Car loans dodge distress for now - Greater Cincinnati Automobile Dealers Association

Car loans dodge distress for now

By Telis Demos, Wall Street Journal

Stimulus programs started to end in August. But so far, when it comes to auto loans the other shoe remains undropped.

As the coronavirus spread, the question on credit risk has been what would happen when borrowers stopped getting government support. That was particularly the case for areas that were showing signs of stress before the crisis struck, like auto loans.

In the early stages of the pandemic, auto loans started showing high rates of customers in deferral programs. But deferrals have yet to turn into waves of defaults. Nearly all of Ally Financial ’s deferrals—96 percent of them as of the end of August—have expired, the company said Tuesday. In total Ally offered Covid-19 assistance to about 30 percent of its auto-loan accounts, or to about 1.3 million customers. Of those, just 7 percent have exited deferral status to become 30-days-past-due delinquent or to be charged off. Huntington Bancshares reported a 30-day delinquency rate of 4 percent for its auto loans formerly in forbearance.

Late payments have ticked up a bit during the summer as stimulus faded, but they are still well below even recent historical levels. Capital One Financial ’s 30-day-plus auto delinquency rate was 3.63 percent in August, up 0.2 percentage point from July, but down more than 2.6 percentage points from a year earlier. Santander Consumer USA Holdings ’ rate of 7.98 percent in August was up more than a point from July, but still nearly seven points lower than a year earlier.

Credit losses are also being flattered by a surge in used-car demand and pricing—meaning repossessed cars are flipped for good value. Ally Financial updated its full-year forecast for auto-loan net losses to 1.3 percent from a range of 1.8 percent to 2.1 percent. In fact, the major negative right now is that demand for autos is such that banks that lend to dealers are seeing a decline in credit utilization because dealers are finding it hard to put cars on the floor.

Still, the all-clear signal hasn’t yet sounded. There is ample time for distress to emerge. Though most post-forbearance loans are not delinquent, they also aren’t all paid in full; for some borrowers, it just means they haven’t yet passed a due date. JPMorgan Chase finance chief Jennifer Piepszak observed new behavior during the pandemic, with people spending less and increasing their reserves, unlike during a typical downturn.

The question is how people will handle new delinquencies as forbearances end, especially if they still aren’t working when opportunities to spend in a reopened economy grow. “I think it’s easy to see that that could be the back half of 2021 before we really start to see those losses realized in a material way,” Ms. Piepszak said.

Investors don’t believe things will resolve all that favorably, with steep price-to-book discounts on stocks such as Ally and Capital One. Nor really do banks, which are reserved for quite substantial losses for 2021 and beyond based on macroeconomic indicators like unemployment.

However, it’s worth keeping an open mind on whether things play out as investors or bank models expect, especially for big public lenders that have mostly avoided lending to the lower parts of the credit spectrum in recent years. Ally finance chief Jennifer LaClair noted that car payments have always been a priority for borrowers, and that Covid-19 has if anything “accelerated the importance of the auto to the consumer,” citing declining ride-share and public-transit utilization.

Defensive driving is only smart up to a point. Being overly cautious can be a danger, too.