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Falling used-car prices pose risk to auto lenders: Capital One CEO

Capital One Financial Chairman and CEO Richard Fairbank is urging caution about U.S. auto lending, warning that falling used-car values could lead to significant losses across the sector.

“As used-car prices come down, I think it will have quite an impact,” Fairbank said during remarks at an investor conference in New York this week. “I think that cloud in some ways hangs over the industry.”

Used-car values fell slightly in both October and November compared with the same months a year earlier, according to the Manheim Used Vehicle Value Index. It was the first time in nearly three years that values of previously owned vehicles dropped for two consecutive months.

Falling used-car prices hold peril for lenders because they put downward pressure on the amount of money that the companies can fetch for repossessed vehicles.

Fairbank said Wednesday that Capital One underwrites auto loans based on the assumption that used-car prices will decline. But he suggested that some competitors may not be as disciplined.

“This industry has been buoyed by used-car pricing that is high, and has consistently over the years been higher than our own expectations,” Fairbank said.

Brian Foran, an analyst at Autonomous Research, suggested in a research note to clients declining used-car values could lead to higher losses, and falling stock prices, for auto lenders.

In a November client note, Foran wrote that strong used-vehicle prices in recent years have more than offset the impact of rising rates of late payments by borrowers.

At the end of the third quarter, McLean, Va.-based Capital One reported $59.3 billion in auto loans held for investment, which was up 3% from the same period a year earlier.

That growth was roughly in line with the industrywide trend. U.S. auto loans outstanding rose 3.8% between the third quarter of 2018 and the same period this year, according to Federal Reserve data.

Earlier this week, a top Wells Fargo executive who spoke at the same conference in New York expressed a more bullish view about the opportunities currently available in auto lending.

John Shrewsberry, the San Francisco bank’s chief financial officer, said that used-car values remain strong in the context of how the company evaluates risk. Wells Fargo has resumed making loans to car buyers with lower credit scores following a period in which it reduced its auto-lending footprint amid a restructuring of the business, he added.

“I’ve been asked, or people have observed, isn’t it a little late cycle to be thinking about taking your auto business down credit?” Shrewsberry said. “And we’re certainly very aware of that. This is the business that we ran before from a credit perspective, and at least on the credit side, we were happy with the results.”

Regional banks, which may have a harder time selling additional products to car loan customers, have generally been less upbeat about the auto lending business. Bank of the West and Regions Financial both announced plans this year to stop making car loans through auto dealerships.

And this week, Citizens Financial Group CEO Bruce Van Saun said that the Providence, R.I.-based bank is trimming its auto loan portfolio with an eye toward improving risk-adjusted returns.

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