TCF Stays the Course on Auto Loans as Others Pull Back

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TCF Financial in Wayzata, Minn., is still hitting the accelerator with auto finance even though other regional banks are tapping the brakes.

The $20.7 billion-asset company's executives said during a conference call Thursday to discuss quarterly results that they plan to continue an aggressive push into car loans, despite sliding yields and subtle signs of credit deterioration.

Analysts used the call to pepper TCF's executives with questions. They were trying to gauge management's outlook for auto lending, after TCF reported a slight uptick in chargeoffs compared to the third quarter.

The auto numbers are "probably one of the top things that people are going to look at," Jon Arfstrom, an analyst at RBC Capital Markets, said during the call. "Is there anything out there on the horizon that causes you to pause a bit, or are you still feeling good about it?"

"We read, as you all do, the headlines of the pending doom in that portfolio," Craig Dahl, TCF's newly minted chief executive, said in response. "We're keeping an eye on it."

TCF's auto book grew by 38% from a year earlier to $2.6 billion, though the average yield for those loans compressed by 7 basis points to 4.17%. Auto chargeoffs rose 13 basis points from a quarter earlier, to 0.75% of average loans, though TCF called the rise a seasonal increase.

Dahl — TCF's former president and successor to recently retired CEO Bill Cooper — has overseen the quick expansion of TCF's auto book, reflecting the company's shift away from mortgages in favor of shorter-term financing.

TCF's auto finance push stands out, as other regional banks pull back.

BB&T in Winston Salem, N.C., reduced its exposure last year because of low yields. Sales finance balances, excluding BB&T's recent acquisitions, fell 18% in the fourth quarter to $8.8 billion. The average rate on auto loans widened by 11 basis points, but remained relatively low at 2.86%.

"We simply are unwilling to participate in the tighter-spread market that exists in that space," Kelly King, the $209 billion-asset BB&T's chief executive, said during a recent conference call to discuss quarterly results.

"It simply does not make sense to book loans where there's not a reasonable risk-adjusted return on capital," King said, characterizing BB&T as scaling back, rather than exiting, auto finance. "We've been very careful and judicious looking at the kind of assets we're willing to book. Right now, sales finance is just not a particularly profitable area."

Fifth Third Bancorp in Cincinnati is also pulling back. The $141 billion-asset company shrunk its auto book by 3% last year to $11.7 billion, and management plans to make further reductions in 2016.

Auto finance margins are "not very attractive to us," said Greg Carmichael, Fifth Third's chief executive, said during a recent interview associated with his company's quarterly earnings.

Ken Zerbe, an analyst at Morgan Stanley, referenced other banks' pullbacks during TCF's call, asking management if it would slow down growth before seeing "meaningfully higher losses" in the portfolio. "Is there anything different about your portfolio?"

"Every portfolio is different," Dahl said, adding that TCF has a different model than Santander Consumer, a Dallas auto lender that recently reported a sharp rise in problem loans. "If your first comparison is to us and Santander, we're not even in the same hemisphere of their FICO band."

Dahl noted that TCF focuses on used cars, while larger competitors mostly focus on new vehicles with bigger price tags. While he noted that TCF originates subprime loans, Dahl declined to provide a breakdown of borrowers' average credit scores.

"We have what we believe to be the right metrics around monitoring this portfolio," he said.

Though BB&T and Fifth Third are hesitant, other lenders have been expanding, including the $71 billion-asset Huntington Bancshares in Columbus, Ohio.

Total auto loans increased 8% in the third quarter compared to a year earlier to $408 billion, according to the most-recent data from the Federal Deposit Insurance Corp. The average rate for a 48-month auto loan was 4% in November, based on data from the Federal Reserve Board.

Dahl also noted that TCF has network of about 12,000 dealers, adding that the company keeps close tabs on those relationships and rarely originates more than five loans per dealer in a given month.

When pressed about looming problems in the auto market, he said TCF's credit metrics — such as delinquency rates and chargeoff levels — remain strong.

"We would have to start seeing those leading indicators change before we would change our strategy," Dahl said.

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