U.S. auto lenders are starting to tally the financial damage from late-summer hurricanes that destroyed an estimated 500,000 to one million vehicles.
So far, the impact on lenders has been relatively small, since many of them are offering forbearance to car owners who are struggling to rebuild their lives. Moreover, the biggest U.S. auto lenders have less than 10% market share, so hurricane-related losses will be spread widely across the sector, hitting credit unions and the financing arms of automakers in addition to banks.
Still, the industry’s eventual losses seem likely to run into the hundreds of millions of dollars across Texas, Florida and Puerto Rico. During the quarter, major auto lenders such as Ally Financial, Wells Fargo and Capital One significantly boosted their loan-loss reserves in anticipation of higher default rates.
Loans with longer terms, as well as loans to borrowers who have little equity in their vehicles, are more vulnerable when borrowers default, since insurance proceeds are less likely to cover lenders’ losses in those situations, according to Fitch.
The costs to specific banks hinge largely on their geographic footprint. Wells Fargo has significant exposure in Puerto Rico, where damage estimates are emerging more slowly than they did in Texas and Florida. A Wells Fargo subsidiary, Reliable Auto, is the largest vehicle financing companies on the storm-ravaged island.
San Francisco-based Wells said during its third-quarter earnings call that it built its reserves by $450 million to plan for hurricane-related losses. The $1.9 trillion-asset bank did not say how much of that total is related to auto loans.
Capital One in McLean, Va., set aside $23 million during the third quarter for higher future expected losses on auto loans as a result of the hurricanes. That allowance build contributed to an increase in the firm’s provision for credit losses, Capital One CEO Richard Fairbank said Tuesday during the company’s quarterly earnings call.
Ally, which is one of the nation’s largest auto lenders, set aside $48 million during the third quarter because of the hurricanes.
“We would expect higher chargeoffs over the coming few quarters due to the localized impact of the hurricanes, which we’ve largely provisioned for,” Ally CEO Jeffrey Brown told analysts Wednesday.
Detroit-based Ally also insures the vehicle inventories held by auto dealers. The company said that it absorbed an additional $19 million in losses in that business, but that some dealers did not file claims because they were able to move vehicles from potential flood areas to higher ground.
“This is why historically hurricanes haven’t been as impactful for us versus hailstorms that are less predictable and can pop up very quickly,” said Ally Chief Financial Officer Christopher Halmy.
Because auto lending is so fragmented, the impact of credit losses on any single institution "should be relatively manageable,” Michael Taiano, an analyst at Fitch Ratings, said in a recent research note.
Analysts at Standard & Poor’s said they expect the hurricanes to have a bigger impact on subprime auto lenders than on firms that focus on more creditworthy borrowers. Borrowers with better credit scores tend to have more equity in their cars.
Subprime auto lender Consumer Portfolio Services downplayed the hurricanes’ financial impact during its quarterly earnings call. CEO Charles Bradley said that the firm has been generous in offering extensions to borrowers in Texas and Florida, which has held down delinquencies.
“So as much as everyone thought, and certainly a lot of people wrote about the problems in those areas, as of yet we really haven’t seen very much,” Bradley said. “Maybe a tad early to say it’s over and done with.”
Another subprime auto lender, Santander Consumer USA, is scheduled to report its third-quarter earnings on Friday.
For the entire auto lending sector, there is a silver lining to the hurricanes. Used-car prices, which determine the value of lenders’ collateral, are expected to rise as hundreds of thousands of Americans who lost their cars shop for replacements.
That is what happened in the wake of Hurricane Katrina, the 2005 storm that devastated New Orleans and other parts of the Gulf Coast. “Used car prices tend to rise after major storms as a result of replacement demand,” analysts at Jefferies wrote in a recent research note.