Analysts raised concerns about an increase in reserves for future auto loan losses at Chase Auto Finance, but the bank said the increase mostly reflects bigger loan and lease volume, and not any particular increase in risk, even as the new-vehicle market peaks.
The bank, a leading auto lender, expects to continue to increase reserves for auto loan losses in future quarters, “but for the right reasons,” Marianne Lake, CFO for parent company JPMorgan Chase & Co., said on a conference call Friday to review the banking giant’s third-quarter financial results.
Overall, the bank reported net income of $6.3 billion for the third quarter, down from $6.8 billion a year ago. For the bank overall, an increase in loan-loss reserves for credit cards was much bigger than the increase for autos.
More loans, leases
“We think the auto opportunity is still strong,” Lake said. “We have great manufacturer relationships that are growing, too.”
Auto loan and lease originations were $9.3 billion during the third quarter, an increase of 15 percent from $8.1 billion a year ago. Year to date through Sept. 30, originations were $27.4 billion, an increase of 18 percent from a year ago.
Besides its own auto loan portfolio, Chase Auto Finance provides private-label loans and leases for the Subaru, Mazda, Jaguar and Land Rover brands and their dealers.
The bank increased its third-quarter allowance for auto loan losses to $474 million, up 27 percent from $374 million a year ago.
“We will continue to build reserve,” Lake said. “However, we are expecting charge-offs to remain under control.” The bank said auto-related charge-offs were 0.49 percent of total outstanding loans, up from 0.4 percent a year earlier.
Some lenders and automakers have extended loan terms during the current sales cycle to help consumers finance better equipped and more expensive vehicles while also keeping monthly payments low or affordable. U.S. new-vehicle sales have edged up 0.3 percent this year through September and analysts say the strength of retail demand over the final three months will determine if a new volume record is set in 2016.
Gordon Smith, CEO for consumer and community banking at Chase, said last month at a conference that the bank would stop making 84-month auto loans, and that it was watching out for lower used-car values.
After six years of growth, the U.S. new-vehicle market is plateauing, automakers and analysts say, with some automakers raising discounts to spur demand. And among subprime customers, those with the riskiest credit profiles, auto loan delinquencies have crept up in recent quarters.
Lake said Friday that subprime auto loans accounted for less than 5 percent of the bank’s auto originations. “We’re a primarily prime lender.” Subprime, Lake said, “is not where we play.”