For lenders, higher losses are the price of sharper competition
Ally Financial and Ford Credit joined a growing trend toward slightly higher delinquencies or credit losses in the third quarter, as credit eases for subprime customers and auto lenders compete with sharper elbows.
"While we don't expect anything dramatic, we do expect to see losses tick up to more normalized levels from here," said Ally Financial Inc. CFO Jim Mackey in a conference call last week for analysts and media. Ally is the preferred lender for General Motors and Chrysler Group brands, among others.
Separately, some of the biggest banks in auto lending -- Capital One, Chase and Wells Fargo -- last month also reported slightly higher delinquencies, higher credit losses or both in the third quarter.
The upshot for dealers is that easier credit should boost volume in 2013. "The credit environment is very strong, with low interest rates and ample credit available," said Mike Jackson, CEO of AutoNation Inc.
Ally's Mackey acknowledged that as an industry, auto lenders probably tightened credit too much in response to the last recession. That resulted in record-low delinquencies and credit losses for many auto lenders, but it also made credit harder to get, especially in subprime.
"As we have been saying for over a year now, we swung the pendulum too far on credit quality in 2009 and 2010, and so we've seen some unusually low loss experience from those vintages," he said.
Ally said that credit losses were still only 0.55 percent of the value of the average loans and leases for the quarter. That was an increase from 0.48 percent a year earlier, but less than half the level of 1.2 percent in the third quarter of 2010.
Ford Motor Credit Co. said its losses were down slightly from the year ago quarter. However, its 60-day-plus delinquencies -- those that are most likely to be charged off as a loss -- were 0.18 percent. That was only a small increase from the year-ago quarter, at 0.15 percent, but it was the highest level since the fourth quarter of 2009, at 0.20 percent.
Ally's Mackey said that slightly higher credit losses are offset by greater volume, including an increase in higher-margin loans for riskier customers.
He said: "We feel very good about our more balanced credit mix that we're originating and, of course, that results in higher profitability on a risk-adjusted basis."
You can reach Jim Henry at email@example.com.