The
bank tapped mortgage executives Matt Vernon and John Schleck to lead
the auto lending business last May, saying they would be able to sell
auto loans alongside other products such as checking accounts and home
equity loans.
In
interviews, the executives and their boss, D. Steve Boland, who
oversees a broad swath of consumer lending, said they still see room for
growth from borrowers who have good credit. They have hired extensively
in recent months, adding dozens of loan officers and salespeople.
But
some competitors and bank analysts said hiring doesn't make sense at
this stage, because auto sales may be close to peaking, and consumer
credit is showing signs of weakness.
Industry-wide,
banks classified $1.1 billion worth of auto loans as uncollectible in
the fourth quarter, according to the Federal Deposit Insurance Corp.
That is up 15 percent from the year-ago period, and up 39 percent since
the fourth quarter of 2011. Ultimately, much of that bad debt turns into
losses for the banks.
"I'm not actively hiring or
growing our operations across the platform. That's for sure," said
Andrew Stuart, head of TD Auto Finance, which is slightly smaller than
Bank of America's auto business.
At
a Feb. 10 conference, Capital One Financial Corp (COF.N) CEO Richard
Fairbank said that while auto loans provided "once in a lifetime type
returns" after the financial crisis, the business has begun to lose
strength. In a January interview on CNBC, JPMorgan CEO Jamie Dimon
called the market "stretched."
Portales
Partners analyst Charles Peabody said Bank of America is late to the
auto loans party. But in its defense, he noted that the bank's Chief
Executive Brian Moynihan and his management team were too busy trying to
resolve mortgage-related issues when the auto lending business seemed
like a smarter bet.
"They
should have been beefing this thing up two years ago, but two years ago
Moynihan was still trying to stabilize the ship," Peabody said.
SLOWING MOMENTUM
All
banks are struggling to boost revenue during a period of stubbornly low
interest rates and tough post-crisis regulation, but Bank of America
has felt the pain more acutely than most of its peers.
The
second-largest U.S. bank by assets, Bank of America trades at just 50
percent of book value, compared to 90 percent for JP Morgan Chase &
Co (JPM.N) and 130 percent for Wells Fargo & Co (WFC.N). Bank of
America took bigger losses than those rivals during the crisis, and
still lags them by other key metrics, including return on equity and
costs in relation to revenue.
While
Bank of America showed some progress in 2015, it still has to prove it
can generate consistent performance under Moynihan, who took the helm in
2010. During his tenure, the bank has paid tens of billions of dollars
in fines and settlements related to mortgages that were issued before he
became CEO.
Bank
of America ranks 10th among U.S. auto lenders, with just 1.84 percent
of the market in the fourth quarter of last year, according to data
released Thursday by Experian Automotive. Ally Financial Inc (ALLY.N),
the largest U.S. auto lender, accounts for 6 percent, followed by Wells
Fargo, which ranked second with 5.57 percent. JPMorgan was fifth with
4.15 percent.
Bank
of America may rank higher on Thursday, when Experian says it will
release fourth-quarter data, because Vernon said much of its growth came
at the end of the year.
Auto
sales remain very robust. Figures carmakers released on Tuesday showed
that sales climbed to a 15-year high for the month of February, driven
by low gasoline prices, wage growth, and because loans are both
available and cheap. But most forecasters expect sales to peak in 2016
and trend down over the next few years.
"We
remain in the 'plateau' camp," RBC Capital Markets analyst Joseph Spak
wrote on Tuesday, sticking to his flat sales forecast.
Stocks
have broadly declined in recent months over concerns about the global
economy, and some companies that make money selling or financing
vehicles have gotten hit even harder. They recovered some of those
losses after the latest sales figures.
Ford
Motor Co (F.N) and General Motors Co (GM.N) are down roughly 6 and 11
percent, respectively, since the beginning of the year, while
publicly-traded auto lenders Santander Consumer (SC.N) and Ally are down
35.7 percent and 2.8 percent, respectively. The S&P 500 Index
(.SPX) has dropped 2.8 percent so far this year.
Delinquencies
on bonds comprised of subprime auto loans hit their highest level in
six years, Fitch Ratings said last week. According to the FDIC, 1.82
percent of all auto loans were 30 to 89 days past due during the fourth
quarter – the highest rate on record since the FDIC began keeping track
in 2011.
As weakness in the auto sector has become evident, regulators have begun to sound alarm bells.
In
a speech in October, U.S. Comptroller of the Currency Thomas Curry
warned of risks from subprime auto loans, as well as loans that mature
in six years or more, which tend to be issued to customers who can't
afford monthly payments on loans with shorter durations. In November,
the Federal Reserve Bank of New York issued a report on auto lending
that showed a growing portion of loans being issued to consumers with
poor credit.
FOCUSED ON PRIME
Bank
of America says it is focused strictly on prime and "superprime"
customers. The "majority by far" of its auto borrowers have credit
scores higher than 700, Vernon said. Borrowers with credit scores above
660 are generally considered to have good credit.
Still,
a decline in used car values would lower recoveries on loans that go
bad, and the longer the life of the loan the greater the exposure to
such a risk. Bank of America will lend up to 75 months — slightly longer
than the six years Comptroller Curry cited as a concern — though Vernon
said the average maturity is far lower.
The
bank does not release granular data on its auto loan book, so it is
hard to know how its borrowers' credit quality has held up over time. In
data provided to Reuters, Bank of America said it made $23.7 billion in
auto and recreational vehicle loans in 2015, up 41 percent from 2014.
Most
of that growth came through auto dealers, the area Vernon oversees, and
much of it happened in the fourth quarter after he hired seven
"relationship managers" whose job is to drum up business with
dealerships around the country. Vernon is targeting 5-10 percent growth
for his operation in 2016.
Schleck,
who oversees the business that works directly with retail customers,
has also been staffing up — nearly doubling the number of loan officers
to 110 from 60 since last May. Although Schleck said he is unlikely to
continue growing staff at that pace, he may hire more this year if
demand warrants. Likewise, if demand cools, Schleck said he is prepared
to reduce staff.
"I
needed to get to a certain level to be able to provide a certain level
of service and I needed to get there very quickly—and did," he said.
"Prior to May there was probably a lot of lost opportunity, whereas
after May, I'm capturing what maybe we could have captured earlier."
Boland, their boss, said it's true that Bank of America was "in a different place in 2012," but disputed the idea that the bank is too late to build up its auto loans business.
"I
don't feel like I'm late at all," he said. "There's not a timing issue
to it. I'm going to continue to focus on growing across our consumer
lending."
As
long as the bank is cautious about borrowers and keeps staffing in line
with demand, it can grow just by selling to more of its existing
customers, Boland added.
Patrick
Kaser, portfolio manager at Brandywine Asset Management, which owns
about 26 million Bank of America shares, said the bank's strategy is
sensible even if it comes at a less-than-optimal time. The bank pulled
back "far too much" from certain businesses after the shock of its
mortgage losses and fines, and re-entering the market with a focus on
healthy consumers makes sense, he said.
"Only
time will tell if they're entering at the peak and whether or not
they'll be too aggressive," said Kaser, "but the banks have a lot of
incentive to show discipline."
By: Dan Freed (Reuters).
Photo: Mike Blake (Reuters).
Review: Emerging Market Formulations &
Research Unit, Flagship Records.
For The #FacebookTeam