JPMorgan Chase Chief Executive Jamie Dimon expressed concern about automotive lending in the near future.
JPMorgan Chase & Co. has put out the caution flag on auto lending.
Jamie Dimon, JPMorgan’s chief executive and perhaps the most influential banker in the U.S., said during a conference the market for U.S. automobile lending is “a little stressed” and that he foresees higher losses for some competitors.
“Someone will get hurt in auto lending,” but not JPMorgan, Dimon said Thursday during an investor presentation in New York.
Inexpensive gasoline, a growing job market and low-interest rates helped boost auto sales since the end of the recession in 2010, setting sales records during the past 18 months.
But some analysts have crown increasingly wary of the industry’s customer profile, which includes a growing number of subprime customers and first-time buyers. The typical loan is a record $30,000 in recent months and extends for 68 months and monthly payments of $500 per month are not uncommon, according to Experian, which tracks credit scores across the economy.
(May auto sales declined due to fewer selling days. For more, Click Here.)
Some lenders are fearful of a slide in new car sales, although that's not predicted to happen in 2016.
Last year, the average amount financed for new-car loans at finance companies rose to $27,986.15 in the fourth quarter of 2015, the highest level since the Federal Reserve began tracking that data in March 2008.
Bankers, like Dimon, are worried the party could be over. U.S. auto sales fell in May for the second monthly decline this year and reinforced the idea that demand for cars and trucks has already peaked and is poised to slide. A shrinking market could tempt manufacturers into an incentive war that could curtail the profits of banks and finance companies.
Analysts also predict a surge in previously leased vehicles for sale will pressure used- and new-car prices, which could lead to consumers owing more on a loan than the auto’s value. The Manheim U.S. Used Vehicle Value Index fell in three out of the first four months and has dropped 2.4%.
“We think some of the credit fears in auto are, candidly, a bit overdone,” Ally CEO Jeff Brown, said at the conference. “While we have a pretty high concentration in the auto industry both in sales and the credit exposure, we understand the industry better than anyone else, we’ve been in it for almost 100 years.”
(Click Here for details about the rise in gas prices for the summer driving season.)
Capital One Financial Corp. CEO Richard Fairbank said that he likes his company’s auto-lending business and he’ll keep an eye on risks including falling used-car prices.
“We have been raising flags about the underwriting practices that we have seen in the industry,” Fairbank, 65, said at the meeting.
U.S. Bancorp CEO Richard Davis, speaking at the same conference, said the auto-lending market is “overheated,” mainly because of pricing competition.
“We like the business, but it’s not for the faint of heart,” said Davis, who runs the nation’s biggest regional bank. “It’s a business you have to watch through the cycles, and right now it is probably at its least attractive. But in what could be a day, a month or a year, it could be very attractive.”
(To see what cars, trucks and crossovers are the best buys for families, Click Here.)
The “stress” in the auto loan market that Dimon mentioned is no doubt in reference to the uptick in defaults amongst subprime borrowers. According to Fitch Ratings, while the rate of defaults on subprime auto loans experienced a slight reprieve in March falling to 4.15%, this drop comes after the rate reached a 20-year high in February of 5.16%, according to Fitch.