Cap One Sees Opportunity at Top End of Credit Spectrum

Geographic expansion and higher credit lending will prop up auto loan originations for Capital One Auto Finance in the coming months, a pair of senior executives said during the company’s third-quarter earnings conference call.

Cap One originated $3.4 billion of auto loans last quarter, up 17% from the second quarter and up 40% from 3Q10. “We expect that auto originations will remain strong and drive continuing growth in auto loans,” said Richard Fairbank, chairman and chief executive of Capital One Financial Corp.

Though auto finance charge-off and delinquency rates increased in the quarter, the trend was consistent with expected seasonal patterns, company executives said. Fairbank noted that there has been year-over-year improvements in both charge-offs and delinquencies, and that auto finance credit performance remains strong, with the most recent originations continuing to perform better than 2007 and 2008 vintages. He added that auto finance credit metrics are near all-time lows, driven by actions the company took to retrench and reposition the business, including tight underwriting and loss-mitigation efforts taken through the recession. Continued strength in used-car prices at auction have contributed to the positive trend, too.

“We believe we’ve reached the cyclical low point for auto finance charge-offs,” Fairbank said.

Additionally, CFO Gary Perlin noted that Cap One’s direct business has been surpassed by the indirect business. “We will both grow the direct business and the indirect business,” he said. “But if I were to predict, you’re not going to see a massive, devastating macro trend of direct taking over indirect anytime soon.”

Both executives explained that the company’s goal in the auto finance sector is to continue what it is doing now in some geographies, then extending that to other regions.

“This is a business that I think can be, over time, quite a bit bigger than it is now,” Fairbank said. “Almost all of the net growth will be in the upper part of the market, because we already have a pretty sizable position in the subprime space. So I’m pretty bullish about it, and it’s many years in the making, and it’s here to stay.”