Banks are cashing in on the rebound in car sales, as their auto lending arms search for ways to boost still-sluggish consumer loans.

Companies including Wells Fargo & Co., Capital One Financial Corp., JPMorgan Chase & Co. and Huntington Bancshares Inc. are reporting a rising number of automotive loan originations, even as increased competition among lenders is squeezing their profit margins.

"The trend line has clearly been very positive," Nick Stanutz, Huntington's president of auto finance, told American Banker in an interview. "Banks have come back in the space. There's just no opportunity in the other consumer products."

Stanutz says Huntington has seen auto loan originations grow more than 20% in each of the last three years, hitting record highs in 2009, then in 2010 and again in 2011.

Wells Fargo, Capital One and JPMorgan Chase — three of the top five largest auto lenders in the country — are also reporting growth, executives at those banks told American Banker.

"There are very few growth categories [for loans] — home equity is down, personal lending is restricted, and credit cards lost outstanding balances as consumers paid down [their debt]," says Ken Alverson, a managing director with consulting firm Novantas.

"For banks that are getting more liquid in terms of deposits, there are fewer and fewer sources to replace those earning assets or grow those assets," he adds.

That has made auto lending a rare and important opportunity for consumer loan growth, particularly for banks already in the business. Auto loans are also attractive because delinquencies tend to be low and they are secured.

Consumers are increasingly seeking bank financing to buy new and used cars, after a dropoff during the worst of the recession. New vehicle sales dropped to a low of 10.5 million vehicles in 2009, the worst sales year in decades, and down from roughly 16 million vehicles sold in 2006. But dealers sold 13 million cars in 2011 and analysts are predicting steady, if not improved sales in 2012.

Banks accounted for roughly 41% of car financing in the fourth quarter of 2011, with more than half of that business going to buyers with super-prime credit ratings, according to credit bureau Experian. As with other types of consumer loans, bankers are increasingly vying with each other for the least risky borrowers.

"It's all more competitive, so you have to be sharp at what you do across all your products," Thomas Wolfe, head of Wells Fargo's consumer credit solutions unit, told American Banker.

Wolfe declined to discuss specifics of how Wells Fargo is handling the increased competition. The bank is currently the second-largest auto lender, behind Ally Financial Inc., according to Experian.

Wells reported in its fourth-quarter earnings statement that indirect outstanding auto loans grew 8% from the prior year to $39.6 billion, and total auto loan originations increased 11% in 2011.

The increased competition among bank and non-bank lenders is driving down interest rates on auto loans, cutting into profits — meaning that those companies that want to remain competitive will have to step up their originations.

"Net interest margins are being squeezed," Alverson says. "While funding costs (deposit rates for banks) have continued to decline, loan rates have dropped even more, year over year."

He estimates that interest rates charged to consumers have fallen to an average of 4.59% for auto loans in the third quarter of 2011 from 5.33% a year earlier. For the very top tiers of credit, where banks have focused their auto lending, interest rates have fallen even more: down to 2.81% from 3.76% a year prior.

At the same time, the deposit rate for banks slipped just slightly, down to 0.69% from 0.90% the year before.

"Bottom line: profit margins are likely to narrow, particularly for prime credits — how low depends on lending alternatives available to the banks," Alverson says.

None of the banks contacted for this story break out revenue or profits on auto lending in public financial statements, nor would they discuss profits directly with American Banker.

But some banks said they are relying on their relationships with individual dealers to help them stand out in the increasingly competitive market.

"We've had a lot of momentum in auto finance business," says Kevin Borgmann, president of that business at Capital One, adding that the bank "focuses on deep relationships" with exclusive auto dealers. The McLean, Va., bank is the fifth-largest auto lender, according to Experian.

"We've had a similar strategy for a number of years, but really in the last two years we've been very, very sharply focused on it," he says.

Capital One's Diamond Dealer program focuses on a subset of dealers that "number in the thousands," according to Borgmann.

"We want dealers to make us their number one [external] lender and in return we have a deep relationship with them. That involves a number of things: deeper underwriting, more flexibility, and a higher tier of service," he adds.

Total auto loans at Capital One rose 22% from a year earlier to $21.8 billon in the fourth quarter of 2011. Originations grew 62% from a year earlier to $3.6 billion. The bank's net charge-offs for auto loans fell from 2.65% to 2.07%, roughly half its charge-off rate for credit cards.

At JPMorgan Chase, the third-largest auto lender, auto loan originations rose just 2% to $4.9 billion in the fourth quarter from a year prior, and total outstanding auto loans fell 3% to $46.9 billion.

But Marc Sheinbaum, head of the Chase auto finance unit, says he remains optimistic about the industry.

"There's no question that competition is stronger and back in the marketplace in full force. Our goal isn't just to increase market share, it's to find good opportunities and new partnerships," he says. "We see growth potential in this market, and we think we can deliver good returns for shareholder and still grow the business. And we're out there looking for opportunities."

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