A glut of used cars on the market is continuing to cause problems for banks in the auto leasing business.
Last year banks lost money on more than 20% of the cars they owned after leases matured, up from 12% in 1997, according to a survey sponsored by the Consumer Bankers Association.
"Because current leases were originated at a time when the industry was more optimistic about used car values, we could very well see more of these losses in the near future," said Rodney Bahr, a partner at KPMG who conducted the study.
Leases ending in 1999 could result in similar or greater losses, he added.
Major banks have seen a drop in profits from auto leasing, according to executives here at the association's automobile finance conference.
In December, Bank One Corp. announced a $100 million cash charge to earnings related to the business.
Behind the losses are overstated residual values, the estimated amount of money a bank will get when it sells a car at the end of a lease.
In the early 1990s, a hike in new car prices made leasing an increasingly popular option among consumers, and banks wanted a piece of the action. Banks could profit from the lease income and sell the automobile for more than its estimated residual value because of a high- demand used-car market.
In addition, banks receive up to $400 in up-front fees for a lease and get certain tax advantages-two perks not available when making a loan, said Nicholas G. Stanutz, senior vice president at Huntington National Bank, Columbus, Ohio.
"It really is more profitable for banks than loans," he said.
To attract more leasing customers, banks lowered monthly payments and made up for it by raising estimates on residual values. But by 1997, many leases ended, creating an oversupply of used cars and driving actual prices well below banks' residual estimates.
According to the Consumer Banker's Association, the average loss caused by a car with a mature lease in 1997 was nearly $1,800; the 1998 figure was not available, though it is expected to be similar, Mr. Bahr said.
According to Mr. Bahr, who polled 24 of the largest banks with auto finance arms and the 25 biggest auto leasing firms, the losses may have persuaded respondents to pull away from leasing and turn back to lending.
New leases declined by as much as 5% in 1998, while loan originations were up 20%, according to the survey.
As a result of the losses, bankers are approaching the leasing business more cautiously.
"I wouldn't say that banks are pulling out of this business, but we are definitely getting quite a bit more conservative," said Richard T. Schliesmann, executive vice president of Wells Fargo & Co.'s auto finance division.
But setting residual estimates is a tricky business. Among other things, banks must account for fluctuations in manufacturers' production volumes and in new car incentives, which can lower the value of used cars.
Adding to the difficulty is the amount of options available on a car. Swerve assistance, night vision, and voice recognition systems are starting to show up in new models, making it far more challenging for banks to estimate the value of cars when leases end.
"What kind of residual are you going to put on a car with night vision?" asked John Blair, vice president of Automotive Lease Guide, which tracks residual value trends. "It is very easy to miscalculate."
As an alternative some banks are offering longer lease periods, hoping that customers will want a different car before the lease ends and "trade out." Lessees who trade out are responsible for any loss in a car's value.
"Banks are looking to longer leases to protect themselves," Mr. Blair said.
