(In March 3 item, corrects paragraph 33 to indicate that
Patrick Kaser is a portfolio manager at Brandywine Global
Investment Management, not Brandywine Asset Management)
By Dan Freed
March 3 (Reuters) - Bank of America (NYSE:BAC) BAC.N is making a big
push into auto lending just as regulators are sending warning
signals, losses from auto loans are rising, and rivals are
growing more cautious after years of strong returns.
The bank tapped mortgage executives Matt Vernon and John
Schleck to lead the auto lending business last May, saying they
would be able to sell auto loans alongside other products such
as checking accounts and home equity loans.
In interviews, the executives and their boss, D. Steve
Boland, who oversees a broad swath of consumer lending, said
they still see room for growth from borrowers who have good
credit. They have hired extensively in recent months, adding
dozens of loan officers and salespeople.
But some competitors and bank analysts said hiring doesn't
make sense at this stage, because auto sales may be close to
peaking, and consumer credit is showing signs of weakness.
Industry-wide, banks classified $1.1 billion worth of auto
loans as uncollectible in the fourth quarter, according to the
Federal Deposit Insurance Corp. That is up 15 percent from the
year-ago period, and up 39 percent since the fourth quarter of
2011. Ultimately, much of that bad debt turns into losses for
the banks.
For a graphic showing auto loans that are 30-89 days past
due and an auto sales projection, see http://tmsnrt.rs/24xv9vV
"I'm not actively hiring or growing our operations across
the platform. That's for sure," said Andrew Stuart, head of TD
Auto Finance, which is slightly smaller than Bank of America's
auto business.
At a Feb. 10 conference, Capital One Financial Corp (NYSE:COF) COF.N
CEO Richard Fairbank said that while auto loans provided "once
in a lifetime type returns" after the financial crisis, the
business has begun to lose strength. In a January interview on
CNBC, JPMorgan CEO Jamie Dimon called the market "stretched."
Portales Partners analyst Charles Peabody said Bank of
America is late to the auto loans party. But in its defense, he
noted that the bank's Chief Executive Brian Moynihan and his
management team were too busy trying to resolve mortgage-related
issues when the auto lending business seemed like a smarter bet.
"They should have been beefing this thing up two years ago,
but two years ago Moynihan was still trying to stabilize the
ship," Peabody said.
SLOWING MOMENTUM
All banks are struggling to boost revenue during a period of
stubbornly low interest rates and tough post-crisis regulation,
but Bank of America has felt the pain more acutely than most of
its peers.
The second-largest U.S. bank by assets, Bank of America
trades at just 50 percent of book value, compared to 90 percent
for JP Morgan Chase (NYSE:JPM) & Co JPM.N and 130 percent for Wells Fargo (NYSE:WFC)
& Co WFC.N . Bank of America took bigger losses than those
rivals during the crisis, and still lags them by other key
metrics, including return on equity and costs in relation to
revenue.
While Bank of America showed some progress in 2015, it still
has to prove it can generate consistent performance under
Moynihan, who took the helm in 2010. During his tenure, the bank
has paid tens of billions of dollars in fines and settlements
related to mortgages that were issued before he became CEO.
Bank of America ranks 10th among U.S. auto lenders, with
just 1.84 percent of the market in the fourth quarter of last
year, according to data released Thursday by Experian
Automotive. Ally Financial Inc ALLY.N , the largest U.S. auto
lender, accounts for 5.75 percent, followed by Wells Fargo,
which ranked second with 5.66 percent. JPMorgan was third with
4.97 percent.
Auto sales remain very robust. Figures carmakers released on
Tuesday showed that sales climbed to a 15-year high for the
month of February, driven by low gasoline prices, wage growth,
and because loans are both available and cheap. But most
forecasters expect sales to peak in 2016 and trend down over the
next few years.
"We remain in the 'plateau' camp," RBC Capital Markets
analyst Joseph Spak wrote on Tuesday, sticking to his flat sales
forecast.
Stocks have broadly declined in recent months over concerns
about the global economy, and some companies that make money
selling or financing vehicles have gotten hit even harder. They
recovered some of those losses after the latest sales figures.
Ford Motor (NYSE:F) Co F.N and General Motors Co (NYSE:GM) GM.N are down
roughly 6 and 11 percent, respectively, since the beginning of
the year, while publicly-traded auto lenders Santander (MC:SAN) Consumer
SC.N and Ally are down 35.7 percent and 2.8 percent,
respectively. The S&P 500 Index .SPX has dropped 2.8 percent
so far this year.
Delinquencies on bonds comprised of subprime auto loans hit
their highest level in six years, Fitch Ratings said last week.
According to the FDIC, 1.82 percent of all auto loans were 30 to
89 days past due during the fourth quarter - the highest rate on
record since the FDIC began keeping track in 2011.
As weakness in the auto sector has become evident,
regulators have begun to sound alarm bells.
In a speech in October, U.S. Comptroller of the Currency
Thomas Curry warned of risks from subprime auto loans, as well
as loans that mature in six years or more, which tend to be
issued to customers who can't afford monthly payments on loans
with shorter durations. In November, the Federal Reserve Bank of
New York issued a report on auto lending that showed a growing
portion of loans being issued to consumers with poor credit.
FOCUSED ON PRIME
Bank of America says it is focused strictly on prime and
"superprime" customers. The "majority by far" of its auto
borrowers have credit scores higher than 700, Vernon said.
Borrowers with credit scores above 660 are generally considered
to have good credit.
Still, a decline in used car values would lower recoveries
on loans that go bad, and the longer the life of the loan the
greater the exposure to such a risk. Bank of America will lend
up to 75 months - slightly longer than the six years Comptroller
Curry cited as a concern - though Vernon said the average
maturity is far lower.
The bank does not release granular data on its auto loan
book, so it is hard to know how its borrowers' credit quality
has held up over time. In data provided to Reuters, Bank of
America said it made $23.7 billion in auto and recreational
vehicle loans in 2015, up 41 percent from 2014.
Most of that growth came through auto dealers, the area
Vernon oversees, and much of it happened in the fourth quarter
after he hired seven "relationship managers" whose job is to
drum up business with dealerships around the country. Vernon is
targeting 5-10 percent growth for his operation in 2016.
Schleck, who oversees the business that works directly with
retail customers, has also been staffing up - nearly doubling
the number of loan officers to 110 from 60 since last May.
Although Schleck said he is unlikely to continue growing staff
at that pace, he may hire more this year if demand warrants.
Likewise, if demand cools, Schleck said he is prepared to reduce
staff.
"I needed to get to a certain level to be able to provide a
certain level of service and I needed to get there very
quickly-and did," he said. "Prior to May there was probably a
lot of lost opportunity, whereas after May, I'm capturing what
maybe we could have captured earlier."
Boland, their boss, said it's true that Bank of America was
"in a different place in 2012," but disputed the idea that the
bank is too late to build up its auto loans business.
"I don't feel like I'm late at all," he said. "There's not a
timing issue to it. I'm going to continue to focus on growing
across our consumer lending."
As long as the bank is cautious about borrowers and keeps
staffing in line with demand, it can grow just by selling to
more of its existing customers, Boland added.
Patrick Kaser, portfolio manager at Brandywine Global
Investment Management, which owns about 26 million Bank of
America shares, said the bank's strategy is sensible even if it
comes at a less-than-optimal time. The bank pulled back "far too
much" from certain businesses after the shock of its mortgage
losses and fines, and re-entering the market with a focus on
healthy consumers makes sense, he said.
"Only time will tell if they're entering at the peak and
whether or not they'll be too aggressive," said Kaser, "but the
banks have a lot of incentive to show discipline."
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Graphic showing auto loans that are 30-89 days past due and an
auto sales projection, see http://tmsnrt.rs/24xv9vV
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