LAS VEGAS — With the credit markets seized up and access to capital constricted, auto financiers are shaving expenses and honing risk-management procedures.
“These are very, very challenging times, both on the asset side of the balance sheet and the liability side,” said Dan Berce, president and chief executive of AmeriCredit Corp. during an executive panel at the Auto Finance Summit earlier this month. “This is probably the worst environment I have seen in my 16 years [in the business]. We have never seen these two factors collide.”
For any auto finance firm, particularly an independent company like AmeriCredit, access to capital dictates origination volume. With the capital markets in such a funk, AmeriCredit’s loan-making abilities have been reduced dramatically. As yet, there is no end in sight.
The troubles first started in July 2007. The situation improved last October when investor confidence was restored a bit, then worsened again. “The trough keeps getting deeper with each wave that goes out,” Berce said. “As an independent company, we look at the bank market and the securitization market. Getting bank credit is nonexistent today. Banks are de-levering so fast — they don’t have the capital to hang on.” In the securitization market, even top-rated securities won’t sell, he added.
Though the economic environment is slightly better for Scotia Dealer Advantage because of its location in Canada, “for every loan that goes on the books, one has to come off,” said CEO Jim Case. Still, the Scotiabank auto unit is “in growth mode from an origination perspective,” he said, “but it is careful growth.” For the past six months, Scotia Dealer Advantage has been moving upscale, to near-prime lending from subprime and nonprime.
As the cost of funding rises, auto financiers are also looking to reduce expenses. “Our profitability targets haven’t changed, but the cost of capital is up,” Case said. “We have to be 20% more efficient in running the book to [hit the same targets]. As our book gets bigger, we’re paying more attention to the nickels in the background.”
CitiFinancial Auto, too, is facing profitability pressure. “We run our business on return-on-equity models,” said Kim Pulliam, the company’s chief marketing officer. “Our ROE hurdles have doubled in the past year.”
To combat the squeeze, CitiFinancial Auto is offshoring more back-end functions, like data processing, servicing, and administrative functions. “We are looking to pull costs out,” Pulliam said, “to do more with less.”
Also, the company has zoomed in on “profitability of individual loans and individual loan vintages,” she said. “We put a lot of focus on analytics and statistical models for loan pricing and structure.” The upshot: There is more benefit to find.
One of AmeriCredit’s strategies for keeping costs in check relates to its dealer-customers. “As an auto lender, we’re probably actively managing our dealer base more than we ever have,” Berce said. Among other things, the company favors those who put together the cleanest loan packages.
TIMEFRAME FOR A TURNAROUND
When might the markets stabilize? Not soon enough, all panelists said. But Berce offered his take on indicators that would signal a recovery.
“We’re looking for access to capital,” he said. “For that to happen, banks’ balance sheets have to be repaired.”
Specifically, the federal government’s plan to pump billions of dollars into the market will help restore investor confidence. “But the bailout plan is no panacea,” he said. It might take six months for things to start moving in the right direction.
A second indicator is stability in the housing markets and abatement of foreclosures. Finally, hedge funds will have to become more realistic in what they can charge for capital.
Despite the difficulties, Berce reminded conference attendees that “the car industry and auto finance itself are absolutely necessary,” adding that “things will get better.”
—Marcie Belles