Some big banks in auto lending are responding to tougher competition by zeroing in on prime-risk loans. Huntington Bank and Fifth Third Bank are restricting lending to prime contracts only. In contrast, Capital One is controlling prime-risk costs as part of a broader lending strategy.
Capital One offers prime, near-prime and subprime auto loans, but subprime and used cars are its traditional specialty. The company reported $5.4 billion in total auto loan originations in the third quarter, up 14 percent from the year-earlier period. Meanwhile, U.S. light-vehicle sales rose 8 percent in the quarter to 4.3 million units.
Complete third-quarter results aren’t yet available. But in the second quarter, Capital One was tied with Ally Financial for No. 2 in used-car loan share, behind No. 1 Wells Fargo Dealer Services, Experian Automotive data show. In new-vehicle loan volume, Capital One was No. 7 in the second quarter, Experian Automotive said. A year earlier, it was No. 8 in new-vehicle loans and No. 2 in used.
Capital One says it’s pursuing closer relationships with the dealerships in its network, including chasing more volume and cross-selling services.
“What’s very clear is that the real leverage is in deep dealer relationships,” Capital One CEO Richard Fairbank said during a conference call last week. “In terms of the quality, the kind of loans that come out of that, it’s a win-win.”
Fairbank said the company’s strategy is to control costs in prime, where margins are thin, and manage risk in subprime, where margins are fatter. He noted, though, that the “extraordinary returns” reaped when competition fell a few years ago “have now pretty much regressed very close to the mean” as the fight for loan share has intensified, he said.
Regional banks Huntington and Fifth Third said last week they are responding to the tougher competition by doing prime-risk loans only. Experian Automotive considers credit scores above 680 to be prime and scores above 740 to be superprime.
Huntington Bank, of Columbus, Ohio, reported third-quarter auto loan originations of about $1.5 billion, an increase of 27 percent from a year ago. The average credit score was 767, up from 762 a year earlier.
During an investor presentation, Huntington said its buy rates are 20 to 50 basis points [one-fifth to one-half of a percentage point] higher than other banks in prime lending. Huntington said it increased business with its existing network of about 3,500 dealerships in 17 states by offering “one-stop shopping,” including commercial loans and other business banking services.
Fifth Third Bank, of Cincinnati, is also sticking to high-end, low-risk auto loans. Fifth Third doesn’t break out its auto loan originations, but its total outstanding auto loans were nearly flat at $12.1 billion at the end of the third quarter, an increase of 0.4 percent from a year ago.
CFO Tayfun Tuzun said the bank is originating $400 million to $450 million in auto loans per month but it is holding back from doing more volume or moving into subprime.
“Clearly, some banks are viewing the subprime auto sector as an attractive sector,” he said. “We have not viewed it the same way.”