If there are any journalism professors out there reading this, then they’ll probably stop once they see me start this blog post with a cliche. But hey, if the shoe fits….
There’s an old business maxim that says the best time to start a business is when the market is at its lowest point. Conversely, the best time to get out is when the market peaks.
Cliches aside, there seems to be some confusion in the auto finance industry about what to do when the market appears to be tilting upwards, but with some fears that it could still topple over.
To wit, two financial institutions — Associated Bank and Cornerstone Community Bank — have announced their exit from the indirect auto finance business, while two other financial institutions — California Republic Bank and CarFinance.com — have announced their entrance into the auto finance industry.
What to make of arrivals and departures occurring concurrently and this not being an airport or a revolving door showroom? That’s hard to say. Each institution uses its own process for determining whether to enter or exit a marketplace.
Neither Associated Bank nor Cornerstone Community Bank was a major player in the auto finance industry. Neither institution ranked among the 100 largest auto lenders, according to the Big Wheels Data Report published by Auto Finance News, a sister publication to AutoFinanceNews.net. Neither institution relied heavily on the auto finance unit to drive revenue or profits. But the carnage appears to be in the rearview mirror. While there is still a chance of an aftershock, all economic and sales data point toward an industry that is moving forward. Why exit now? Loan sale prices are still well off historical highs, yielding little incentive for the institutions to sell their auto loan holdings. Other lending markets — such as mortgages, credit cards, and student loans do not appear to be as poised as the auto finance industry for a significant growth spurt.
To California Republic Bank and CarFinance.com, a hearty welcome and best wishes. Hopefully, they have timed the market correctly and are getting in just as the auto finance industry begins its upward growth trend.
Given the cautious optimism in the auto finance industry, is now the right time to get out? Or the right time to get in? Or both?
I’d say the right time to get in. But I’m ever the optimist, Mike. 🙂
I agree with JJ. It’s definitely the right time to get in. Prime has always had a very narrow margin of profit, thus prompting banks to exit at odd times but subprime has a more acceptable profit margin if managed correctly. I, too, congratulate California Republic Bank and Car Finance for jumping in now. The Prescher and Landy teams will do well as always.
The best time to get in was the middle of 2008, if you had any money to lend. That was maybe the best, ever, or at least the last 25 years. The second best time to get in was 2009. The third best time was 2010. And now is still pretty good. Associated is shutting down their whole consumer loan piece (not just auto), as it is not their core business. Perhaps this goes to show that if you’re going to get into auto finance, you have to be really serious about it, or you can get burned either from a risk standpoint or operationally.
I think the time to get in is still good, though I don’t think anyone should build their business model planning for fast economic growth. Slow and steady is the path towards success for the foreseeable future.
I must disagree with that point. People don’t get in the non/subprime auto finance business because of economic growth, they get in because they want to make money, with high returns on investment. The fact is that competitive balance was decimated in 2007-2009, and even the less damaged companies followed the battered giants to the sidelines, like lemmings. The few that remained were able to name their own terms and those companies can’t even count the money they’re making, and continue to make. Essentially, the paralytic fear of the lemmings has allowed the aggressive to buy 90-97% payers at 40-50%+ effective rate with the discounts and goodies like Gap. And this goes on while the senior managers express their “surprise” at the low delinquency and losses when they announce yet another quarter of record returns, all the while warning those still on the sidelines not to become irrationally exuberant and getting back in the game themselves. It’s a big canard, in my opinion.