Ready to Capitalize

Capital One Auto Finance’s story of survival over the last five years isn’t unlike other sources in this credit segment. And like other companies, the firm that once symbolized the full-spectrum lending movement appears poised to grow again. We sat down with Sanjiv Yajnik, the individual selected to steer the company’s auto finance business through the economic downturn, to find out if the company is indeed back in the driver’s seat.

F&I: Sanjiv, you took over Capital One’s auto finance unit in December 2007, right around the time the country was admitting that it was in a recession. What was the company’s response to the credit crisis and the fallout that ensued?

Yajnik: We essentially transformed our business by aggressively retrenching and repositioning ourselves at the outset of 2008. We scaled back our prime business by focusing on a much smaller network of dealers with whom we had deeper relationships, dealers who had better credit and profitability performance.

Our focus was on originating loans with better credit characteristics by tightening underwriting and steering our originations upstream within both the subprime and prime segments of the market. Basically, we stopped originating loans to the riskiest parts of the subprime segment.

Now, it was around that time that we kicked off our Diamond Dealer program, which we have refined since then. Essentially, it focuses on deepening relationships with key dealers, providing them with exceptional service and access to sophisticated direct marketing and pre-approved credit offers.

F&I: So, what results have you seen from the adjustments you made?

Yajnik: We are seeing solid indications of better credit performance from those originations across all of our segments. And as we look at our current originations, we are seeing signs that they are holding up against any further deterioration of the economy — even beyond what we presently expect.

Our total loans now stand at $17.2 billion, which is down from about $21 billion at the end of 2008. The decline is a result of our choice to cut back on the amount of new loans we booked this year.

So, in the first quarter we added about $1.3 billion in new loans. In the most recent quarter we booked another $1.7 billion. We are looking to slowly and methodically grow our business going forward, as our goal is to continue leveraging our dealer partnerships and originate loans in areas where we have significant expertise and experience.

Again, our current origination volumes are strong and we continue to hold or gain market share in what is once again a competitive auto market.

F&I: A competitive market typically means more sources for dealers, but I’m not sure dealers are seeing that these days.

Yajnik: The competitive intensity in the industry is returning. We are seeing expanded loan-to-value ratios, but we don’t see things going back to where they were. See, a lot of the loans originated in 2006 and 2007 were not profitable, and that was unhealthy for the whole industry.

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F&I: Does “full-spectrum” still describe your lending program?

Yajnik: Full-spectrum lending remains a key part of our strategy. We are taking Capital One’s historical strength in combining powerful analytics and data to determine creditworthiness and merging it with an intensive customer-relationship focus through our Diamond Dealer program. Dealers under that program are on the receiving end of the maximum amount of rate flexibility and exceptions that our relationship managers are empowered to give to these dealers.

F&I: So, who is the ideal customer for Capital One?

Yajnik: Capital One Auto Finance is focused on serving all customers, including those with subprime credit. In terms of defining the right customer, there are many factors that go into that determination, so it’s difficult to characterize the ideal candidate. For us, information scale is important. And with our access to a significant amount of data, we are able to empower our relationship managers to shape the deals they approve. This is an important part of the relationship strategy we have with our Diamond Dealers.

With that said, we are seeing strong demand from credit-challenged customers, who are the core of our business. And we feel we have the information needed to feel comfortable putting together the right deals for these customers.

F&I: How are things looking for the rest of the year?

Yajnik: As I said, our credit remains exceptionally strong. Now, the second quarter is typically the low point for charge-offs before they begin increasing in the back half of the year. However, the seasonal uptick in delinquencies during the second quarter, which we expected, suggests that our charge-off rate will increase in the second half. However, we have invested in building up a world-class loss mitigation group, which has been instrumental in managing our customers through these tough times.

Adjusting for seasonal effects, we expect underlying performance to continue improving on the strength of our repositioned portfolio and a stabilizing economy. And with our improved modeling and the improvement we’ve seen in the external environment, we’ve expanded our programs both in terms of who we are lending to and where we are lending. For the most part, our Diamond Dealer program has been targeted at specific dealers with whom we have strong relationships. Now we’re taking that program and looking at a very thoughtful expansion into additional markets. 

F&I: You recently conducted a first-time buyer survey. Can you talk about those results?

Yajnik: What we found was that a majority of consumers are doing their research, comparing prices and various vehicle makes and models before making a final purchase decision. Most first-time car buyers also are developing a budget to help them determine what they can afford and how they’ll make payments or manage other expenses. And of those that do that, the vast majority (88 percent) said they stuck to their budget when they purchased their car.

F&I: The study also found that there is plenty of room for improvement, correct?

Yajnik: Yes. See, despite all the research done by first-time car buyers on the front end of the purchase, our survey showed that even the most scrupulous new-car owner can get into trouble after he or she has driven off the lot. In fact, out of the 63 percent of those who said they thought they accurately calculated the true cost of buying a vehicle, nearly half said they did not factor in maintenance and repair costs, as well as registration and parking. And of those who obtained a loan to purchase their car, nearly half did not know the interest rate.

What all that means is that many first-time car buyers are not fully educating themselves about how auto financing works. They don’t check their credit scores and don’t realize that there are several resources online to help them through the financing process, including our auto buying guide at www.capitalone.com/autoloans.com. In today’s economic environment, it’s crucial that consumers take advantage of these opportunities because, from our standpoint, educated consumers are our best customers.