October 1, 2020

Lenders expected to weather crisis

Major U.S. auto lenders took a beating in the first quarter due to the coronavirus, though most losses cited by the top banks came from preparations for the carnage yet to come.

Lenders entered crisis mode at the tail end of March when COVID-19 closures dried up auto sales and sent millions of consumers to the unemployment line. Offering payment deferments to customers while bracing for future loan losses and substantial declines in used-vehicle values dragged down net profits for lenders — including Ally Financial Inc., Bank of America, Wells Fargo and JP Morgan Chase.

Losses were quick and dramatic, though large auto lenders expect to weather the storm. Many banks boasted stronger balance sheets and processes during first-quarter earnings calls, outlining expectations of riding the pandemic’s economic fallout better prepared than during the 2008 financial crisis.

Credit ratings agency Moody’s Investors Service said last week six of the nation’s largest captive auto lenders it rates — Ford Credit, GM Financial, Nissan Motor Credit Co., Honda Finance, Toyota Financial Services and Hyundai Capital America — have adequate liquidity to withstand the coronavirus market disruption.

Chase CFO Jennifer Piepszak said during an investor call April 7 that the lender offered payment relief for “hundreds of thousands” of consumer lending accounts and expects that figure to rise “meaningfully” through time.

COVID-19 complications took a bite out of Chase’s earnings as net income fell 69 percent for the bank and revenue slid 3 percent to $29.07 billion.

“But in terms of what we’re seeing, those are the numbers,” Piepszak said. “They’re still, as I said, relatively small compared to what we think we’ll ultimately see.”

Net income for the bank’s consumer credit products including auto tanked 95 percent year-over-year to $191 million. Auto originations rose 5.1 percent from a year earlier to $8.3 billion in the first quarter. Total auto volume rose half a percent to $84 billion. Chase maintains private-label indirect lending agreements with Subaru, Jaguar Land Rover, Aston Martin, Maserati and Enterprise Car Sales.

Capital One, one of the largest U.S. auto lenders, told investors during an earnings call April 23 that auto customers are asking for more assistance than credit card customers. The lender posted a net loss of $1.3 billion in the first quarter.

“While it’s striking, I don’t think it’s necessarily surprising,” CEO Richard Fairbank said on the call, adding that auto payments are typically much higher than minimum credit card payments. Fairbank added that auto payments are often prioritized by customers.

“They’re very motivated to make sure that they can keep their car,” he added.

Wells Fargo posted a 19 percent increase in auto originations as net income plummeted 89 percent to $653 million.

Ally Financial posted a net loss of $319 million in first-quarter 2020 compared with a net income of $374 million in first-quarter 2019. One-fourth of auto loan customers requested payment deferrals, the lender said April 20, and the vast majority have never been delinquent.

Auto originations fell across the board in March, though generous automaker incentives allowed domestic captives to steal larger shares of the shrinking market.

Some captives are better prepared for the downturn, Moody’s said.

Ford Credit and GM Financial both have provisions in their support agreements that promise the parent company will inject capital if the lender becomes overleveraged.

So far, both automakers have said that scenario is unlikely.

GM Financial’s balance sheet was tested under “draconian” credit and residual value loss scenarios that GM considers more severe than the financial crisis, GM CFO Dhivya Suryadevara said May 6. Doubling the losses from those scenarios, “GM would still not be required to contribute capital,” she said. GM Financial could lose $2 billion off its current balance sheet and not require capital, Suryadevara said.

Earnings for GM Financial decreased 36 percent to $230 million in the first quarter. The captive contributed a $400 million dividend to the automaker in the first quarter, and GM expects another $400 million this year.

Executives at Ford Motor Co. told analysts this month that its captive finance arm has been “indispensable” during this crisis. Ford Credit’s earnings before taxes dropped 96 percent in the first quarter as the lender clocked $600 million in credit losses as it padded reserves for potential future losses stemming from the coronavirus outbreak.

Hannah Lutz contributed to this report.