JPM / Credit Tracker: Auto Loan Losses UP Sharply and to Rise Further (from equity banks analyst)



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The Credit Tracker

Auto Loan Losses Up Sharply and to Rise Further



Below is a note released today from our equity banks analyst (Vivek Juneja) focused on recent auto loan loss trends by non-captive financials

Auto loan losses are rising quickly and likely to rise further due to both higher defaults and greater loss severities. A key driver of higher loss severities is the recent decline in the value of SUVs and pickup trucks with surging gas prices. Severities have been worsened by weaker loan terms with longer loan terms and higher LTVs. Rising unemployment would further increase defaults.


>Net chargeoffs are rising sharply and quickly – up 86% yoy on average in 1Q08 from very low levels. Auto loan loss trends need to be looked at on a yoy basis, not qoq, because of very large seasonal swings. Seasonal benefit may mute the qoq increase in auto loan net chargeoffs in 2Q, but we expect yoy increase to exceed 100 bp on average and could accelerate in 2H08.

> 30-day delinquencies on indirect auto loans are at the highest level seen since 1972 and above the peaks seen in all recessions since then. Delinquencies on subprime auto loans are up very sharply and also rising quickly on prime loans from extremely low levels.

>Used SUV and pickup truck values each fell 10-12% over the past two months per Manheim index data. SUVs, pickup trucks, vans, and crossover utility vehicles account for 50% of total vehicles. However, car vehicles are holding up on average and rising for compacts.

>Auto leases are also likely to have higher losses due to sharply lower residual values and early lease terminations. US Bancorp was the only bank among the top 10 auto lessors in 07 with $3.8 bil in lease residuals, 42% of which are SUVs. USB has insurance on these residuals that would cover a l arge part of the losses according to the company, but the insurance does not cover early lease terminations.

>Dealer finance loan losses are also likely to rise due to increasing inventories of vehicles whose values are declining. Most of our banks are in this business and some have sizable exposures.

>Geographically, defaults are up the most in states worst affected by the housing crisis: California, Florida, Nevada, and Arizona. Subprime auto loan losses are rising at a faster rate. Among our universe, Citi has the greatest predominance of subprime auto loans, and then Wells Fargo and Wachovia.

>Fifth Third would have the greatest impact on earnings from rising consumer auto loan losses as it has the largest share of consumer auto loans in its portfolio at about 10% at 3/31. FITB would also likely be impacted by higher dealer finance loan losses due to its sizable exposure to these loans. SunTrust would have the next highest impact on EPS. Citi would be hurt by the highest subprime focus, but it has the smallest proportion of auto loans.


>One positive development is the recent improvement in auto loan spreads, which should improve profitability of new originations.

Losses on Auto Loans Rising and Likely to Go Higher

Auto loan credit losses have begun rising and are likely to rise further due to increasing defaults and worsening severities. The rise in auto loan losses has accelerated over the past three quarters, and losses are obviously rising to a greater extent in subprime car loans due to weakness in the quality of loans. Securitized subprime auto loan losses are up 324 bp yoy from 5.25% in 1Q07, and securitized prime loan losses are up 45 bp yoy from a very low level of 0.69% in 1Q07. Total losses rose 153 bp yoy from 2.34% in 1Q07.

Auto Loan Losses Have Lots of Seasonality

Auto loan losses should be looked at on a yoy basis because of very large seasonal swings. Auto loan losses tend to go down in the first and second quarters on a linked quarter basis every year, but in 1Q08 losses rose yoy and also qoq, both in securitized auto loans and loans held on balance sheet at some of the banks and other major players, which is another negative sign.

The dollar amount of auto loan net chargeoffs rose about 86% yoy, and auto loan net chargeoff ratio rose about 83 bp yoy on average in 1Q08, from very low levels, on loans held at our banks and other major players. This increase was faster than the 50 bp yoy increase in 4Q07 and 28 bp yoy increase in 3Q07.

Lease Losses Also to Rise Sharply

Losses on auto leases are also likely to rise sharply, but leasing is dominated by captives. US Bancorp was the only bank in the top 10 players in auto leasing in 2007 with $5.8 bil in auto leases, including $3.8 bil in auto lease residuals of which 42% were SUVs. US Bancorp has residual value insurance that covers a large part of the losses but not all. However, importantly, the insurance does not cover early lease terminations, which we understand have increased sharply on vehicles like SUVs.

Losses Led by Sharp Decline in Vehicle Values

Auto loan losses are rising, especially due to increasing severities as a result of sharp drops in the values of SUVs and pickup trucks as well as weakening loan terms. SUV values are down 13% from 2006 and pickup trucks down 16% despite rising in early 2007. In contrast, cars have maintained their values as consumer behavior has shifted to smaller vehicles due to surging gas prices.

Manheim Used Car Index Values Also Down

Manheim used car index values are also down sharply in April and May, especially in SUVs and pickup trucks, which are down by 10% and 12%, respectively, since March. There has also been a smaller decline of about 6% in vans. Compact car values are up sharply for the past two months. According to some of our banks, foreign car values have held up better than domestic cars.

Rising Delinquencies Also Point to Higher Losses

Delinquencies have also increased sharply, which indicates further rise in credit losses. Indirect auto loan delinquencies are the highest since 1972, worse than in any of the prior recession cycles. Delinquencies declined month on month for the 3 months from February to April due to seasonality but rose yoy. We understand from some of our banks in the business that the delinquency increases are being led by the states worst affected by the housing crisis: California, Florida, Nevada and Arizona. As home price weakness spreads, this would also likely result in weakness in auto loans in other states. Furthermore, higher unemployment would also drive higher delinquencies.

Higher Defaults Are Likely to Be the Primary Driver of Higher Losses on Subprime Auto Loans

Delinquencies on subprime auto loans are already above 10% levels in securitized pools, and we understand from industry sources that these delinquencies could double. Securitized subprime auto loan losses are up over 300 bp yoy already. Severities generally tend to run lower on subprime auto loans, but higher defaults and some increase in severities could drive losses up another 300 bp.

Higher Severities Likely to Be Primary Driver of Higher Prime Loan Losses

Prime auto loans could see further increase in losses because of the rapid drop in values of SUVs and other big vehicles. Generally SUVs and such vehicles were bought by better credit worthy customers, but loss severity rates on these are being hurt by sharp decrease in recovery values.

2007 and 2006 vintage loans seem to be of weaker quality and are showing higher losses than 2004 and 2005 vintage loans with a more pronounced increase in subprime auto net chargeoffs.

Weaker Loan Terms Also to Hurt

Auto loan terms have weakened over the past few years similar to other consumer loans. Loan maturities have extended from 4-5 years to some loans at as much as 7-8 years. The proportion of 4-5 year loans for used cars has dropped from 70% in 2004 to 55% in 2008, whereas 5-6 year loans have risen from 29% to 39%, respectively, and over 6 year loans accounted for 6% of used car loans. Over 6 year loans accounted for 11% of new car loans in 2008 from 2% in 2004.

Credit losses on auto loans rise exponentially with higher LTVs – up four-fold when LTVs go from below 110% to over 120%. Losses also increase, but to a lesser extent, with loan maturities – up 60% when loans go from 60 months to 72 months.

Dealer Finance Loan Losses Also to Rise

In addition to consumer auto loans, losses are also likely to rise on auto dealer loans due to rising inventories. Losses are likely to rise on loans to dealers that have sizable inventories of SUVs and pickup trucks. Auto companies and dealers are offering sharp markdowns to try to sell some inventory, which further reduces the value of the collateral. Many players that are significant in indirect consumer auto loans also have sizable dealer loan portfolios, but there are also some banks that are more active in dealer finance loans such as National City, which is based in the Midwest (it is running off its indirect auto loan portfolio). Bank of America is one of only two of our banks to disclose auto dealer loans, which are about $14 bil (1.6% of total loans) and National City is the other with $849 mil (0.7% of total loans) but there are no details on type of vehicles.

However Improved Retail Loan Pricing Recently

There is some offset that benefits more recent originations as lenders started to tighten lending standards over the past 9 months and pricing has also improved. We understand that auto loan net interest spreads have increased from under 200 bp on average for prime loans to over 250 bp.

FITB Likely Highest EPS Hit from Higher Auto Loan Losses

Among our bank universe, they are almost all involved in auto loans, with most doing direct and indirect loans, and all are also involved in dealer finance loans, but National City’s indirect auto loan portfolio has almost run off. Fifth Third has the highest mix in auto loans at 10% of total loans, and the rest averaged from 3% to 8% in 1Q08.

Fifth Third would also have the highest impact on earnings from each 100 bp increase in consumer auto loan losses, which would lower 2009 consensus EPS by about 4%. However, loss increase at Fifth Third could be higher due to its geographic focus on the auto manufacturing belt and Florida. Increased losses on auto loans could impact the rest of our banks from about 2% to 5% of 2009 EPS.

Key drivers of losses would be vehicle mix and LTV (loan to value) ratios plus geographic mix, which are not disclosed by the banks. These estimates of increase in losses for the banks do not factor in losses on loans to dealers and do not differentiate by mix of vehicles (SUV/pickups vs. others), prime vs. subprime, or loan terms as those details are not disclosed by any of our banks.

Citigroup’s auto loan losses are also likely to rise sharply because of its focus on subprime loans. However, the bottom-line impact on earnings is likely to be less than our other banks because auto loans account for about 2.7% of total loans.

if your a leech with horrible credit and no down payment, why would any company loan you money for an automobile?

and if you don't pay them, and they can't find you or the car, what are they going to do.

and if they do find you and the car, what will they recover other than the car, an handful of paper judgements.

greed, these companies were getting massive amounts of interest on these loans, and dealers loved it because most leeches don't care what numbers you put in the contract, no money down, sign here.

Short plays here are also Capital One and Carmax.
COF and KMX have an auto loan book. Suckas.

BTW--my two neighbors who work for Chrysler change out their company cars the way we change our underwear....and these guys are low level finance guys who work 40 hours a week....government employees work harder than they do!

The hounds of hell are going to eat ****. mark my words.