Auto loan delinquencies continued to rise in the second quarter, but bankers reported few concerns with the sector, and some see opportunity.
Some investors and media outlets have been warning for years of an impending collapse in subprime auto loans. While delinquencies have steadily increased, the collapse has not materialized, due in part to resilient used car values. Strong used car values limit auto loan charge-offs since struggling borrowers can sell the car for a profit, or lenders that seize the car can recoup the outstanding loan balance. The Manheim Used Vehicle Value Index revealed that used car values increased by 2.6% on a year-over-year basis in July.
Those trends continued in the second quarter with bankers reporting stability in the sector despite modestly higher delinquency rates.
"Better-than-expected auction values and a benign economy continue to support strong auto credit," said Capital One Financial Corp. Chairman, CEO and President Richard Fairbank. Capital One's auto loan delinquency rate rose 63 basis points from the year-ago quarter, the largest increase among the 25 banks with the most auto loans. Capital One's auto loan delinquency rate was nearly triple the industry aggregate at 6.74%, but Fairbank said the rise merely represented a normalization of credit rather than a sign of significant deterioration.
"We continue to expect that the annual auto charge-off rate will increase gradually as the cycle plays out," he said on the earnings call.

In the second quarter, the delinquency rate for auto loans held by banks was 2.41%, an increase of 17 basis points from the year-ago quarter. The largest auto lender, Ally Financial Inc., reported a more modest increase in delinquencies, up 15 basis points from the prior-year period, while retail auto net charge-offs declined 9 basis points year over year. Management said on their earnings call that they saw more opportunity than risk in the space, calling the competitive landscape "rational," which enabled strong pricing trends.
"We're really pleased with the continued strength of our market position," CFO Jennifer LaClair said, according to a transcript. "We're continuing to find a lot of opportunities to originate strong flows at the right pricing."
The banking industry's total auto loan balance reinforced that point of view. In aggregate, the banking industry reported $468.25 billion of auto loans in the second quarter, up 4.0% on a year-over-year basis. That was double the year-over-year increase from the first quarter.

A significant chunk of that loan growth came from Santander Holdings USA Inc., which reported a 20.3% year-over-year increase in auto loans. Executives at one of its main subsidiaries, Santander Consumer USA Holdings Inc., reported that loss rates indicated a benign credit environment.
The specialty lender has a significant subprime auto lending operation, contributing to delinquency rates much higher than the industry aggregate. In the second quarter, Santander Holdings USA reported a delinquency rate of 13.01%, down by 329 basis points from the year-ago quarter. On Santander Consumer's earnings call, executives expressed confidence in the state of the nonprime auto market.
"Nonprime industry securitization data points to relatively stable net loss and delinquency trends compared to last year," CFO Juan Carlos Alvarez de Soto said.
On the other hand, credit analysts for S&P Global Ratings noted that there is still cause for caution in auto. In a July 16 report, auto sector analysts warned that the auto industry's yearslong run of growing sales and robust used-car prices would soon come to an end. The analysts predict a 3% decline in light-vehicle sales this year followed by more declines through 2021, and they predict used-car prices will fall by 2% to 3% by year-end. And a July 30 report from structured finance analysts warned that asset-backed securitizations featuring auto loans currently have longer loan terms, which increase repayment risk and back-load expected losses.


Click here to access data on the 25 largest auto lenders among banks and thrifts as of June 30, 2019.
