After the subprime mortgage bubble burst back in 2009, new regulations prevented banks from rushing right back into mortgages to re-inflate a market that nearly took down the global financial system. Of course, Uncle Sam didn’t restrict wall street from blowing massive bubbles in all asset classes, in fact the Fed seemingly condones it, just the mortgage market.
And so, all that loan volume shifted to autos…
…and student loans.
Alas, it seems as though commercials banks are finally starting to wonder whether they’ve inflated at least the auto loan bubble to the brink of bursting. As the Financial Times points out today, the FDIC’s commercial lending report for 1Q 2017 showed that commercial banks slashed their auto loan exposure sequentially for the first time in the past six years.
But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. The total slipped $1.6bn to $440bn from the fourth quarter of last year to the first of this, suggesting that banks — wary of repeating the mistakes of the subprime mortgage crisis — have been spooked by rising delinquencies and the threat of litigation.
Wells Fargo and JPMorgan Chase, the two biggest banks in the sector, saw first-quarter originations drop by double digits from the same period a year earlier. Even relatively aggressive specialists such as Capital One — which added a net $2bn to its $50bn car loan book over the first quarter — are toning down their outlook.
“We’re certainly one more notch cautious,” said Richard Scott Blackley, chief financial officer, noting bigger-than-expected falls in used car prices in the first quarter. “We think that by pulling back a little bit, we’re going to . . . maximise price over volume,” he said.
But for all you banking investors out there who are worried about replacing that juicy auto lending revenue stream, fear not because Citizens Financial’s CEO would like for you to know that while they “ran up auto for a while” they now see “better risk-adjusted returns” in things like student loans….
One of the banks pulling back is Citizens Financial Group, the US’s ninth largest by assets. Bruce van Saun, chief executive, told the Financial Times he would rather steer resources into areas such as student loans. “We ran up auto for a while when there was not much else going on. Now we have growth in other areas which offer better risk-adjusted returns.”
...which we guess is true if you simply ignore the fact that over $135 billion of student loans are currently in default.
Of course, this shouldn’t be new news to our readers as we recently pointed out that after 21 consecutive quarters of loosening lending standards from 2Q 2011 through 2Q 2016, commercial banks finally started to pull back on auto loans in 3Q 2016…
Lending Standards Have Eased…: While overall household debt remains below pre-crisis peaks, auto debt has ballooned to all-time highs. While this debt grew, the median FICO score of borrowers receiving auto loans fell roughly 30 points from peak to trough. According to the Senior Loan Officer Opinion Survey (SLOOS), auto lenders eased lending standards for 21 consecutive quarters from 2Q 2011 through 2Q 2016.
…but Lenders Now Appear to Be Reversing Course and Tightening Standards: While FICO scores did drop precipitously, they have recovered in recent months, and the SLOOS reports 3 quarters of tightening standards after the 21 of easing. A look at the weighted average FICO scores of loans going into subprime ABS deals reveals similar trends, with a number of lenders reporting increases in these scores over recent years. However, the overall trend has moved lower since 2013.
…which probably had something to do the soaring delinquency rates that have resulted from years of declining underwriting standards.
But sure, 18mm new cars per year is probably a ‘normalized’ level of demand for the U.S. market…just like 1.3mm in new home sales was ‘normal’ in 2005.