National Full-Spectrum Auto Lenders Find Market Challenging

McLEAN, Va. — The slower economy, which has strained consumer finances and the credit environment has impacted three of the national full-spectrum auto lenders. In fact, all reported that their auto finance business struggled.

Giving an overview of Capital One's business, Richard Fairbank, Capital One's chairman and chief executive officer, said, "As the economy has weakened, we have selectively pulled back loan growth and maintained appropriately conservative underwriting standards.

"We feel confident that our strong balance sheet, resilient businesses and decisive actions will allow us to successfully navigate the cyclical economic weakness, and we remain poised to generate above-average returns on the other side of the cycle," he explained.

Looking specifically at the auto finance business, the company reported a net loss for 2007 of $33.8 million, compared with net income of $233.5 million in the prior year. In the fourth quarter, the division posted a net loss of $112.4 million, which officials said was due to the effects of worsening credit.

"Increases in charge-off and delinquency rates were a result of expected seasonal patterns, credit normalization and weakening in the U.S. economy," executives indicated. "While the company increased its pricing and tightened credit standards in the fourth quarter of 2007, the reduction in competitive intensity allowed the company to originate $3.6 billion of high quality loans, up 11.5 percent compared to the third quarter of 2007."

The tighter underwriting requirements and higher prices put into effect in the fourth quarter have lead to stronger credit profiles and better pricing on the portfolio, officials continued.

"An intended effect of the tightened underwriting has been to reduce the amount of originations. In 2008, the company expects to further reduce originations and focus its dealer prime business on a much smaller network of dealers," the company reported.

Meanwhile, Wells Fargo didn't fare much better.

Mike Loughlin, chief credit officer, characterized 2007 as "challenging."

"We largely avoided many higher-risk wholesale and consumer loan products and practices that are problematic to the industry," he said. "However, we did not fully appreciate the severity of the residential real-estate downturn and its impact on our home equity portfolio, particularly our third-party originated higher loan-to-value second mortgages."

Charge-offs in other revolving credit installment loans, mostly in the auto portfolio, jumped to $421 million for the fourth quarter, the company indicated. The $28 million increase in auto-charge-offs for the period, however, "was consistent with historical, second half of the year seasonal trends," the company reported.

Wells Fargo Financial covers real estate secured debt consolidation products, auto finances, consumer and private label credit cards, in addition to commercial services to consumers and business throughout consumers in the U.S., Canada, Puerto Rico and the Pacific Rim.

This segment of the company's business reported net income for the fourth quarter of $78 million, down $80 million from a year ago, which is when the company completed the final portion of its divestiture from some of its Latin American operations.

For 2007, officials said net income was $481 million, down from $852 million in the previous year. Executives indicated that the downturn was due partly to the result of the Latin American sale and a $50 million reversal of Hurricane Katrina related reserved in both 2006. However, the company also noted that 2007 showed higher losses and slower growth in its auto portfolio.

"Results in 2007 were significantly impacted by the auto business, stemming from a decision in late 2006 to slow the growth rate of this business in order to concentrate on reducing losses, delinquencies and to improve the loan collection process," explained Tom Shippee, president and CEO of Wells Fargo Financial.

"Growth in losses did slow in 2007, delinquencies remained lower than a year ago, although they did increase somewhat late in the year primarily due to seasonality, and the targeted improvements in the collection process have now been completed," he continued.

"While overall risk in this business has been reduced, revenue growth has moderated as we slowed the business down," Shippee pointed out.

Continuing on, Chase's Auto Finance division reported that net income was $49 million, down $16 million, or 25 percent, from 2006. Moreover, net revenue reached $450 million, which was up $39 million, or 9 percent, which officials said was due to higher vehicle operating lease revenue.

"The provision for credit losses was $133 million, up $36 million, reflecting an increase in estimated losses," executives explained. "The net charge-off rate was 1.27 percent, compared with 0.75 percent in the prior year."
Additionally, officials said non-interest expense of $237 million was up by $30 million, or 14 percent, mostly due to higher depreciation expense on owned vehicles subject to operating leases.

"Auto loan originations were $5.6 billion, up 12 percent from the prior year," according to the company. "Average loan receivables were $41.1 billion, up 6 percent from the prior year."

For the fourth quarter, the company reported net income of $49 million, compared with $76 million the third quarter and $65 million in the fourth quarter of 2006.

Net revenue came in at $450 million, compared with $447 million in the prior period and $411 million in the fourth quarter of 2006.

Origination volume for the quarter was $5.6 million, compared with $5.2 in the previous quarter and $5 million in the fourth quarter of 2006.

Auto loans 30 or more days delinquent accounted for 1.85 percent, compared with 1.72 percent in the same period of 2006.

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