After nearly a year of tightened underwriting standards and muted demand for credit, big banks are finally clawing back and reclaiming lost market share.
In fact, outstandings rose $41 billion to $1.282 trillion in the second quarter, according to the Federal Reserve. By comparison, banks’ auto outstandings grew by $24 billion in the six months between the beginning of Q4 2020 and the end of Q1 2021.
The growth follows second-quarter increases in consumer demand for auto loans as banks started to loosen underwriting standards. Back in the second quarter of 2020, lenders tightened auto credit underwriting standards to levels not seen in 15 years in response to the COVID-19 economic crisis. This led to banks losing market share to captive financiers that offered longer-term, subvented financing programs to help drive sales during the pandemic.
In the second quarter of 2021, nearly every publicly traded bank posted increases in auto outstandings. Chase Auto, for one, grew origination volume to $12.4 billion, an increase of 61% year over year and 10.7% sequentially, another record for the auto lender, Chief Financial Officer Jeremy Barnum said on the company’s earnings call in June. Total average loan and lease assets grew 4.7% YoY to $86.8 billion.
Wells Fargo Auto, too, reported record origination volume in the second quarter following increased sales volume as a result of pent-up demand.
Second-quarter originations clocked in at $8.3 billion, a 48% YoY increase, driven largely by record volume in June, Chief Financial Officer Mike Santomassimo said on the company’s second-quarter earnings call.
“Consumer demand for auto loans continued to be very strong, despite higher prices and limited inventory,” Santomassimo said. “June [set] a new monthly record for originations exceeding our previous highs in June of 2016.” Total outstandings came in at $51.8 billion, a slight increase from $50.0 billion in Q1 and $49.9 billion in the same reporting period last year.
PNC Financial also logged an increase in its auto portfolio after four consecutive quarters of decline following its acquisition of BBVA USA. The bank’s auto outstandings were at $17.6 billion in the second quarter, an increase of 29.2% from the first quarter and 8.6% YoY. Meanwhile, Truist Bank also recorded an 8.9% YoY increase in its auto portfolio, and U.S. Bank’s auto outstandings rose to $22.1 billion, an 18.1% year-over-year increase and 7.5% sequential increase. Ally Financial’s second-quarter originations came in at $12.9 billion, the highest quarterly origination volume in 15 years, Chief Executive Jerry Bowen said on the company’s earnings call, bringing the lender’s total consumer auto portfolio to $86.5 billion.
Still, not all banks reaped equal rewards of favorable market conditions. Bank of America’s auto outstandings, for example, came in at $46.4 billion in the second quarter, a decrease of 4.1% YoY following a decrease of 7.9% YoY in the fourth quarter of 2020 to $46.4 billion due to the pandemic.
Record recoveries, reserve releases fuel Q2 performance
Perhaps one of the most interesting stories to come out of the second-quarter earnings season were reports of recoveries on net charge-offs, which, coupled with releases on reserves, fueled positive auto loan performance at some of the nation’s largest noncaptive auto lenders.
Chase Auto’s second quarter was marked by a $75 million reserve release spurred by positive recoveries in net charge-offs. In fact, recoveries on net charge-offs clocked in at 0.1% of the bank’s total auto portfolio, or $16 million. That’s 26 bps below Q1’s net charge-off rate of 0.16% and 40 bps below the Q2 2020 rate of 0.3%.
Positive credit performance, continued reduction of principle balances under payment deferral, and increased confidence surrounding the economy spurred a $75 million release in auto reserves. By comparison, in Q2 2020 Chase Auto added a $310 million build in reserves in response to economic turmoil spurred by the pandemic.
U.S. Bank, too, recorded a positive recovery rate on net charge-offs as delinquencies continue to trend downward. Recoveries on net charge-offs landed at 0.02% of its $22.1 billion portfolio, driven by elevated used-vehicle prices. In the first quarter of the year, the net charge-off rate was 0.24%, and in the second quarter of last year the net charge-off rate came in at 0.32%.
At Ally Financial, reserve releases and record used-vehicle values fueled a positive recovery rate on net charge-offs, which came in at $5 million, or 0.03%, recovery on net charge-offs driven by negative credit loss provisions. Retail auto reserves inched down 10 bps from last quarter at 3.70% of the portfolio, or $2.8 billion. In the second quarter of 2020, auto reserves came in at $3 billion, or 4.09% of the portfolio.
“For the first time in our history, credit for the quarter was a net recovery, reflecting the resilience of the auto asset class, strong consumer demand, broad strength and health among consumers, [along with] the benefits of meaningful fiscal and monetary actions and our focused and modernized approach to underwriting and collections,” Ally Chief Executive Jerry Bowen said on the lender’s Q2 earnings call.
Citizen’s Bank also recorded positive recoveries on net charge-offs amounting to $2 million, or 0.04% of the lender’s $12.8 billion portfolio. Sustained economic improvement coupled with lower charge-offs spurred a sequential release in allowance for credit losses in auto. ACL fell to 1.31% of the portfolio, or $168 million, compared with last quarter’s coverage rate of 1.41%, or $175 million.
Positive recoveries on net charge-offs were driven by meteoric rises in used-vehicle values and declines in reserve balances first implemented to combat the uncertainty of the COVID-19 economic crisis. This was a first for the industry in at least the last four decades, Mike Buckingham, managing director of PIN auto finance at JD Power, told Auto Finance News last month.
“A number of lenders in their second-quarter earnings announcements spoke to positive net credit losses,” Buckingham said during the July episode of the Industry Pulse. “I’ve never seen that, and I’ve been doing this for 40 years.”
“That’s a great story for the lenders,” Buckingham mused.
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