More community banks are de-emphasizing indirect auto lending.
Chemical Financial in Midland, Mich., and Fidelity Southern in Atlanta are the latest banks to scale back in the business.
There are several reasons for pulling back.
While credit quality at the $4.6 billion-asset Fidelity Southern remains strong — the average FICO score for its borrowers tops 765 — market forces are driving sales down.
Big auto lenders are “moving out of subprime,” said H. Palmer Proctor Jr., Fidelity Southern’s president. “That puts pressure on the sales price. The gain on sale is not there anymore.”
Chemical decided to allocate more resources to higher-yielding businesses, said David Klaeser, the $19 billion-asset company’s chief financial officer. The decision to scale back came after management determined that indirect auto loans were producing lower rates of return than other forms of credit.
Broadly, auto sales are declining. Sales are projected to fall by 7% in 2017 from a year earlier, according to Autodata and the Bureau of Economic Analysis. That could increase competition among financial institutions that opt to stay in the business in a significant way.
As banks cede market share in auto lending in 2017, credit unions have been among the primary beneficiaries.
CU Direct, an auto-lending platform that serves more than 1,000 credit unions nationwide, said it ranked as the nation’s biggest lender in the first half of the year. CU Direct made 568,000 auto loans through June 30, an increase of 18% year over year, and just enough to edge out Capital One Financial for the top slot, spokesman Bill Meyer said.
Credit unions “have become extremely aggressive in the space,” Proctor said. “They’ve got a real advantage when it comes to not paying taxes. They’re definitely a major factor.”
To be sure, not every bank is taking a step back. Huntington Bancshares in Columbus, Ohio, recently said it would seek to take advantage as competitors retreat from the business.
“We’re going to use this as the opportunity to grow market share,” Rich Porrello, the $101 billion-asset company’s executive managing director of auto finance and dealer services, said at a conference this month in New York hosted by Barclays.
More often that not the message from banks discussing indirect lending has been less, not more. Fifth Third, Citizens Financial and Regions Financial have all signaled reductions in their levels of indirect lending.
"Our auto portfolio will continue to be a headwind as we're working down the balances there," Regions Chief Financial Officer David Turner said at the Barclays conference. "We are not going to put a suboptimally returning asset on our books just to get loan growth."
For its part, Fidelity Southern is projecting indirect origination volume of roughly $1 billion this year, which would represent a 29% decrease from 2016 and a 35% decline from the peak in 2015. Still, the company has no plan to exit the business, which it entered in 1990. Rather, the strategy is to hunker down and wait for conditions to improve.
“We’re still very positive on this asset class,” Proctor said. “It’s always been a big part of what we’ve done and it will always be a big part of what we do.”
Like Chemical, Fidelity Southern expects to pick up the slack by making other types of loans. It expects to boost originations in commercial and residential construction lending, and to pursue more Small Business Administration business.
Fidelity Southern is looking to hire SBA lenders as it targets a national footprint, Proctor said. SBA lending, like many other lending segments, has also “become a very competitive space,” he said.
There is some upside to the decline in indirect auto lending, Proctor said, noting that it would result in a more diversified portfolio. Shifting to commercial and SBA lending should also spur deposit growth since auto loans are not a significant source of funding, he added.