problem with Citizens is they matched up with Santander Consumer USA, used them as a third party, and are now getting out of that [flow agreement],” he said, noting the similarity to Regions. “When you get into indirect auto and use a third party, the returns are much lower than if you get in and do it [yourself ].”
On the other hand, institutions such as Huntington Bank and M&T Bank are looking to expand. “[M&T] has actually seen spreads start to widen on the indirect auto,” he added. “So it is talking about growing that portfolio where it had been pulling back.”