Storm Damage: Auto Lenders Brace for Losses

Posted on November 08, 2017 by Laura Lam

used car prices stormU.S. auto lenders are starting to tally the financial damage from late-summer hurricanes that destroyed an estimated 500,000 to one million vehicles.  So far, the impact on lenders has been relatively small, since many of them are offering forbearance to car owners who are struggling to rebuild their lives. Moreover, the biggest U.S. auto lenders have less than 10% market share, so hurricane-related losses will be spread widely across the sector, hitting credit unions and the financing arms of automakers in addition to banks.

Still, the industry’s eventual losses seem likely to run into the hundreds of millions of dollars across Texas, Florida and Puerto Rico. During the quarter, major auto lenders such as Ally Financial and Wells Fargo significantly boosted their loan-loss reserves in anticipation of higher default rates.

The costs to specific banks hinge largely on their geographic footprint. Wells Fargo has significant exposure in Puerto Rico, where damage estimates are emerging more slowly than they did in Texas and Florida. A Wells Fargo subsidiary, Reliable Auto, is the largest vehicle financing companies on the storm-ravaged island.  Wells said during its third-quarter earnings call that it built its reserves by $450 million to plan for hurricane-related losses.

Ally, which is one of the nation’s largest auto lenders, set aside $48 million during the third quarter because of the hurricanes.  “We would expect higher chargeoffs over the coming few quarters due to the localized impact of the hurricanes,” said Ally CEO Jeffrey Brown.  Ally also insures the vehicle inventories held by auto dealers. The company said that it absorbed an additional $19 million in losses in that business, but that some dealers did not file claims because they were able to move vehicles from potential flood areas to higher ground.

Because auto lending is so fragmented, the impact of credit losses on any single institution “should be relatively manageable,” stated Michael Taiano, an analyst at Fitch Ratings.  Analysts at Standard & Poor’s said they expect the hurricanes to have a bigger impact on subprime auto lenders than on firms that focus on more creditworthy borrowers. Borrowers with better credit scores tend to have more equity in their cars.

For the entire auto lending sector, there is a silver lining to the hurricanes. Used-car prices, which determine the value of lenders’ collateral, are expected to rise as hundreds of thousands of Americans who lost their cars shop for replacements.

Source:  American Banker