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 The bank tapped mortgage executives Matt Vernon and John Schleck to
lead the auto lending business last May, saying they would be able
to sell auto loans alongside other products such as checking
accounts and home equity loans.
In interviews, the executives and their boss, D. Steve Boland, who
oversees a broad swath of consumer lending, said they still see room
for growth from borrowers who have good credit. They have hired
extensively in recent months, adding dozens of loan officers and
salespeople.
But some competitors and bank analysts said hiring doesn't make
sense at this stage, because auto sales may be close to peaking, and
consumer credit is showing signs of weakness.
Industry-wide, banks classified $1.1 billion worth of auto loans as
uncollectible in the fourth quarter, according to the Federal
Deposit Insurance Corp. That is up 15 percent from the year-ago
period, and up 39 percent since the fourth quarter of 2011.
Ultimately, much of that bad debt turns into losses for the banks.
For a graphic showing auto loans that are 30-89 days past due and an
auto sales projection, see http://tmsnrt.rs/24xv9vV
"I'm not actively hiring or growing our operations across the
platform. That's for sure," said Andrew Stuart, head of TD Auto
Finance, which is slightly smaller than Bank of America's auto
business.
At a Feb. 10 conference, Capital One Financial Corp <COF.N> CEO
Richard Fairbank said that while auto loans provided "once in a
lifetime type returns" after the financial crisis, the business has
begun to lose strength. In a January interview on CNBC, JPMorgan CEO
Jamie Dimon called the market "stretched."
Portales Partners analyst Charles Peabody said Bank of America is
late to the auto loans party. But in its defense, he noted that the
bank's Chief Executive Brian Moynihan and his management team were
too busy trying to resolve mortgage-related issues when the auto
lending business seemed like a smarter bet.
"They should have been beefing this thing up two years ago, but two
years ago Moynihan was still trying to stabilize the ship," Peabody
said.
SLOWING MOMENTUM
All banks are struggling to boost revenue during a period of
stubbornly low interest rates and tough post-crisis regulation, but
Bank of America has felt the pain more acutely than most of its
peers.
The second-largest U.S. bank by assets, Bank of America trades at
just 50 percent of book value, compared to 90 percent for JP Morgan
Chase & Co and 130 percent for Wells Fargo & Co. Bank of
America took bigger losses than those rivals during the crisis, and
still lags them by other key metrics, including return on equity and
costs in relation to revenue.
While Bank of America showed some progress in 2015, it still has to
prove it can generate consistent performance under Moynihan, who
took the helm in 2010. During his tenure, the bank has paid tens of
billions of dollars in fines and settlements related to mortgages
that were issued before he became CEO.
Bank of America ranks 11th among U.S. auto lenders, with just 1.72
percent of the market in the third quarter of last year, according
to the latest available data from Experian Automotive. Ally
Financial Inc, the largest U.S. auto lender, accounts for 6 percent,
followed by Wells Fargo, which ranked second with 5.57 percent.
JPMorgan was fifth with 4.15 percent.
Bank of America may rank higher on Thursday, when Experian says it
will release fourth-quarter data, because Vernon said much of its
growth came at the end of the year.
Auto sales remain very robust. Figures carmakers released on Tuesday
showed that sales climbed to a 15-year high for the month of
February, driven by low gasoline prices, wage growth, and because
loans are both available and cheap. But most forecasters expect
sales to peak in 2016 and trend down over the next few years.
"We remain in the 'plateau' camp," RBC Capital Markets analyst
Joseph Spak wrote on Tuesday, sticking to his flat sales forecast.
Stocks have broadly declined in recent months over concerns about
the global economy, and some companies that make money selling or
financing vehicles have gotten hit even harder. They recovered some
of those losses after the latest sales figures.
Ford Motor Co and General Motors Co are down roughly 6 and 11
percent, respectively, since the beginning of the year, while
publicly-traded auto lenders Santander Consumer and Ally are down
35.7 percent and 2.8 percent, respectively. The S&P 500 Index has
dropped 2.8 percent so far this year.
[to top of second column] |
Delinquencies on bonds comprised of subprime auto loans hit their
highest level in six years, Fitch Ratings said last week. According
to the FDIC, 1.82 percent of all auto loans were 30 to 89 days past
due during the fourth quarter – the highest rate on record since the
FDIC began keeping track in 2011.
As weakness in the auto sector has become evident, regulators have
begun to sound alarm bells.
In a speech in October, U.S. Comptroller of the Currency Thomas
Curry warned of risks from subprime auto loans, as well as loans
that mature in six years or more, which tend to be issued to
customers who can't afford monthly payments on loans with shorter
durations. In November, the Federal Reserve Bank of New York issued
a report on auto lending that showed a growing portion of loans
being issued to consumers with poor credit.
FOCUSED ON PRIME
Bank of America says it is focused strictly on prime and "superprime"
customers. The "majority by far" of its auto borrowers have credit
scores higher than 700, Vernon said. Borrowers with credit scores
above 660 are generally considered to have good credit.
Still, a decline in used car values would lower recoveries on loans
that go bad, and the longer the life of the loan the greater the
exposure to such a risk. Bank of America will lend up to 75 months —
slightly longer than the six years Comptroller Curry cited as a
concern — though Vernon said the average maturity is far lower.
The bank does not release granular data on its auto loan book, so it
is hard to know how its borrowers' credit quality has held up over
time. In data provided to Reuters, Bank of America said it made
$23.7 billion in auto and recreational vehicle loans in 2015, up 41
percent from 2014.
Most of that growth came through auto dealers, the area Vernon
oversees, and much of it happened in the fourth quarter after he
hired seven "relationship managers" whose job is to drum up business
with dealerships around the country. Vernon is targeting 5-10
percent growth for his operation in 2016.
Schleck, who oversees the business that works directly with retail
customers, has also been staffing up — nearly doubling the number of
loan officers to 110 from 60 since last May. Although Schleck said
he is unlikely to continue growing staff at that pace, he may hire
more this year if demand warrants. Likewise, if demand cools,
Schleck said he is prepared to reduce staff.
"I needed to get to a certain level to be able to provide a certain
level of service and I needed to get there very quickly—and did," he
said. "Prior to May there was probably a lot of lost opportunity,
whereas after May, I'm capturing what maybe we could have captured
earlier."
Boland, their boss, said it's true that Bank of America was "in a
different place in 2012," but disputed the idea that the bank is too
late to build up its auto loans business.
"I don't feel like I'm late at all," he said. "There's not a timing
issue to it. I'm going to continue to focus on growing across our
consumer lending."
As long as the bank is cautious about borrowers and keeps staffing
in line with demand, it can grow just by selling to more of its
existing customers, Boland added.
Patrick Kaser, portfolio manager at Brandywine Asset Management,
which owns about 26 million Bank of America shares, said the bank's
strategy is sensible even if it comes at a less-than-optimal time.
The bank pulled back "far too much" from certain businesses after
the shock of its mortgage losses and fines, and re-entering the
market with a focus on healthy consumers makes sense, he said.
"Only time will tell if they're entering at the peak and whether or
not they'll be too aggressive," said Kaser, "but the banks have a
lot of incentive to show discipline."
(Reporting by Dan Freed; Editing by Lauren Tara LaCapra and Martin
Howell)
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