Auto loan market accelerates as demand for cars in US holds
While Tesla’s skyrocketing bitcoin assets have caught the attention of investors, an old-fashioned one has quietly seen a surge in the Covid-19 era: auto loans.
Auto loan-backed bond prices have reached multi-year highs. The riskiest groups of triple-B back-to-back bonds, according to JPMorgan, are now trading with yields only 0.7 percentage points higher than treasury bills of similar maturities. This additional return on the world’s leading risk-free asset fell 0.3 percentage point from its previous lows in January 2020, before the onset of the coronavirus crisis.
Even though yields in the $ 220 billion backed bond market fell due to rising prices, interest rates charged by lenders for loans barely fell, thanks to strong demand for cars among consumers.
“The automobile has been a real winner at Covid,” said Jennifer LaClair, chief financial officer of Ally Financial, the online bank solely from the financial arm of General Motors and whose majority of its loan portfolio is devoted to the automobile. Ally’s share price is 30% above its pre-Covid highs.
The short lifespan of auto loans – usually three to five years – means borrowers don’t tend to refinance. Loans also consume less of a household’s income than other common forms of debt. “Unlike mortgages where[1 percentage point]. . . worth hundreds of dollars per month, the difference between 6 and 7 percent is about $ 12 per month “on a typical loan, LaClair said.
The average yield on an Ally retail auto loan is just under 7%, at a time when 30-year fixed rate mortgages below 3% are increasingly common. This means that lenders like Ally have been able to maintain declining margins in other asset classes.
New car sales in the fourth quarter were down about 5.7% from a year earlier, according to Edmunds, a research firm. But, as Edmunds analyst Ivan Drury points out, this is largely due to rental fleets and other corporate clients, which typically account for 10-15% of total sales.
Retail demand, on the other hand, is “extremely strong,” Drury said, noting that cars stay on dealership lots for 57 days, on average, the lowest in at least five years. Used cars are also in high demand, offering good salvage values for lenders in the event of borrower default.
Stimulus checks distributed as part of the government’s coronavirus relief program mean credit quality has held up. Defaults and written off loans declined significantly in the fourth quarter from a year ago, at Ally and other prime and near-prime auto lenders such as Capital One, Wells Fargo and JPMorgan. Santander Consumer, a subprime mortgage specialist, had a loan cancellation rate of 3.5% in the fourth quarter, down from 8.5 per year previously.
The terms for subprime auto lenders that cater to weaker borrowers are “excellent,” Jefferies analyst John Hecht said. “Santander is operating at a load level which is a third of normal, and although volumes were stable last year, they have become more selective – their loan-to-value ratios are declining.” The number of Santander customers withholding payments has also returned to pre-Covid levels.
Jennifer Thomas, an analyst at asset manager Loomis Sayles, argued that part of the reason loan pricing remained strong was that lenders were reluctant to lower interest rates, given concerns about what would happen to credit quality when government stimulus eventually expired.
“The performance was supported by stimulus, without a doubt,” she said. On a call with investors, Capital One chief executive Richard Fairbank agreed. “We expect auto credit metrics to rise from their unusually low levels as auction prices [for used cars] normalize and the temporary impacts of abstaining from Covid are manifesting themselves, ”he added.
Additional reporting by Joe Rennison