The banking industry's run of dominance in automobile lending appears to be coming to an end.
That's because nonbank finance companies that pulled back during the recession are actively lending again — eating away at banks' market share by offering ultralow rates and stretching out loan terms to seven, eight, even 10 years.
The upshot: a possible boost in the volume of auto loan securitization, since banks have tended to keep these assets on their balance sheets.
With the increased competition squeezing margins industry-wide, some banks are prepared to tap the brakes on auto lending. Wells Fargo reported record loan originations of $7.1 billion in the second quarter, but yields on auto loans fell by 54 basis points year over year, to 7.05%.
"Competition's lowered margins across the spectrum," says Tom Wolfe, Wells Fargo's head of consumer credit solutions. "In some cases, we view some of the returns unacceptable, and so we'll shift out of a tier just because of pricing concerns."
The competition among lenders being driven largely by consumer demand for new vehicles. Based on June sales figures, the National Automobile Dealers Association expects 2013 to be the strongest year for car sales since 2007.
On earnings conference calls last month, executives at banks such as Wells, Capital One Financial, Huntington Bancshares and Fifth Third Bancorp — all among the nation's top auto lenders — were asked repeatedly about the increased competition and its potential impact on banks' bottom lines.
"It's not lost" on nonbank lenders "that there was some gold in them there hills," Capital One Chief Executive Richard Fairbank said during the company's second-quarter earnings call. "The car companies are getting their mojo back and stepping up volumes quite a bit."
Capital One is keeping pace — its auto loan portfolio grew 16% in the second quarter compared to a year earlier — though credit quality is weakening a bit. Thirty-day delinquencies rose to 6% in the second quarter, up from 5.2% a year earlier.
Fairbank told analysts that Capital One will remain an active player in auto lending, but he said they should expect growth to slow as competition intensifies.
"This is not a red flag that I'm dropping on this business," Fairbank said. "It's really more of a return from an exceptional, once-in-a-lifetime kind of period to something more normal."
Wells Fargo's Wolfe says that pricing has gotten most competitive for borrowers with the best credit scores. In the first quarter of this year, the average interest rate on a new car purchase was 4.47%, almost two percentage points lower than its level in the first quarter of 2009, according to data from Experian. For borrowers with the highest credit scores, average interest rates for new car purchases fell to 3.00%.
During a recent interview at Wells Fargo's offices in Irvine, Calif., Wolfe said he is also uncomfortable with the increasing length of repayment periods. For new car purchases, the average loan term was 65 months in the first quarter of 2013, up one month from a year earlier, according to Experian. Loans of six years or longer have become much more common than they used to be.
Wolfe says that some companies are now making loans with terms as long as 10 years, a trend he views as troubling given the rapidly depreciating value of automobiles.
Others are more sanguine about the lengthier loan terms. "Vehicles have been lasting longer," says Mike Wall, an automotive analyst at IHS, who notes that the average lifespan for an automobile is now 11 years.