Auto Plays Major Role in Stress Tests Results for Ally, Cap One

While everyone now knows that all but one of 30 big U.S. banks have enough capital to weather another economic downturn, according to the Federal Reserve’s stress test results released last week, the overall role of auto loans in a severe case of economic crisis is less clear.

But, it’s safe to say, that among the banks passing muster with Fed, two of the nation’s biggest auto lenders ― Capital One Financial Corp. and Ally Financial Inc. ― were refreshingly transparent, offering up details of the role of auto lending in a hypothetically high-stress scenario.

For example, Cap One said the most pronounced impact to projected income forecasts in the Supervisory Severely Adverse Scenario would stem from the credit loss provision for auto loans and credit cards.

Capital One noted that during the previous recession, credit quality and underwriting were impacted earlier in the auto finance portfolio than in its other portfolios. At the time, the bank’s auto portfolio contracted 31% to $17.4 billion as of March 31, 2010, from $25.1 billion at yearend 2007.

Capital One also said in its report that, compared with most other banks subject to stress testing, it has much higher marketing costs as a percent of risk-weighted assets because of the high volume of new originations required to grow its auto loan and credit card portfolios.

In the stress test, the bank revealed that marketing last year cost $1.4 billion, and that figure should rise this year.

Meanwhile, before diving into the stress scenario, Ally Financial said in its report that compared with years past, the bank is “believed to be in a much stronger position to withstand the effects of a stressed macroeconomic environment.”

But under the worst case stress, Ally said “the expectation is that light vehicle sales would decline and reduce revenue from new retail and lease originations as well as dealer floorplan financing.”

Ally said its largest loan portfolios, retail auto loans and dealer floorplan financing, have historically experienced low loss rates when compared with other asset classes in the CCAR analysis. It said the projected loss rates in the stress test are “consistent with, and in some cases, significantly more conservative than those experienced during the most recent economic recession.”

The lender said its balance sheet is comprised mainly of “high-quality, short duration automotive assets,” which would enable the company to withstand severe stress events and meet regulatory requirements throughout the forecast horizon.