Subprime Auto Lenders Straining Under Bad Debts

The U.S. subprime auto-lending market continues to show signs of weakness, leading to increased worries among economists that despite the positive-appearing figures being tossed off by the U.S. economy, blue collar America continues to struggle to pay its bills on time.

The nation’s two largest subprime auto lenders — Credit Acceptance and Santander Consumer (a subsidiary of the NY-listed Spanish bank) — tumbled yesterday (Jan 31) as both reported putting aside larger than anticipated sums to cover loans gone bad.

Credit Acceptance dropped 9 percent after nearly doubling provisions for loan losses in the fourth quarter from a year ago. Santander Consumer took a 7 percent hit after its provisions came in almost 15 percent lower than analyst forecasts.

That news follows reports of widening losses at the big banks on credit card debt — and it spurs more concerns that consumers are borrowing beyond their ability to pay, despite the fact that interest rates and unemployment are both at historic lows.  They also raise concerns about how auto-industry underwriting standards are applied, as subprime auto lending has, in recent years, been the fastest growing part of the segment.

Shares had seen a bump last year on the hope that increasing consumer employment would head off default rate increases.

“Investors had thought we had turned a corner, and that things would be improving in 2018,” said Vincent Caintic, analyst at Stephens. “It sounds like that may not be the case.”

Credit Acceptance set aside $61.3m for bad debts in the final quarter of 2017 — a big increase from the $27.4 million the lender allocated during the same period a year ago.

“It’s a timing change,” Brett Roberts, chief executive, noted on the changes to how the firm is predicting cash flow.

John Rowan, analyst at Janney Montgomery Scott, reported being “taken aback a bit” that executives at the company were “caught off-guard by a slower pace of cash collections on longer-term loans.”

Santander Consumer put aside $562m for bad debts, which was actually less than it had put away during the same period a year ago. And while that drop off from $686m is good news, the Q4 count was an increase over the $536m Santandar put away in the third quarter.

A somewhat disturbing result, since Juan Carlos Alvarez de Soto, chief financial officer, had predicted that Q4 losses would be no higher than Q3's.

“The overall macroeconomic environment remains stable and supportive for our business. Consumer confidence remains high.” However, Mr. Rowan said: “We still see deterioration.”



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