Americans went shopping for cars in a big way during the pandemic. Auto-loan originations in the US hit a record $734bn in 2021, according to data from the Federal Reserve Bank of New York. Total outstanding debt in the sector grew by $84bn to $1.46tn, outpacing the increase seen in student and credit card debts combined. The Federal Reserve chair Jay Powell argued this week for more aggressive monetary tightening, which hints at augmenting credit risks.
For the four banks that dominate vehicle lending in the US — Ally Financial, Capital One, Wells Fargo and JPMorgan Chase — auto loans have offered a bright spot amid a sluggish recovery in loan growth elsewhere. Ally said 2021 was its best year for auto lending since the early 2000s. These types of loans account for almost all its pre-tax profits. At Capital One, auto loans jumped a third last year.
The avoidance of mass transportation by US commuters during the pandemic primed the pump for car sales during 2020. Since then sales have tailed off. Supply chain issues made cars harder to come by, crimping unit sales. But this supply crunch also drove up all car prices. Buyers in turn ended up paying more and taking on bigger loans.
High interest payments on these debts lined the coffers of auto lenders. Swelling prices for used cars have also allowed banks to more easily recoup their capital in cases of default. Used car values are not far off decade highs in the US, according to Manheim data.
However, rising interest rates, sharply higher petrol prices and an eventual easing of the car shortage all threaten to put the brakes on the auto loan boom. Already, shares of Ally Financial and Capital One have trailed the broader US Russell 1000 financials index since last summer.
When used car prices do weaken, lenders who have extended large loans may take a different view on collateral. Since July, auto defaults have been creeping up again, according to the S&P/Experian Auto Default Index. It is early, but shareholders will want to buckle their safety belts.
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Source: Financial Times