The ongoing coronavirus pandemic is putting pressure on the U.S. auto industry as vehicle demand drops and production is halted, but experts say banks giving loans in the auto sector might not face much trouble.
Experts are forecasting that auto sales will drop by millions of vehicles in 2020 as the pandemic has locked down consumers across the globe. Some automakers have tapped their credit lines to the tune of billions in cash to help weather uncertain times, though experts say such credit should be used only if companies run out of money to clear debt payments, which is an unlikely scenario.
Even with temporary production shutdowns in North America, automakers are likely to continue paying their bills, experts say.
"Lots of furloughs and temporary plant closures and things like that, but I haven't heard that they're desperate and running out of money either," said Stephen Biggar, director of financial institutions research for Argus Research.
As of Dec. 31, 2019, Wells Fargo & Co. had the largest amount of outstanding transportation-related loans, with $26.95 billion in automobile-related and transportation services, according to data compiled by S&P Global Market Intelligence.
A Wells Fargo spokesperson said the majority of its auto business is indirect auto lending, or car loans consumers receive at a dealership. On the commercial side, the bank provides financial services to auto dealers. The spokesperson declined to respond to specific questions as the bank is in a quiet period before the release of first-quarter earnings April 14.
Comerica Inc. had the second-highest amount of outstanding transportation loans with $8.66 billion in the automotive sector, according to Market Intelligence data. A Comerica spokesperson declined to comment, citing the company's quiet period before first-quarter earnings April 21.
Automakers are going to struggle in 2020, but the magnitude of impact on auto sales in the second half of the year remains unclear, according to Gerard Cassidy, managing director, head of U.S. bank equity strategy and large-cap bank analyst for RBC Capital Markets.
Cassidy expects a rise in credit delinquencies and defaults on all loans because of a forecast economic downturn, and this includes the auto sector.
"It's too early to tell what these loans will look like at the end of the year," Cassidy said. "Clearly, if annual sales of autos stays depressed, the automobile companies will have to make some changes in the way they run their business that could hopefully offset revenue shortfall."
A point of concern for the banks would be a possible lack of revival in auto sales, Cassidy said. However, he added that bank loans have a higher priority in the capital stack, which means they have maximum protection from nonpayment.
"It's right now not the focus of real concern, but again, if the second half of the year proves to be recessionary, then yes, this will be a problem for the banks," he said.
U.S. auto sales could fall to 14.4 million vehicles in 2020, down about 15.3% year over year, according to a March 25 report from IHS Markit. The analytics firm had previously forecast about 16.8 million vehicles sold in the U.S. in 2020.
An important indicator to gauge the strength of companies in the auto sector is credit ratings, in addition to the position of balance sheets and other sources of income, Argus Research's Biggar said.
Ford Motor Co. said March 19 that it notified lenders about borrowing the total unused amounts against two lines of credits, including $13.4 billion under Ford's corporate credit facility and $2 billion under the company's supplemental credit facility. The cash will help offset financial impacts from the temporary production shutdowns, Ford said. General Motors Co. also said it would draw down approximately $16 billion from its revolving credit facilities, adding that the funds would supplement the automaker's cash position of about $15 billion to $16 billion expected at the end of March.
On March 25, S&P Global Ratings downgraded Ford to BB+ from BBB- and placed the automaker on CreditWatch Negative. The rating agency also placed GM, Toyota Motor Corp., Nissan Motor Co. Ltd. and Honda on CreditWatch Negative because of the pandemic. The rating agency said it expects to resolve the CreditWatch placements over the next 90 days once there is a better understanding of how long vehicle demand and production will remain curtailed.
Eric Compton, an equity analyst at Morningstar, said banks also lend to auto dealers for floor plan financing, which allows dealers to borrow against retail inventory, but those portfolios are usually pretty small. They are also typically backed by the collateral of the vehicles, he said.
"Maybe as auto dealers are under more pressure from a lack of sales in the short term, you'll see some defaults here," he said, adding that it will not be a "make or break" moment for banks, such as Wells Fargo or Comerica.
Banks are diversified across a range of sectors, which helps curb their vulnerability to any one industry, Biggar said.
"They manage their loan portfolio, so it doesn't get too much concentration in one area without finding buyers or selling off chunks of it or insuring against it or hedging," he said. "That's just a routine part of bank loan portfolio management."
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.