Boom in Auto Loans Fizzles as Competition Drives Down Prices

Car sales are up, and Detroit is on the comeback trail — but the miniboom that banks enjoyed in car lending may be over.

Ally Financial Inc., the country's top car lender, is struggling to translate higher sales into more profits. So, too, are the big commercial banks that stole market share from the former lending arm of General Motors Corp. during the recession.

Virtually every auto lender — just about the only market where banks could expand lending in 2010 — wants to extend as many loans as possible to car buyers and car dealers, driving down rates and making them less lucrative for everybody.

Earnings fell 15.8% in the first quarter at Ally's North American auto finance division — the primary lender to GM and Chrysler dealers — compared with a year earlier, though its originations of new- and used-car loans nearly doubled.

Ally's quarterly performance indicates that problem is not going away anytime soon: The Detroit company, which is majority-owned by the government and plans to go public soon, suffered from softer revenue even as it took market share from banks and the lending arms of Toyota Motor Corp. and Honda Motor Corp.

Michael Carpenter, Ally's chief executive officer, said during a conference call that the mortgage and auto lender is positioned to pursue more car buyers after its $11.6 billion of quarterly originations enabled it to displace Toyota as the country's top auto lender.

"The competition is exhilarating," Carpenter said, adding that its "multi-decade relationships with dealers" gives it an edge over the big banks that had essentially retreated from auto lending before the recession presented an opportunity for them to get back into it. "We have reputations of being there through thick and thin."

Ally is also setting its sights on used cars, a lending segment in which it says it is No. 2 to Wells Fargo & Co.

"The used market is a great growth opportunity for us," Bill Muir, the president of Ally, told analysts Tuesday on a conference call. "We used to focus on selling the new vehicle as a captive-type lender but as an independent we are growing the used business. Used could get equally as big as the new business, but it could take some time."

Such competition is making car loans less lucrative even as demand increases. Automakers sold more than 1.2 million vehicles in March, up 16.9% from a year earlier, according to data from Autodata Corp.

And about 25% of the loan officers polled in the Federal Reserve's April survey in lending practices reported strengthened demand for auto loans.

But auto loan standards eased at about 30% of the large banks that responded to the survey, and slightly more than that said spreads on auto loans had weakened. The quarterly poll questioned 77 domestic and foreign-owned bank officers.

Its findings echoed comments in April from executives at a number of large banks where auto lending gains narrowed during the first three months of the year, suggesting that the miniboom in auto lending that some banks enjoyed in 2010 is coming to an end.

"There are new players, new entrants coming back into that space," Kevin Kabat, the chief executive officer of Fifth Third Bancorp in Cincinnati said in a call with analysts last month. "That's the battle of everyday that we compete with."

Fifth Third is the seventh-biggest provider of used car loans, according to data from Experian Automotive that Ally included in an investor presentation.

Fifth Third's total loans to car buyers were up 2% quarter to quarter and 9% year over year, to $11.7 billion.

Kabat said those results were "solid" but that the company had expected them to be higher. The portfolio's "unusually attractive" spreads have also been narrowing, he said.

"Originations are generally being made at lower yields than the loans at which they're replacing," Fifth Third's chief financial officer, Daniel Poston, said during the same call. "That's true in most categories with auto loans being a notable example."

BB&T Corp. had the same problem. Its auto loans grew by 3.8%, its fourth straight quarter of growth in that book and its second highest quarterly growth rate in a year.

But its $7.12 billion portfolio generated less interest than it did a year ago because yields on auto have fallen sharply. They yielded 5.21% in the most recent quarter, compared with 6.31% a year earlier.

BB&T CEO Kelly King said in a call with analysts in April that auto lending was "down a little bit from what we would hope … but still good."

Other Ally competitors reported softer auto lending results.

Bank of America Corp.'s loans to car dealers for managing inventory were down quarter to quarter. U.S. Bancorp's auto lending leveled off after relatively strong growth in 2010. The Minneapolis company makes new and used car loans to consumers. It added about $39 million, or less than 1%, more of them to its books in the first quarter. That portfolio grew by about 2% and 6.5% in the fourth and third quarters, respectively.

JPMorgan Chase & Co.'s auto growth flattened in the quarter. The New York company, which makes auto loans at more than 16,000 dealers, is the country's No. 5 auto finance provider, according to the data provided by Ally.

Though JPMorgan Chase's chief financial officer, Doug Braunstein, told analysts last month that its auto business had a "solid performance" last quarter, average auto loans fell by about 1%, or $700 million.

Balances were up 2% from a year earlier, but that was the first quarter-to-quarter decline in four quarters.

Auto originations, meanwhile, were flat from the previous quarter and down 24% from a year earlier, to $4.8 billion.