Wall Street analysts fret about the growth in subprime auto lending and the inherent risks of consumer defaults. But the superprime and prime segments are heating up, too, said lenders at a conference in New York last week. And some said they’re seeing tougher competition as they expand into higher credit tiers.
Auto lenders are especially chasing greater volume in superprime, Ally CEO Michael Carpenter said at the conference, sponsored by Morgan Stanley.
Carpenter said some banks, although not Ally, are parking money in high-end, low-risk auto loans because the auto segment is seen as safe and predictable, especially in contrast to mortgages.
“The fact of the matter is that most of the action in terms of leading-edge competition is in the superprime segment, where the banks are sitting there saying, ‘I’m awash in deposits, they cost me nothing, I have no idea what to do with it, so why don’t I go buy a few car loans? And they’ll mature in two or three years and then hopefully the environment will be better, I’ll figure out what to do with them,’” Carpenter said. He added: “We don’t do a lot of that kind of business. That is where the intense competition is.”
Capital One Financial Corp., traditionally a used-car specialist, is experiencing sharper competition as it expands its mix of prime-risk loans, CFO Steve Crawford said.
But the increased competition, and resulting margin compression, is a case of “reversion to the mean” in terms of the business cycle, he said.
“Most competitors left the [auto] business in 2008-2009,” he said. “We could underwrite in an incredibly disciplined way and still enjoy good returns. Competition has returned to that marketplace. There has been an evolution in pricing. It is still above appropriate risk-adjusted returns. There’s just a lot more competition.”
A couple of lenders at the conference with roots in subprime, near prime and used-car lending said they are experiencing smaller margins as they move upscale into lower-risk auto loans.
One such lender was Santander Consumer USA.
“I think price pressure is evolving across the entire credit spectrum, relative to a time in 2009, 2010, 2011 where there wasn’t a lot of liquidity. But now there is plenty of liquidity, lots of competition,” said Tom Dundon, CEO of Santander Consumer USA.
Last year, Santander began providing private-label financing for Chrysler Group dealers as Chrysler Capital. Its growth is a big factor in today’s competitive environment.
Santander’s Chrysler-related originations were more than $3.5 billion in loans and $1.2 billion in leases in the first quarter of 2014, out of a total of $6.9 billion in consumer loans and leases. In the year-earlier period, its total originations were about $2.8 billion.
Santander, which is historically a subprime specialist, is dialing back originations in some categories in the Chrysler Capital channel until it has more experience, Dundon said.
He said the bank has identified pockets in which it wants to make more loans and pockets in which it wants to pull back on loans, depending on the relationship between risk and return. The company is “just kind of waiting to get more information,” he said.
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