Higher Reserves to Hurt Auto Lenders' Near-Term Profits - Yahoo Finance

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Despite the coronavirus pandemic and the resulting economic crisis, delinquency rates on automotive loans declined in first-quarter 2020 on a year-over-year basis. According to Experian’s latest State of the Automotive Finance Market Report, thirty-day delinquency rates on auto loans declined to 1.93% from 1.98% recorded in the prior-year quarter. Also, the sixty-day delinquency rates fell to 0.67% from 0.68%.

While a decline in delinquency rates is a positive sign for the auto lending industry, it can’t be concluded that the industry got spared from the impact of the virus. In fact, it is highly likely that the actual impact of the outbreak was not reflected in first-quarter results, and that delinquency rates in the second and third quarters will reflect the true impacts of the pandemic.

The probable reason why the first-quarter results did not reflect the true impacts of the virus outbreak is that it was declared a pandemic in mid-March, and the subsequent lockdown and halt in business activities took place only after that.

Notably, Melinda Zabritski, Experian’s senior director of automotive financial solutions, stated, “COVID-19 wasn’t declared a national emergency until mid-March. Add to that, some consumers are likely leveraging financial resources and assistance programs, such as stimulus checks, to manage through financial hardship, so its true impact may not be evident until the months ahead.”

According to Experian’s analysis of the finance trends during April, it can be seen that new vehicle title changes fell 50.8% year over year, while used-vehicle title changes declined 54%. Also, leasing of new vehicles declined in April on a year-over-year basis.

Thus, given the expectation that the auto lending industry will bear the brunt of the virus in the coming quarters, auto lenders might have to create additional reserves to cope with the crisis.

An increase in provisions will likely negatively impact the profitability of auto lenders like Ally Financial Inc. ALLY, Credit Acceptance Corporation CACC, Capital One Financial COF and others to some extent in the quarters ahead.

Notably, in first-quarter 2020, these lenders built substantial reserves to combat the coronavirus-related concerns, which, in turn, resulted in an increase in credit costs.

Moreover, the near-term prospects of the Auto industry are shadowed by disrupted supply chains, lesser production activities, store closures and lower demand for discretionary items, owing to the coronavirus outbreak.

Although the economy is gradually getting back on track and consumers’ sentiment is improving, consumers are likely to put off discretionary purchases like cars until the pandemic dies down.

Thus, an expected decline in demand for auto loans as well as lower interest rates will likely hurt revenues.

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