Auto Loan Defaults Could Trigger Sell-Off in Automaker and Bank Stocks
Don’t overlook what’s happening with auto loans. If you own automaker or bank stocks, you might want to look at the auto loans market very closely.
Thanks to low interest rates, we saw an influx of auto loans being made by banks to those with very low credit scores (subprime auto loans). Why? Because yields on these loans were higher than on other loans.
Between the first quarter of 2010 and the fourth quarter of 2017, $786.2 billion worth of auto loans were given to those with FICO credit scores of 620 or less. (Source: “Quarterly Report on Household Debt and Credit February 2018,” Federal Reserve Bank of New York, last accessed May 14, 2018.)
Broadening the credit scores further, $1.3 trillion worth of auto loans were given to those with credit scores of 659 or lower.
Car Sales Got a Boost
As result of this, we witnessed an influx of new car buyers all of a sudden.
Look at the chart below: It shows auto sales in the U.S. economy.
(Source: “Light Weight Vehicle Sales: Autos and Light Trucks,” Federal Reserve Bank of St. Louis, last accessed May 14, 2018.)
In January 2010, the annual rate of car sales in the U.S. was around 10.7 million. In April 2018, this rate was around 17.1 million. This represents an increase of over 60%.
In September 2017, it was as high as 18.5 million.
Default Rates Surging, at Highest Level Since 1996
The situation is different now; interest rates are going higher.
It’s no surprise that defaults on subprime auto loans have been surging. According to Fitch Ratings, Inc., a well-known credit ratings agency, default rates on subprime auto loans are already higher than they were during the 2008/2009 financial crisis.
The delinquency rate for subprime auto loans that are more than 60 days past due reached 5.8% in March, which is the highest rate since 1996. During the financial crisis, it was around five percent. (Source: “Consumers Skip More High-Rate Auto Payments Than During Crisis,” Bloomberg, May 14, 2018.)
With this, what do you think could follow? You don’t need to be a rocket scientist to figure this out.
Just before the financial crisis, default rates on subprime mortgages soared. As a result, home sales slumped.
With defaults on subprime auto loans increasing, it’s safe to assume that it could really impact overall car sales.
Now, you see, automakers could be really hurt.
Understand this: Automakers can only sell more vehicles if banks are lending money. With auto loan default rates rising, it’s difficult to see how sales could surge.
So, if automakers’ sales tumble, their profitability could come under fire. Don’t for a second think that their stock prices will remain at the current level. They could go much lower.
We see weakness already. Take General Motors Company (NYSE:GM) stock, for example. It’s down 20% from its recent highs.
It’s also worth watching U.S. bank stocks as all this happens. Defaults could hurt their balance sheets and profitability, and their stock prices could tumble.