Early on in the financial crisis, Regions Financial Corp. abruptly shut down its $4.5 billion indirect auto lending business. Fear of rising delinquencies prompted the Birmingham, Ala., company to give its 2,600 participating dealers one day's notice that it would no longer offer the loans. Many other lenders—including HSBC—had exited even before Regions did in October 2008.
Now, two and a half years later, Regions is joining a rush back into the business. But in contrast to its fast exit, the company is pacing itself, with a staggered rollout of the service across the 16 states where it operates. "We're starting from scratch," says Tom Lazenby, a senior vice president in charge of the bank's indirect program.
In a way, so is the rest of the industry. Having endured two years of declining auto sales and tightened credit standards, indirect auto lending is suddenly hot again.
Huntington Bancshares in Columbus, Ohio, is expanding outside its footprint to dealers in Pennsylvania and New England, and another Birmingham banking company, BBVA Compass, is back in the business after a hiatus. But auto lending's biggest mover is Canada's Toronto-Dominion Bank with its $6.3 billion purchase of Chrysler Financial—a deal that pairs a widespread North American branch network with a captive finance operation for more than 2,000 dealers in the U.S. and Canada.
For bankers who left the business during the crisis, or those who are considering it for the first time, now is a chance to jump into one of the highest-margin segments in consumer lending, consultants say. Car buyers are returning to showrooms, and these loans are a natural outlet for the industry's excess deposits.
There is growing competition from credit unions and nonbank finance companies, but opportunity remains in this fragmented market where no bank lender has more than an 8 percent share of used or new vehicle loans, according to Experian's automotive finance research unit.
Historically banks have ebbed and flowed with auto lending as car buying fluctuates. "I think what we're seeing is typical in this business," says Mark Pregmon, executive vice president of consumer banking operations at SunTrust Banks in Atlanta and former chairman of the auto finance committee of the Consumer Bankers Association. With profitability returning as rates rise and the cost of deposits remain low, "a lot of banks are seeing this as an opportune time," he says.
New U.S. car sales for January—at 819,688—jumped 17 percent compared with the same month a year earlier, according to data compiled by Automotive News. Also in January, the Mannheim Index—a widely followed survey tracking used vehicle pricing at franchise dealerships—was up 6.2 percent from the year before, indicating increased demand.
That's great news for banks in two ways. They already have a leading 43.4 percent market share in used car financing at franchise auto dealers—more than either captive finance companies or credit unions. And higher used-car values mean less risk in lending, since losses from repossession are drastically reduced.
Jeff Hooper, the consumer lending manager who oversaw more than $4 billion in auto loan originations at SunTrust last year, says used car values rose after manufacturers decreased their output of new cars over the past few years.
According to Experian, the average auto loan chargeoff for banks fell from $9,089 in 2009 to $6,929 last year. The percentage of loans past due 60 days or more also sank from 0.89 percent to 0.7 percent.
Most banks began to sense a change in the market in the fall. "In November we started to see a slight uptick," says Ronald Luth, the consumer lending executive who oversees indirect lending for the $2 billion-asset TIB Financial Corp. in Naples, Fla. "A lot of our car dealers said they had their best year."
Though rates are down slightly, according to Experian's year-end auto lending analysis, the average amount financed rose $209, to $25,789, for new cars and $711, to $16,992, for used ones. "Vehicles are costing more because of the content manufacturers are putting into them," such as navigation systems, says Nick Stanutz, head of the auto finance division at Huntington. "The average loan size is going up, even though the size of the vehicle is becoming smaller."
The rise of new opportunities in this $634 billion market has been so dramatic that some incumbent indirect lenders, including M&T Bancorp in Buffalo, N.Y., have complained recently that their margins are down due to the influx of new entrants. "At times the competition gets a little frothy," Rene Jones, M&T's chief financial officer, said on the company's fourth-quarter conference call.
That's quite a contrast from two years ago. For the $2.7-billion asset Brookline Bancorp in Massachusetts, getting through the storm in 2008 meant nearly doubling its loss provisions to $11.3 million, after defaults grew.
Brookline also buttoned down its already conservative prime-lending criteria even further, says CFO Paul Bechet. One way was by no longer approving "dealer accommodation" loans in which the bank accepted otherwise unqualified borrowers as a favor to high-volume dealers.
"If a dealer wanted us to make a loan, we told them they should be happy to guarantee it," Bechet says. "Obviously, in those instances, they didn't want to guarantee it."
One of the challenges companies like Huntington overcame was the phasing out of dozens of Chrysler and General Motors dealerships in 2008. "We had more dealer consolidation in the Midwest than in any other part of the country," Stanutz says.
Huntington helped offset the loss of loan volume by riding the coattails of its remaining dealers who expanded their sales and service territory, and by ramping up its dealer "floor planning" business—the wholesale financing service that dealers use to pay manufacturers for new inventory. "Some of our dealers made more money in 2010 than they ever had made," Stanutz says.
Though Huntington's auto loan originations were down in the fourth quarter, Stanutz says there is enough pent-up demand for cars that he expects a lift of 10 percent to 15 percent in new auto sales this year.
Several analysts say banks' most fervent competitors are also revving up. Credit unions' market share in franchise auto lending grew to 17.5 percent last year, from about 10 percent three years ago, says Tony Bouttelle, president and chief executive of Credit Union Direct Lending. His company offers a lending platform that 900 credit unions use to link to dealers, similar to the widely used DealerTrack and RouteOne portals that allow dealers to compare rates at numerous banks and finance companies.
Also bouncing back are the captive finance companies associated with car manufacturers. Captives in the third quarter regained a 50-plus percent share of the new-car finance market, after having fallen to the mid-40s in 2009. That share may balloon in 2011, thanks to an exceedingly high demand for new-car leasing, says Jonathan Banks, an analyst with the National Automobile Dealers Association Used Car Guide. New-car leasing, which banks generally avoid, is projected to comprise 26 percent of new-car financing for 2011—"a dramatic increase from what we went through the last two years," Banks says.
Increased demand for loans in the secondary market is further bolstering efforts at captive finance companies for Honda, Toyota and other manufacturers. The asset-backed securities market for auto loans will approach $53 billion this year, up from $48.5 billion in 2010, according to Wells Fargo Securities. That will be nearly equal to the $53.9 billion issued in 2009, when the Obama administration's Cash for Clunkers program artificially boosted new-car sales during the credit crisis.
Despite the improvement, "it's not getting us back to where we were," says John McElravey, a Wells Fargo Securities analyst. From 2002 through 2006, issuance of securities backed by autos loans ranged from $85 billion to $103 billion a year.
Most banks are not considering selling off auto loans, but more are considering buying them. "One of the things they like about it is the cash flow," says Jared Shaw, a senior vice president in the fixed-income department at Keefe, Bruyette & Woods. "It's a short-duration asset that has a decent yield on it."
Lazenby says that Regions' interest in the secondary market will be limited, as it focuses on rebuilding its dealer network and keeping loans on the books for income. Since relaunching indirect lending in September, the company has already produced $750 million in auto loans. It plans to sign up 1,200 dealers and grow this loan segment to $1.9 billion by the end of next year.
