An improving economy and rising consumer confidence continue to fuel recovery in the auto industry. In 2010, U.S. auto sales increased 11.1% from 2009. Also, in February 2010, auto sales climbed 27% with more than 40% growth coming from Toyota Motor Corp. (TM) and General Motors Corporation (GM).
Will this drive value for banks? Yes, since rising sales along with stabilizing delinquency rates will encourage banks to lend more money to auto buyers and consequently support their interest income growth.
According to TransUnion, a Chicago-based credit reporting agency, in the last three months of 2010, auto loans increased 28% from the year-ago period. The average size of the auto loan increased to $12,602 in the fourth quarter of 2010 from $12,500 in the prior-year quarter.
Buying Incentives: The Spark Plug?
Auto sales were aided by a host of factors, with cash incentives being behind the wheels. A case in point is the 22% sales increase at General Motors in January 2011, attributable to an average incentive of $3,762 per vehicle shelled out by the company. Competitors including Ford Motor Co. (F) and Nissan Motor Co. Ltd. (NSANY) followed in General Motor’s tracks and raised their respective spending on incentives.
In the near term, discounts/incentives are likely to continue for consumers trading old cars for newer fuel-efficient models. These would, in turn, drive auto sales.
Stabilizing Delinquency: An Attraction
Auto loan delinquency rate is showing an improvement, igniting banks to lend more money to car buyers. The auto loan delinquency rate with payments delayed by 60 days or more remained almost stable at 0.59% in the fourth quarter of 2010 compared to 0.58% in the prior quarter, but showed a marked improvement from 0.81% in the year-ago quarter.
Expectedly, the auto delinquency rate will improve further as the arrival of new loans in the industry will help lower the overall rate.
Rising Fuel Price: A Speed Breaker?
The persistent rise in fuel prices still remains a major challenge for the industry as it could end up in buyers worrying much about their wallets. Consequently, the buying trend may change with an expectation of reduced affordability in maintaining cars.
Gas prices are still under control and are not expected to significantly impact buying decisions. But the oil price shot up to more than $100 per barrel on continued turmoil in the Arab Countries.
Easier Credit: Key Driver, Key Risk
The acceleration in auto loans owing to increased sales is a result of perked up consumer confidence and economic improvement. However, sales were primarily powered by attractive lease deals and financing from lenders.
During the financial crisis, lenders including Bank of America Corporation (BAC) and U.S. Bancorp (USB) reduced auto lending in drastic measures. However, with signs of economic improvement, lenders have started issuing loans more aggressively, making these easier for all categories of borrowers now as compared to the recession period.
Borrowers with flawed credit histories are also getting financing facilities. According to CNW Marketing Research, new cars sold to consumers with a subprime credit rating increased about 60% in 2010 from the prior year. Now, the question is whether lenders have secured the license to take such risks or are they are being reckless like in the pre-recession times?
Overall, as the near zero interest rates have now kept auto lenders’ cost of funds extremely low, increased lending will help them reap large profits. Though a need for speed is felt in auto lending activity, excessive risk taking could spoil the ride ahead and result in yet another mess.
BANK OF AMER CP (BAC): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
NISSAN ADR (NSANY): Free Stock Analysis Report
TOYOTA MOTOR CP (TM): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
Zacks Investment Research
