In association with Auto Finance News

Looking ahead: Financiers predict a grim

LeAnne Graves

Auto financiers have shifted their 12-month outlooks into
reverse, as they predict lower loan and lease origination volume,
deteriorating performance, and declining net interest margins.

Specifically, 75 per cent of respondents to Auto Finance
’s most recent Auto Finance Forecast in April expect
direct and indirect loan originations to drop in the next 12
months, compared with 57 per cent of September 2007 respondents who
expected volume to climb. The outlook on lease originations,
meanwhile flip-flopped to mostly lower (50 per cent) from
predominantly higher (43 per cent) during the same time frame.

In terms of credit performance, 92 per cent of respondents
expect loan delinquencies to climb, compared with 73 per cent in
the fall survey. Relative to lease delinquency expectations,
respondents no longer predict lower late-payment rates.

Among financiers in the survey, half indicated that they
anticipate profit margins to worsen in the next year. By
comparison, 67 per cent of respondents to the previous survey
expected margins to climb.

Financiers mentioned a few positives stemming from the tougher
environment, though. For one thing, the harder-to-come-by credit
will force “competition to lighten,” wrote one respondent. And
“finance companies will adapt and new products and approaches to
lending and cost savings will evolve,” wrote another.

Still, one financier summed it up this way: The lending
landscape will “get worse before it gets better, but will improve
after about six to nine months.”

CREDIT RISK: Portfolio performance poised for

Marcie Belles, Mattew Schechter

Soft used-car prices and a sputtering economy contributed to
weakened credit performance among auto financiers last quarter. But
efforts to curtail origination and mitigate risk may position
lenders for a rebound by midyear.

AmeriCredit Corp. blamed its lower year-over-year earnings, in
part, on waning demand for used cars. Lower auction values,
combined with a tough capital markets environment and higher
unemployment contributed to the lender’s slowdown in origination
volume. The lender underwrote $1.3bn of loans last quarter,
compared with $2.5bn in the prior-year period, and announced
further compression in its origination target — to $3bn for the

“During the March quarter we saw some seasonal improvement in
our portfolio from the weak credit performance we experienced
during the December quarter,” said AmeriCredit president and chief
executive Dan Berce. “However, on a year-over-year basis, credit
performance is still considerably worse.”

Capital One Auto Finance has also ramped down originations.
Richard Fairbank, chairman and CEO of parent company Capital One
Financial Corp said: “We have exited the riskiest 25 per cent of
subprime originations, and we continue to focus on the uppermost
part of the subprime risk spectrum.” As a result, originations fell
to $2.4bn in the first quarter, 33 per cent lower than in the
previous quarter and 26 per cent lower than in the year-prior
period. Net income for the quarter dropped to a net loss of

Lingering losses

GMAC LLC’s losses climbed, despite a decline in delinquency
rates. Specifically, delinquencies fell to 2.4 per cent of managed
assets, from 2.5 per cent in the first quarter of 2007. Credit
losses, though, increased to 1.3 per cent from 1.1 per cent in the
same timeframe. The weakened performance comes on the heels of a
massive restructuring that calls for the Cerberus Capital
Management unit to close 75 per cent of its auto finance offices
and fire 930 people — 15 per cent of its workforce in the U.S. and

Citigroup Inc. bolstered its loan-loss reserve in the quarter,
in part because of “a higher expectation of losses in the auto
portfolio,” said CFO Gary Crittenden. Last month, subsidiary
CitiFinancial Auto announced a 33 per cent reduction in origination
volume and the firing of 800 employees — 20 per cent of its

A handful of exceptions

Wachovia Corp.’s auto finance credit trends “were a positive
story relative to our expectations entering the quarter,” said
Donald Truslow, senior executive vice president and chief risk
officer. “This portfolio is outperforming the industry, in part
because beginning in mid-2006 we began migrating our average
originations toward higher-quality credits.”

And within Wells Fargo Financial’s $28bn auto portfolio, credit
losses declined $6m from the fourth quarter because of seasonality.
Delinquencies, too, declined 25 per cent on a linked-quarter basis.
The bank attributed the improvements to “the tangible progress we
have made under a new management team after having installed new
collections and underwriting systems a year ago, along with tighter
underwriting and pricing,” said CFO Howard Atkins.


Real rides, virtual worlds

As virtual worlds – computer-based simulated environments
populated by users who interact via digital avatars – gain
popularity, auto financiers are looking for ways to tap real-world
customers through them.

Toyota Financial Services, one of the auto lending pioneers in
the virtual space, approved 896 Scion loans in Whyville ( last
month, pushing up its total since joining the site to 22,840, said
TFS spokeswoman Kerry Rivera. Approvals have outpaced financing,
though, as only 9,381 vehicles have been purchased on the site so

Whyville caters to the 8-to-15-year-old crowd. For Toyota
Financial, the impetus for joining Whyville was to develop early
brand loyalty and to create an atmosphere in which children
influence their parents. However, the lender is also promoting
financial literacy while integrating its brand for offline

However, TFS has its work cut out for it in terms of teaching
financial competence in Whyville. Case in point: Of the 9,381
Scions sold on the site, 1,974 have been repossessed — a 21 per
cent rate.

Lenders Forecasts for the next 12 months in Auto Finance (%)

Motor Finance Issue: 44 – June 08
Published for the web: June 26 08 15:18
Last Updated: June 26 08 15:35