Rebounding car sales are offering banks a rare chance to expand lending in a business line that many of them fled just before the economy collapsed.
It's an opportunity unlikely to be fully embraced.
As car sales have risen this year, auto lending has too, modestly, at JPMorgan Chase & Co., Wells Fargo & Co., U.S. Bancorp, Fifth Third Bancorp and a handful of other large and midsize banks. While the growth isn't gangbusters, it is notable given the tepid lending environment across most corporate and consumer loan categories, and banks' recent history in the auto loan sector.
Still, few observers expect an industry that claims it's anxious to grow assets to take advantage of the uptick in demand to make a big push in the sector — even though the trend could boost banks' bottom lines.
In part, banks' present reluctance reflects a downsizing of auto lending operations going into the recession, a time when car company-owned finance operations like GMAC LLC were driving down prices and underwriting standards in a bid to capture more of the market.
Analysts say the recession damped bankers' appetite for commodity-type businesses, and that they may be wary of having to compete again with so-called "captive lenders," especially with reports that General Motors Co. is considering buying back GMAC, which has been renamed Ally Financial Inc.
Rene Jones, chief financial officer of M&T Bank Corp., said in an interview last moth that the Buffalo lender — which has been pulling back from auto lending for years — has no interest in reversing course.
"My sense is that everybody is going after the same high-quality customers," he said. "The pricing doesn't make sense for us. It's too competitive — we can't offer rates that low."
Compared with auto lending, bankers also see better long-term growth prospects in areas like small-business loans, observers said.
Dale Greene, executive vice president of Comerica Inc., said in a conference call with analysts last month that the Dallas lender sees "fairly muted" chances for revenue growth in auto, even as strengthening in that sector presents "some good opportunities" for the company. Comerica's auto dealer loans were up $100 million in the first quarter.
Jeffery Harte, managing director with Sandler O'Neill & Partners LP, notes that some banks that held on to their auto loan businesses are simply regaining some of the market share they let go of last decade.
"You have a lot less competition," he said. "The banks stepped back and let the captives have [the auto space] — not long after that the credit bubble burst. And the captives had huge losses in poorly underwritten and poorly priced loans. The banks are kind of stepping back into that void."
But even if auto lending is rising, "it's still a long way from where it kind of used to be," Harte said, adding, "I would think, right now, banks are going to be very cautious in their lending decisions."
The first quarter's auto loan growth numbers were hardly eye-popping, even as vehicle sales have surged. Auto sales in April rose 20% from a year earlier, according to Edmunds.com, which tracks industry data. Consumers who put off purchases during the recession are taking advantage of favorable deals, experts say.
JPMorgan Chase said auto loans were up 3% — or $1.4 billion from the prior quarter, a pittance for a company of that size. They were up about 1%, or $118 million, at U.S. Bancorp.
Huntington Bancshares Inc. and Fifth Third reported similarly modest growth.
Nonetheless, while auto loan growth may not have been large, it has been lucrative.
Don Kimble, Huntington's chief financial officer, said in a call with analysts last month that yields on auto loans were in the "5.5% to 6%" range. Originations have also been especially favorable because people qualifying for car loans right now have high credit scores, so loss rates should be low, he said.
Fifth Third's auto loans yielded 6.24% in the first quarter, higher than its commercial and home loans. U.S. Bancorp's retail book — the bulk of which is composed of auto loans — yielded 6.78%, the highest yield of any portfolio.
Anthony Davis of Stifel Nicolaus said yields of 5% to 6% are "attractive … considering what rates you can get with other loans," he said.
"At some point, when rates start rising and commercial loans get better … the relative appeal of auto loans won't be as stark," he said. "But right now that's a pretty attractive rate."
Brett Rabatin, an analyst with Sterne, Agee & Leach Inc., points to another factor that might drive auto lending: an opportunity for banks to put some of their liquidity to work while waiting for loan demand to pick up elsewhere.
"They're extremely liquid" and seeking "opportunities that they can find to grow loans," he said. "If they think the credit risk is right and the rates are right — they are going to pursue this."