Under new CEO, Truist is exiting near-prime auto lending

• Key insight: Truist Financial is dropping its near-prime auto lending business, having decided the sector is not core to its strategy and has been dragging down credit quality.
• Supporting data: The company's non-performing indirect auto loans reached $569 million in the second quarter, making up about one-third of Truist's total non-accruing assets. 
• Expert quote: "To the extent that these businesses, or certainly these assets, don't fit our eye and don't fit the economics, then we're going to stop doing them." — Mike Maguire, chief financial officer at Truist

Truist Financial is leaving the near-prime auto lending business, as new CEO Michael Lyons begins to make his mark on the bank.

The Charlotte, North Carolina-based company said Tuesday that it's reached a deal to sell $5.5 billion of auto loans, essentially clearing out all the assets of the Regional Acceptance Corp., its auto-lending subsidiary.

The deal is expected to close in this year's third or fourth quarter. Truist did not disclose the buyer.

Mike Maguire, Truist's chief financial officer, said the $556 billion-asset bank holding company is exiting the business for a number of reasons. First and foremost, he said, the sale is part of a strategy championed by Lyons.

"Mike's applying a framework that I think everybody can appreciate," Maguire said Tuesday at the Barclays Global Financial Services Conference in New York. "In the simplest form, it's going to be focusing on fewer things that frankly leverage our strengths."

Lyons, a 30-year banking veteran who most recently led the fintech Fiserv, became Truist's CEO on Sept. 1. During his first two weeks at the helm, Maguire said, Lyons has added "urgency and intensity" to a companywide review of which businesses are working and which ones are not.

"To the extent that these businesses, or certainly these assets, don't fit our eye and don't fit the economics, then we're going to stop doing them," Maguire said.

In terms of the economics, the CFO said, there was a "pretty compelling financial case" for dropping the Regional Acceptance Corp. business: Though the loans were relatively high-yield, they also suffered from many delinquencies and charge-offs. In the second quarter, Truist's non-performing indirect auto loans reached $569 million, making up about one-third of the company's total non-accruing assets.

"The concentration in non-performing loans and charge-offs in this business … creates an opportunity to to really improve our overall credit profile," Maguire said.

In a securities filing, Truist said it expects the sale of the loans to reduce net charge-offs as a share of total loans by about 10 basis points annually, as well as bring "modest" improvement to earnings and return on tangible common equity.

Gerard Cassidy, an analyst at RBC Capital Markets, saw the move as part of Lyons' broader strategy, which he expects to continue.

"New CEO Mike Lyons has moved swiftly in his first 15 days on the job," Cassidy wrote in a research note on Tuesday. "We also believe further divestitures are likely as Lyons repositions Truist for stronger growth and profitability over the next three years."

That narrowing-down process started before Lyons arrived. Earlier this year, Truist stopped originating loans for recreational and marine vehicles, citing a need to "allocate capital to the highest-value opportunities across the company," as outgoing CEO Bill Rogers put it.

Now near-prime auto loans have joined loans for RVs and boats on the chopping block. One problem with all three categories, in Truist's view, is that such loans are often one-and-done transactions that rarely lead customers to other services.

"Regional Acceptance is typically a loan-only, loan-first national business where our opportunity to really have a meaningful relationship with these clients beyond that single loan product is extremely limited," Maguire said.

This is a concern shared by a number of banks that have pared down their auto-lending businesses in recent years. In 2023, Fifth Third Bancorp scaled back its indirect auto lending program, and Citizens Financial Group exited the business altogether. Both banks cited a desire to focus on developing deeper client relationships.

In Truist's case, Maguire said, the sale of its near-prime auto business is only one step in a much longer process.

"I think Mike's eager to conduct that review, make those choices and then get us, frankly, back into growth mode," Maguire said.