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Consumer Auto Demand Provides Loan Growth for Banks, Fitch Says

February 21, 2012

NEW YORK — Fitch Ratings announced U.S. banks have a chance to foster loan growth via their auto portfolios, as consumer demand and sales of both new and used vehicles increases. The ratings agency added that timing and competition could present challenges.

U.S. banks continue to struggle with sluggish loan growth, but there are expansion prospects in the auto loan sector driven by high demand, according to Fitch. Last month, sales of new cars and trucks recorded their fastest monthly pace since 2009, and demand for used cars also has been on the rise, highlighted by an increase in used-car sales and overall demand in 2011, as well as a subsequent 3 percent rise in prices in 2011.

An ease in lending criteria to more normalized levels also has opened the door to borrowers that had been cut off to credit due to rigid lending standards. Fitch, however, said the loosening standards is driven by higher demand rather than riskier lending strategies. And while low interest rates continue to inhibit meaningful loan growth for banks, they also can precipitate consumer borrowing and beef up their portfolios.

Banks may be able to maneuver their auto loan portfolios with less difficulty vs. other sectors, given the typically short dated assets that run off relatively fast, leaving them with limited risk exposure. But unlike comparable loan sectors, Fitch added, the auto loan space is a dealer-based business. Banks that have not cultivated longer term relationships with dealers might find it difficult to enter or re-enter the auto loan business without facing barriers of access into dealer networks.

Captives have an advantage over banks in their ability to attract customers via manufacturer incentives and their intricate understanding of the underlying product and close dealer relations, according to Fitch. Since auto loan performance was the first of the consumer assets to turn the corner following the financial crisis, lending increased in 2011 over 2010, particularly in the below-prime sector.

The company said it also believes heavy demand could spur loan competition and drive down yields, putting pressure on margins. This could result in lenders loosening underwriting standards and overall credit.

For more information, visit www.fitchratings.com

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