Cap One CEO Expects Lower ― But Still Lucrative ― Auto Returns

Capital One Founder and CEO Richard Fairbank expects the auto finance business to get back on a normal cycle in the coming year.

“As we enter 2014, we expect that auto finance revenues, margins, and returns will continue to decline as we move from exceptional levels to more cycle-average performance,” he said in the firm’s fourth-quarter earnings call yesterday. “We expect that auto finance returns will remain resilient and well above hurdle rate.”

The auto lending business has been in “a kind of once-in-a-lifetime set of conditions that existed competitively in the auto business, where a lot of competitors ran for the hills,” Fairbank said, repeating a position (and using similar phrasing) he discussed last month at a Goldman Sachs Conference.

Fairbank also noted that with the credit crisis seeming to come to an end, the auto lending business may be the first section of the credit industry to start moving. “I think auto was the first mover before the Great Recession, and maybe it’s a first mover on the other side of this,” he said. “I don’t know.”

In line with trends at other lenders, Capital One Auto Finance recorded a year-over-year increase in loan originations for the fourth quarter of 2013. The lender originated $4.3 billion of loans last quarter, a 23% increase from $3.5 billion in the prior-year period.

The increase originations came largely from prime loans. “For the full year 2013, subprime originations were relatively stable, while prime originations grew as we captured additional prime share from our existing dealers,” Fairbank said.

Cap One’s auto portfolio totaled $31.9 billion at yearend 2013, up 18% from $27.1 billion a year earlier.