Standard & Poor's is sounding the alarm on big U.S. auto lenders including Ally Financial (ALLY) and the Spanish bank Santander (SAN) following years of surging loan volumes, loosening industry underwriting standards and a recent decline in used-vehicle prices.
At Ally, where some $59 billion of retail auto loans account for roughly half of the Detroit-based bank's overall lending and leasing portfolio, returns could be nearly wiped out if charge-offs double from the current rate of 1.34%, S&P estimated Monday in a report.
The situation could even lead to losses at Santander Holdings USA, given that almost all of its $26 billion of retail auto loans are to subprime borrowers -- with credit scores below 680 -- or to those with no credit scores at all, according to the ratings firm.
S&P's warning could portend the ugly end of a lending boom that has seen auto loans in the U.S. climb an average 8% a year to a record $1.1 trillion as of year-end 2016, as consumers took advantage of historically low interest rates and easy borrowing terms. Enticements included low downpayments, bigger balances and longer payback periods, in some cases exceeding six years.
Used-car prices started falling last year and are expected to continue their slide in 2017, partly because of a flood of vehicles coming off leases, according to S&P. Lower used-car prices mean banks get less of their money back when they sell a vehicle following repossession.
Meanwhile, delinquency rates are rising among subprime borrowers; lenders including Wells Fargo (WFC) have indicated plans to tighten their auto lending standards.
Other banks that could face pressure include McLean, Virginia-based Capital One Financial (COF) , which has increased its auto loans by half in the past three years to $48 billion, according to S&P. One bank, TCF Financial (TCB) in Wayzata, Minnesota, has more than doubled its auto-loan portfolio to $2.9 billion over the time period.
"The financial institutions that hold significant amounts of retail auto leases and nonprime loans face the greatest risks from potentially lower used-car prices and declining asset quality," S&P said in the report.
While big banks like Wells Fargo and JPMorgan Chase (JPM) are among the nation's largest auto lenders, their portfolios are smaller relative to total assets and wouldn't pose a major threat to overall finances, according to the report.