As if high interest rates were not straining profits enough, the demise of automobile leasing has forced several large regional banking companies into huge writedowns and scared some away from the business altogether.
Auto leasing, once a high-flying niche business embraced as a reliable source of interest income and fee revenue, has suffered recently from sharply declining used car prices.
Several factors have contributed, including a rising popularity of shorter-term lease contracts, which is creating more turnover and a glut of used cars on the market, and waning popularity for sports utility vehicles, a product segment that consumers financed heavily with leases.
Bank of America Corp. of Charlotte, N.C., the worst-hit in the third quarter, said last week that it would take a $257 million pretax charge related to the deterioration of its auto-lease residuals portfolio. Huntington Bancshares of Columbus, Ohio, said it would take a $33 million after-tax charge related to its auto leasing operation.
Bank One Corp. of Chicago, which is working through a companywide restructuring, blamed a $58 million charge from writedowns in auto-lease residuals for pushing its fee income down 17%.
The business has suffered from a drop in the value of residuals, the worth of a used car when the consumers lease contract expires. In a presentation to analysts at a pre-earnings warning in September, Huntington executives said that in 1997 the residual value of a vehicle in a four-year lease reached a peak of 61%, and the residual value of a vehicle in a five-year lease hit a high of 51%.
The residual value estimates have retreated sharply since then, now at 50% for four-year contracts and 38% for five-year pacts, according to the Automotive Lease Guide.
Nancy Bush, a banking analyst at Prudential Securities, said some banks were at the high-end in their estimates for the value of the residual, and a decline in prices only exacerbated the situation. Banks just cant stay ahead of the drop in used car prices.
Problems with auto leasing began in 1998, but this year they represented one more sore spot as banks have increasingly been forced to wrestle with poor credit quality, slowing revenues, and large restructuring charges.
As part of a $1.9 billion after-tax restructuring charge in the second quarter, Bank One included $518 million in charges at its retail business, most of which were attributed to the auto leasing business. First Union Corp. in Charlotte said early last year that it would wind down its auto lease portfolio, which at the end of June 1999 had a book value of $5.1 billion.
Unionbancal Corp., mostly owned by Bank of Tokyo-Mitsubishi, wrote down $5 million of third-quarter auto lease residuals and announced last month that it would quit a related business, indirect auto lending.
I think banks go into the leasing business because it was becoming more popular as a means of financing, said David Hilder, an analyst at Morgan Stanley Dean Witter. But they clearly did not understand the long-term economic risk there could be in making a mistake on the forecasting of residual values.
Still, not all banks in this business have had to write down losses.
Firstar Corp., the Milwaukee banking company that recently announced its intent to acquire U.S. Bancorp of Minneapolis, appears to have headed off writedowns by buying insurance to protect against a depreciation in residual values.