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Auto Sector to Take Hit, US Economy Faces Pressure

Posted by: : Shayne HeffernanPosted on: October 12, 2014 Auto Sector to Take Hit, US Economy Faces Pressure

Auto Sector to Take Hit, US Economy Faces Pressure

Wells Fargo & Co (NYSE:WFC) JPMorgan Chase & Co. (NYSE:JPM) most exposed

Balances remaining on auto loans have risen by about a third since April 2011, reaching an all-time high of $924.2 billion in August, according to credit reporting bureau Equifax. About a fifth of the loans are subprime.

Banking regulators fear that reckless lending may be at least helping to fuel that growth, and there are early signs that delinquencies are increasing in the sector.

Banks can have just as many different kinds of exposure to auto loans as they have to mortgages. Wells Fargo & Co, for example, is the largest U.S. auto lender, with $50.8 billion outstanding at the end of 2013. About $15 billion of that was subprime. It is also the largest underwriter of bonds backed by subprime auto loans, having sold $3.3 billion of these securities this year, according to industry publication Asset-Backed Alert.

In addition, since 2011 Wells Fargo has extended more than $1.5 billion of credit lines to some of the largest subprime car lenders through its Des Moines, Iowa-based subsidiary Wells Fargo Preferred Capital Inc., according to merger advisory firm Colonnade Advisors LLC.

Other banks, including Capital One Financial Corp and JPMorgan Chase & Co are also players in the business of lending to auto finance companies, according to Colonnade. Wells Fargo declined to comment. Chase and Capital One did not immediately comment.

“Banks are making a lot of money off these (auto) loans in many different ways,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

To be sure, these types of exposures are relatively small for a bank like Wells Fargo, which has $1.5 trillion of assets, a net worth of about $180 billion as measured by equity, and a market value of about $264 billion.

Of course, car loans are smaller than home loans – there is about nine times as much mortgage debt outstanding in the United States as auto debt. The loans are also shorter-lived than mortgages, meaning borrowers pay more off every year. And repossessing the collateral is much easier than for a home loan.

Few analysts currently fear a subprime auto meltdown on par with the mortgage crisis. If auto finance companies that specialize in subprime loans fail in an economic downturn, they may not present much of a wider danger to the financial system.

“The subprime auto sector appears too small to present a systemic risk,” Bank of America Merrill Lynch economist Michael Hanson wrote in an October report. “It does not appear to be in bubble territory, but bears watching.”

And while there are growing concerns about the world economy, which has been reflected in recent declines in U.S. and global stock markets, the U.S. economy has been increasingly buoyant, with the jobless rate sliding below 6 percent and new auto sales strong.

It is also too early to tell what regulators will find, and there is no indication of any wrongdoing by the banks.

Wells Fargo executives have downplayed the risks of the bank’s own auto loan exposure. Finance chief John Shrewsberry said in July that the credit scores and other measures of the health of its consumer portfolio of auto loans “has improved not only over the last 5 years, but improved meaningfully from pre-crisis levels.”

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Shayne Heffernan Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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