Cap One Sees Its Auto Lending Business Stabalize in 3Q
Richard Fairbanks, Capital One Finance Corp.’s CEO, said auto finance stabilized at the bank last quarter. His remarks on auto finance from the company’s earnings call yesterday, courtesy of SeekingAlpha.com:
Our Auto Finance business posted net income of $14.5 million for the quarter. Third quarter profits were driven by solid and stable revenue margin and efficiency as well as lower provision for loan losses as the overall portfolio continues to shrink. These factors more than offset the sharp increase in charge offs and delinquencies that are typical during the third quarter.
We took aggressive steps to retrench and reposition our Auto business at the beginning of the year. We pulled back on originations and we’re shrinking managed loans. We improved the credit characteristics of new originations. We’ve leveraged pricing opportunities in the face of shrinking competitive supply, and we continue to aggressive manage operating costs.
Originations for the second quarter were $1.4 billion, down 56% from the third quarter of 2007. We’re on track for Auto loan originations for the full year of 2008 to be at least 45% lower than 2007 originations. The total Auto loan portfolio shrank by $1.1 billion during the quarter and by $2.8 billion year-to-date.
As we’ve stepped back from our riskiest segments and focused only on our best dealer customers, the credit characteristics of new originations continued to improve, as evidenced by rising average FICO scores, improving loan to value ratios, and encouraging early delinquency performance of our 2008 origination vintages. We’ve been able to maintain pricing power and solid revenue margins while improving the credit characteristics of our new originations.
The overall results of our Auto Finance business are likely to be influenced by sometimes conflicting forces and trends. Expected seasonal increases in chargeoffs will put significant pressure on profitability for the remainder of 2008. The continuing pressure from the seasoning 2006 and 2007 vintages and broader cyclical economic challenges are likely to be a drag on results throughout 2009, and the continuing decline in loan balances will impact the optics of our Auto business.
For example, declining loan balances would reduce the denominator for calculations of metrics like chargeoff rates, delinquency rates and operating expenses as a percentage of loans. This would put upward pressure on these ratios, making them appear more negative than the actual trends in chargeoff, delinquency and operating expense dollars. On the other hand, the expected improvements in the credit performance and profitability of the 2008 origination vintages are likely to gradually improve Auto Finance performance over time. We also expect that Auto Finance performance will be helped by our continuing aggressive actions to improve operating efficiency. And the shrinking loan portfolio will continue to have favorable loan loss allowance impact.
We’ll need to see further progress and improvement in overall results, but we believe the aggressively repositioning of the business and our continued actions to navigate the downturn will result in a substantially smaller Auto business that can deliver above hurdle risk adjusted returns over the cycle. We’re monitoring the business results closely, especially the performance of new originations, and we’ll be prepared to take further appropriate actions based on the results and industry conditions we see over the next few quarters.
