Auto loan market faces big tests; U.K.’s big four banks boost market share

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Wirecard bust

“German prosecutors suspect Wirecard was looted before its spectacular collapse in June, with $1 billion funneled to opaque partner companies even as the payments group fought allegations of accounting fraud,” the Financial Times reported. “The embezzlement is suspected to have taken the form of unsecured loans, which Wirecard claimed were for advance payments to merchants processing card transactions through its partners in Asia.”

“Money flowing out of the company accelerated in the months before the collapse. The bulk of the new loans extended in early 2020 went to Ocap — a Singapore-based company run by a former Wirecard executive whose wife at the time still worked in a senior position at the company. In the first quarter, Ocap received almost €100 million, giving it a total debt to Wirecard of €230 million.”

“Singapore police brought their first criminal charges against an individual linked to the suspected fraud at Wirecard,” the Wall Street Journal reported. “The city-state’s white collar crime division charged R. Shanmugaratnam, a director and owner of Citadelle Corporate Services, with falsifying papers that showed more than €100 million ($118 million) in three separate escrow accounts held on behalf of Wirecard.”

“The charges were filed in early July against Mr. Shanmugaratnam, a 54-year-old Singapore citizen. They alleged he falsified the letters from Citadelle to Wirecard in March 2016 and 2017 and that he did so willfully ‘and with intent to defraud.’”

Shanmugaratnam “is suspected of being a key figure in an alleged multiyear fraud, accused of playing the role of trustee for fake bank accounts, which Wirecard told auditors were filled with cash,” the FT said.

Wall Street Journal

Road test

“A decadelong boom in auto lending threatens to unravel as payment deferrals end while unemployment remains high and stimulus measures fade. Borrowing for cars, trucks and SUVs rose more than 90% in the past decade, faster than all other types of borrowing except student loans, according to the Federal Reserve Bank of New York.” Auto debt outstanding hit a record $1.35 trillion in the first quarter, and 5.1% of car loan balances were 90 or more days delinquent, “only slightly below the peak of 5.3% in the financial crisis.”

“The lending boom was fueled by banks and investors who believed auto loans were a safe way to get extra yield while interest rates were low. They were relying on lessons learned in the financial crisis when consumers defaulted on their mortgages but kept making car payments. The risk is that the excesses caused by a flood of investor cash into the mortgages could show up in auto lending. If defaults rise, it will test whether lenders, and the investors that enthusiastically backed the loans, can work out deals that prevent borrowers from losing their wheels.”

Merger blueprint?

“For the first time in years, European bank mergers look to be more than a tantalizing mirage on the horizon.” In a hostile deal, two Italian banks are merging, “creating the eurozone’s second-largest bank by market value, after BNP Paribas. Investors and top bankers have long wanted industry consolidation in Europe—particularly cross-border tie-ups—to help diversify risk, build scale, boost profitability and compete with better-funded Wall Street players. But deals have proved elusive.”

“That just might be changing. Intesa-UBI, though an all-Italian affair, is the region’s first big acquisition not borne out of financial distress in many years. If it proves successful, other lenders might consider similar moves. The European Central Bank has made clear its support for tie-ups and even laid out its supervisory approach.”

Financial Times

Entrenched

“Experts fear the latest economic downturn will further entrench the dominance of Britain’s biggest banks — Barclays, HSBC, NatWest and Lloyds. The big four banks had provided more than 80% of the government-backed loans designed to help small and medium-sized businesses through the pandemic, as of the end of June. In contrast, the four largest banks in the U.S. accounted for just 12% of lending in their government-backed scheme in the same period.”

“Although the U.S. market has become more concentrated in recent years, its four largest banks still hold just 35% of customer deposits. In the U.K., the top four hold well over 50% of deposits, and have a particularly large share of cash in low-interest current accounts, which regulators have said provides a ‘significant funding cost advantage.’ The trend has worried the Open Banking Implementation Entity, a body that was set up to deliver competition-boosting measures after a 2016 investigation by the Competition and Markets Authority.”

Toughest test

Banks around the world, “particularly those focused on bread and butter lending to small businesses and consumers, are facing their toughest test since the financial crisis of 2008, as untold millions of companies face bankruptcy amid unprecedented global lockdowns and travel bans. For the smallest and weakest still struggling to recover from the cataclysm 12 years ago, coronavirus could prove fatal. For the biggest, it portends a period of hand-to-mouth survival — weak profits, no dividends and much lower, or no, bonuses — at a time when most investors had already turned bearish.”

Washington Post

Fix it or start over?

The Federal Reserve “is increasingly facing questions” over “whether relaxing the rules” of its $600 billion Main Street Lending Program “might help facilitate more business loans, or whether it should try an entirely different approach to help mid-sized firms fighting for survival. That debate was front and center during a Congressional Oversight Commission hearing on Friday. One of the biggest issues is that the Fed can only lend money, meaning it can’t provide grants to companies unable to take on more debt.”

“Fed officials say the Main Street program can, and has already been, revised to reach as many companies as possible. If the economy and pandemic worsen later in the year, having the program as a backstop could be key, officials say.”

Members of the commission “expressed frustration with the pace” at which the program “was propped up and the limited interest so far in the effort,” American Banker’s Neil Haggerty reports.

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