Auto loan delinquencies ticked up in the first quarter year over year and used car values plummeted in April before bouncing back in May. Whether charge-offs materialize will depend on the spread of COVID-19 and the ability of consumers to successfully navigate widespread forbearance programs.
With more than 30 million workers on unemployment, lenders have allowed forbearances on billions of dollars' worth of loans. For now, delinquencies remain modest, potentially due to elevated unemployment benefits that will expire at the end of July. But even if delinquencies jump, lenders could dodge significant charge-offs if car values hold strong.
In April, there were signs that the used car market, which has shown resilience in recent years, was feeling pain. Wholesale used vehicle prices dropped 11% month over month, according to the Manheim Used Vehicle Value Index. But the index bounced back in May, gaining 6%. The price recovery follows supply trends, which spiked in April but dropped in May back to pre-pandemic levels, according to a May 28 presentation by Jonathan Smoke, chief economist for Cox Automotive, the research company that produces the Manheim index.
"We've been seeing those values recover and recover fairly aggressively," Smoke said in a webinar hosted by Equifax Inc.
At the same time, there was fresh stress in the auto space in May. Hertz Global Holdings Inc. filed for Chapter 11 bankruptcy protection. One of the rental car company's top creditor groups is pushing for a reduction in its fleet of cars, which averaged 518,580 vehicles in the first quarter. And Wells Fargo & Co. signaled some discomfort with the business line by severing relationships with hundreds of independent auto dealerships.
With aggressive forbearance policies and elevated unemployment benefits, analysts project delinquencies will not rise until the third quarter, at the earliest. In the asset-backed securities market alone, $7.8 billion of loans have received payment extension as of April, according to a June 4 report from S&P Global Ratings.
Since car values are tied to supply, a spike in defaults could drive down prices if lenders are forced to repossess and auction off a crush of vehicles. For now, delinquency rates remain modest. The delinquency rate on bank-owned auto loans in the first quarter was still down from the linked quarter, following a typical seasonal pattern, though it was 35 basis points higher than the year-ago quarter. Newly delinquent auto loans accounted for 6.9% of all outstanding auto loans in the first quarter, down 2 basis points from the linked quarter and 18 basis points lower than the year-ago period, according to data from the New York Federal Reserve, based on a random sample of Equifax credit report data.
Subprime auto loans have a significantly higher extension rate at 16% compared to just 6% on prime auto loans, according to the report. But on the upside, more subprime borrowers have resumed making payments. Of subprime borrowers that received a forbearance in March, 24% made some sort of payment in April, compared to 18% of prime borrowers, according to the S&P Global Ratings report.
The largest bank-owned auto loan portfolio belongs to Ally Financial Inc., which reported $64.58 billion of auto loans in the first quarter. The company reported a delinquency rate of 5.01% on that portfolio, up 128 basis points from the year-ago quarter. Ally set aside $624 million in provisions for macroeconomic factors, including COVID-19, pushing its total loan loss reserves to $3.2 billion. On the company's April 20 earnings call, management said the provisioning did not account for positive benefits from the forbearance program, suggesting a conservative approach.
"I think our overall confidence is about as high as it can be right now, and we'll continue to manage and monitor it as we go into Q2 and beyond," said CFO Jennifer LaClair.
Banks appear to be taking a cautious approach to the auto loan space while continuing to ink new deals. Total auto loans for the industry clocked in at $486.0 billion in the first quarter, up 6.2% from the year-ago quarter and higher than the 2019 fourth quarter. While banks are still issuing new auto loans, they are favoring customers with higher credit scores. As of May 10, more than 60% of auto loan originations carried a credit score of 700 or higher, compared to less than 50% as of March 1, according to data presented at the May 28 Equifax webinar.
The potential for credit losses in the auto space will depend on a number of variables: whether the tightened underwriting makes a difference, whether borrowers return from forbearance programs able and willing to make payments, and whether used car values retain their incredible buoyancy.
On May 12, S&P Global Ratings placed 33 subprime auto ABS deals on CreditWatch with negative implications. On May 21, the rating agency decided against any downgrades, but ratings analysts made it clear that the future is unknown.
"S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak," analysts wrote. "Some government authorities estimate the pandemic will peak around midyear, and we are using this assumption in assessing the economic and credit implications."
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.