Banks are all revved up for boat, RV lending

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Bank of the West in San Francisco will exit indirect auto lending and instead focus on financing purchases of boats and recreational vehicles.

The decision may seem counterintuitive, as auto-loan originations hit a near-record high of $159 billion in the third quarter, according to the Federal Reserve Bank of New York. Richard Fairbank, chairman and CEO of Capital One Financial, said on Oct. 24 that “we continue to see a growth opportunity” in indirect auto lending.

But the $91 billion-asset Bank of the West is hardly alone in opting to exit a business line that is seen as intensely competitive. Several regional banks, including TCF Financial in Detroit and Regions Financial in Birmingham, Ala., have decided to scale back or get out of indirect auto, citing shrinking returns and limited opportunities for cross-selling.

Bank of the West, a unit of France’s BNP, will stop making indirect car loans this month, Michael Pereira, the head of personal finance, said in an emailed statement.

He declined to say why it was leaving the business, but a company spokesperson told the trade publication Powersports Finance last week that Bank of the West’s personal finance team “will refocus resources on its RV/marine loan business.” (Powersports Finance was the first to report the bank’s decision.)

The shift is not without risks; if the economy weakens, consumers are likely to curtail spending on big-ticket items such as powersports equipment and RVs.

But in a healthy economy, boat and RV lending is an attractive line of business for banks because it’s far less competitive than indirect auto, said Virginia Bell Flynn, an attorney at Troutman Sanders in Richmond, Va., who advises banks on auto lending compliance.

“Banks have to compete with nonbanks that have a fundamentally different regulatory structure, which lowers overhead and allows them to offer more competitive pricing,” she said.

Boat and RV loans also typically carry higher interest rates, said Brian Foran, an analyst at Autonomous Research.

“The hope is you can attract prime borrowers,” Foran said. “They could pay upfront, but they would rather spread it out over time, so you can get a long-duration loan with a decent yield.”

Bank of the West has been gradually scaling back its auto lending and shifting assets elsewhere. Total car loans fell 26% to $3.8 billion between June 30, 2016, and June 30 this year, according to Federal Deposit Insurance Corp. data. Other loans to individuals, which includes RV and marine, rose 14% to $11.3 billion.

A number of other regional and community banks are also becoming more bullish on marine and RV lending.

The $11 billion-asset Northwest Bancshares in Warren, Pa., will gain a $225 million portfolio of RV and marine loans through its agreement to acquire the $2.1 billion-asset MutualFirst Financial in Muncie, Ind.

Home BancShares in Conway, Ark., created a marine division last year after it bought a business from Atlantic Union Bank in Richmond, Va.

Huntington Bancshares in Columbus, Ohio, said last month that its RV and marine business has been the fastest-growing category in its consumer loan book over the past year. RV and marine loans rose 13% to $3.6 billion in the third quarter from the same period a year earlier.

The $109 billion-asset Huntington has said that the average FICO credit score for customers taking out boat or RV loans is 800.

Moreover, the loans carry attractive yields. In the third quarter, average yields on RV and marine loans at Huntington were 4.96%, or 87 basis points higher than the average yield on auto loans.

Some banks are exiting indirect auto lending and shifting to other asset classes because they see little opportunity to capture borrowers’ deposits or offer other products or services.

There’s no customer relationship, so there’s no opportunity to cross-sell or deepen the relationship,” said Christopher Donat, an analyst at Sandler O’Neill.

Indirect auto has also become a business dependent on high volume, which has made it something of a commodity, Foran said.

“The blessing and the curse of indirect auto is that it’s really easy to generate volume,” Foran said. “The blessing is that it’s efficient and easy to ramp up. The curse is that it compresses profit spreads and it’s hard to differentiate your business.”

Still, plenty of large and regional banks, including Ally Financial and Capital One Financial, remain committed to indirect auto lending.

“They put a lot of effort into their underwriting and make sure they have the best data,” Donat said.

Many community banks and credit unions remain committed to indirect auto as well. Particularly in slow-growth markets, the loans can provide steady returns for small banks, said Alexander Twerdahl, an analyst at Sandler O’Neill. He cited the $3.1 billion-asset Arrow Financial in Glens Falls, N.Y., as a prime example of a community bank that is seeing strong growth in auto lending.

“Indirect auto has been a great asset class for Arrow,” Twerdahl said. “That loan book throws off a significant amount of cash flows that can be reinvested.”

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Consumer lending Auto lending Bank of the West Huntington Bancshares Capital One Ally Financial