Some of the nation's biggest banks are backing away from auto finance after taking a beating this year, especially in leasing.
Factory incentives are just too rich, the banks complain. Ironically, automakers are groaning about the same thing. (See story at right.)
Bank of America, the biggest bank in auto lending, decided recently to quit the Northeast and Midwest markets, which represented 8 percent of its auto finance business.
Eight percent may not sound like much. But Bank of America has an auto portfolio of about $23 billion in retail loans and leases nationwide, said Floyd Robinson, president of the bank's auto group.
The bank has another $6.8 billion worth of auto-related commercial loans, such as dealer floorplan and capital improvements.
Bank of America, based in San Francisco, announced in August that it will stop writing new auto loans and leases outside the 20 states in which it has branch banks, mostly in the South and West. In those states, the bank will concentrate on cross-selling other banking services to dealers, said Robinson.
'If we try to go out in a new market with only a lease product, or retail loans as a stand-alone product, that is a very competitive environment where we may not enjoy any particular competitive advantage,' Robinson said.
Other nationwide auto finance powerhouses, like Bank One Credit Co. and Chase Manhattan Auto Finance Corp., also have disclosed problems with their auto portfolios this year. So have regional banks such as Key Auto Finance, PNC Bank and Huntington Bancshares Inc.
The banks saw it coming. As far back as the Consumer Bankers Association auto finance conference in San Francisco in March, top auto lending executives at both Bank One and Chase went public with their concerns. They warned colleagues that they would stop trying to match the heavy incentives captive finance companies were pouring into short-term leases, even though it would cost the banks volume.
Since then, soft used-car prices and rising interest rates made matters even worse.
ON THEIR OWN
The banks' auto lending subsidiaries complain that they have to achieve a profit on their own, while the captives can lose money as long as they help move the metal. For instance, Ford Motor Credit Co. got $3.2 billion from the parent company and other affiliates in 1999 for interest rate support and other costs on finance and lease transactions. That was more than twice Ford Credit's reported 1999 net income of $1.3 billion.
'We operate in the same marketplace (as the captives), but we have different end goals,' said Ed Tinsley, president of Bank One Credit in Phoenix, the auto lending subsidiary of Chicago-based Bank One Corp.
'Clearly, they are in the business of selling cars, and we are in the business of selling financial services for money. That sounds pretty basic, but institutional memories are short,' Tinsley said in an interview.
Due in part to lower volume, the auto lending arm will consolidate 17 underwriting centers to four, Tinsley said. The remaining four will squeeze out costs in several ways, including more automation, he said. Tinsley refused to say whether the consolidation would bring layoffs.
Without citing specific numbers, he acknowledged that Bank One's lease penetration is down 70 percent this year because it is refusing to 'enhance' vehicle residual values. Tinsley said leasing has gone from the lion's share of Bank One's auto originations in early 1998, to less than 30 percent.
'We have stopped trying to outguess the experts (in residual values). Enhancements are not a part of what we're doing,' he said.
In leasing, the customer in effect borrows the difference between the up-front cost and the projected residual value at the end of the lease. To cut monthly payments, lenders have commonly inflated residual values above what they expect the unit actually will be worth at the end of the lease. The lender sets money aside in reserve to cover the difference.
But reserves are expensive and may not be enough to cover the loss when those units are sold at auction, if actual used-car prices are even lower than expected.
According to a survey by the Consumer Bankers Association, a trade group in Alexandria, Va., lessors lost money on 84 percent of the lease units that came back to them in 1999 at lease end, vs. 71 percent in 1998. The average loss also worsened: $1,920 per vehicle in 1999, vs. $1,185 in 1998.
In that environment, New York-based Chase Manhattan added another $100 million to its reserves in the first quarter to cover lower-than-expected market prices for off-lease units. The bank's volume has slowed, too. Total auto originations were $5.1 billion for the first half of this year, vs. $6.7 billion in the year-ago half.
Nevertheless, Chase is still gung-ho for the auto business. In fact, Chase had record auto originations in August of about $1.2 billion and a similar daily rate in September, said Joe Scimone, senior vice president, sales and marketing.
Chase's auto portfolio, including retail and wholesale lending to dealers, is about $25 billion, he said. The bank expects to increase that number another 20 percent next year, Scimone said.
'The $100 million is in addition to an already significant reserve. It is not simply a hit that occurred in that quarter; it goes out over the next four years,' he said.
'We're feeling very comfortable now with our residuals. Leasing is a big portion of our business, and it will continue to be because that's what our customers want - our dealer customers and the retail customers,' Scimone said.
Still, it has been a bruising year. Tinsley at Bank One put it simply: 'At some point you've got to find some ways to optimize your cost structure. It (auto lending) becomes a case of, `I love you, but I can't afford you.' '