Recent reports demonstrate renewed strength in the auto industry. Not only are auto sales expected to rise in the U.S. and China in 2013, but many banks are beginning to see more auto loan applications as well. Now, banks are reporting that auto loans in their portfolios have lower default rates than other loans. To accommodate for this trend, institutions are looking to increase auto loan originations. One financer has been able to speed up its payments due to the strength of the auto industry, encouraging other banks to look more into this market.
Ally Financial, which declared bankruptcy due to mortgage losses after the crisis, was bailed out through the government’s Troubled Asset Relief Program (TARP) and still owes $14.6 billion. But Michael Carpenter, the CEO, explained at the National Automobile Dealers Association’s convention that Ally will be able to pay off its debts by 2014.
The company has made the highest number of U.S. car loans of any lender for the past two years. Ally’s success in this market has encouraged it to implement plans that will make auto loans its only product moving forward. The bank has sold its Canadian and Mexican operations to different companies, and its Europe, Latin America and China businesses were sold to GM late last year.
Wells Fargo and Chase banks have also significantly increased the number of auto loans made in the fourth quarter of last year, with plans to continue in 2013. With slow recovery in most markets, the auto industry is giving many financial institutions some optimism.
Not only does this scenario suggest possible growth banks may want to prepare for, it also shows the different turns the recovery can take. Originators that once made a variety of loans may eventually find themselves in a niche market, depending on how the market reacts and what consumers find attractive in the future. Regardless, the stronger risk assessment tools a company has, the better it can adapt and prepare for possible changes.