Big banks are pulling back from the $1.2 trillion U.S. car loan market due to fears that consumers have taken on more debt than they can handle.
According to The Financial Times, new data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years.
The total slipped $1.6 billion to $440 billion from the fourth quarter of last year to the first quarter of 2017, suggesting that banks are put off by rising delinquencies and the threat of litigation. There is also worry over looser underwriting, which has seen lenders stretch out terms for borrowers while pushing up loan-to-value ratios and debt-to-income ratios — an echo of the subprime mortgage crisis
One of the banks backing away is Citizens Financial Group, with its Chief Executive Bruce van Saun saying he would rather steer resources into areas such as student loans. “We ran up auto for a while when there was not much else going on. Now we have growth in other areas which offer better risk-adjusted returns.”
Capital One, which added a net $2 billion to its $50 billion car loan book over the first quarter, is also toning down their outlook. “We’re certainly one more notch cautious,” said Richard Scott Blackley, chief financial officer, noting bigger-than-expected falls in used car prices in the first quarter. “We think that by pulling back a little bit, we’re going to … maximize price over volume.”
Analysts expect losses to keep rising if used-car prices, already down about 8 percent this year, continue to fall. And while the consequences of a car sector meltdown are unlikely to be as severe as in mortgages, “there will be fallout,” said Joseph Cioffi, chair of the insolvency and creditors’ rights practice at Davis & Gilbert, a law firm. “Just because something doesn’t kill you, doesn’t mean it’s good for you.”