Regulators have been pounding the podium for months warning about frothy conditions in the market for automobile loans. But things had to hit close to home — in the form of shrinking loan yields and rising delinquencies — before bankers really paid attention.
Several companies, including Fifth Third Bancorp and Citizens Financial Group, said that they plan to scale back indirect auto lending, citing increased competition and narrowing spreads. Others are reducing exposure by selling off large chunks of auto loans — though those banks insist they remain committed to auto lending.
Their moves come at a time when auto lending has reached record highs. The volume of auto loans made by banks, credit unions and finance companies hit $1.07 trillion in the second quarter, up 7% from a year earlier and more than 50% since mid-2010.
Meanwhile, credit quality is worsening. Delinquencies on prime loans of at least 60 days rose 17% in August, compared to a year ago, according to Fitch Ratings. Fitch also reported in March that more than 5% of securitized subprime auto loans were at least 60 days late, the highest delinquency rate in 20 years.
Risks associated with auto lending have increased because of "unprecedented growth" in the space, the Office of the Comptroller of the Currency said in its Spring 2016 Semiannual Risk Perspective report. "As banks have competed for market share, some banks have responded with less stringent underwriting standards for direct and indirect auto loans," the OCC said. Banks have also increased loan-to-value ratios and extended loan-repayment terms, both of which are also signs of potential trouble.
Banks are deciding to pull back because "they hear the regulators' drum beat and that's coupled with their own risk appetites," said Christopher Wolfe, an analyst at Fitch Ratings.
Credit quality is a mounting concern. Regions Financial in Birmingham, Ala., said auto loans between 30 and 89 days past due rose 10% from the same period last year, to $57 million in the third quarter, compared to a year ago.
On a conference call with analysts Tuesday, Chief Financial Officer David Turner said that while the company will continue to make indirect auto loans it is being more selective in choosing its dealer partners.
"We continue to focus on growing our preferred dealer network while exiting certain smaller dealers," Turner said. "In addition, we remain focused on achieving appropriate risk-adjusted returns in this portfolio."
Others that reported some deterioration in their auto loan portfolios -include the $149 billion-asset Citizens Financial Group in Providence, R.I., and TCF Financial in Wayzata, Minn.
Citizens said Friday that nonperforming auto loans rose 45% year over year to $55 million, while the $21 billion-asset TCF boosted its credit reserves by nearly 40% due in part to a sharp increase auto loan chargeoffs.
Citizens' auto loan portfolio increased just 1% year over year to $14.1 billion and company officials said on a call with analysts that the slow pace of growth was intentional. Bruce Van Saun, its chairman and chief executive, attributed the decision to declining loan yields, not higher chargeoffs.
"It's really just that the returns in auto, given the competition there, are not great," he said in an interview Friday. "We found better opportunities to grow in consumer with our education-refinance loan products and with our personal unsecured efforts."
Other bankers agreed that increased competition is hurting spreads. The $143 billion-asset Fifth Third Bancorp in Cincinnati decided to reduce originations of indirect auto loans "to trim back production in some of the lower-spread, lower-yield asset classes," Lars Anderson, its chief operating officer, said during a Thursday conference call. As a result, Fifth Third's auto loans in the third quarter fell 12% from a year earlier to $10.5 billion.
The $2.1 billion-asset Belmont Savings Bank in Belmont, Mass., during the third quarter suspended all indirect auto originations because of "market conditions," CEO Bob Mahoney said in an interview.
"The pricing for high-quality borrowers has become too low to allow for satisfactory spreads," he said.
TCF said that yields on its auto loans fell by 9 basis points in the quarter, to 4.09%.
On its conference call, though, analysts seemed more concerned that the bank is continuing to increase its auto lending even as delinquencies and chargeoffs have risen. TCF's auto loans rose 13% in the third quarter when compared with year earlier.
CEO Craig Dahl reassured investors that TCF is keeping its risks in check and that its primary concern is profitability, not growth.
"I wouldn't say we have a grow-at-all-costs strategy right now," Dahl said.
Selling off loans is part of that strategy. The company sold off $615 million of auto loans in the quarter and generated gains on those sales of $11.6 million, up 12% from a year earlier.
The $205 billion-asset SunTrust Banks in Atlanta sold a $1 billion indirect auto loan portfolio during the third quarter. The sale was made to optimize SunTrust's balance sheet "by staying disciplined on returns," Chairman and Chief Executive William Rogers said during a conference call.
A SunTrust spokesman said the bank "remains committed" to both indirect and direct auto loans and does not plan to reduce indirect auto originations. The sale was not in response to regulators' concerns about the auto-loan market, he said.
Some smaller banks are also seemed unfazed by regulators' warnings. At the $4.4 billion-asset Fidelity Southern in Atlanta, indirect auto rose 17% to $1.6 billion from a year ago. The $2.6 billion-asset Arrow Financial in Glens Falls, N.Y., originated $70 million of indirect auto loans in the third quarter. And the $1.8 billion-asset California Republic Bancorp in Irvine is trying to expand its indirect auto lending business to a national scale.
Brian Patrick Eha and Kristin Broughton contributed to this story.