Capital One is withdrawing auto loans due to competitors’ “aggressive” pricing

Capital One Financial is retreating somewhat from the booming auto market, with its chief executive citing “aggressive” action by credit unions and other lenders, who are leaving their prices roughly unchanged even as interest rates rise.

The McLean, Va.-based lender is not taking a “major exit” from the auto sector or its relationships with dealers, CEO Richard Fairbank told analysts at a quarterly earnings call after the market close on Thursday. But auto lending margins have tightened, prompting Capital One to “cut around the edges,” Fairbank said.

“The auto opportunity continues to matter to Capital One,” Fairbank said, adding that the company “will continue to be pretty tight around the edges” until pricing becomes more attractive.

Capital One originated about $10.3 billion in auto loans in the second quarter, down 12% from $11.7 billion in the first three months of the year. Auto originations were 20% below the nearly $13 billion in loans Capital One originated in the second quarter of 2021.

Fairbank said major banks and most auto lenders have “raised their rates very consistently and responsibly” to align with Federal Reserve interest rate hikes that have pushed up funding costs for the industry.

However, some big players have kept their prices “far behind” the Fed’s rate hikes, Fairbank said. Credit unions also have a different business model and “really haven’t changed at all” in their pricing, Fairbank said, giving them a big increase in their market share. Fairbank did not specify which companies are keeping their prices unchanged.

Capital One’s caution aligns with that of Providence, Rhode Island-based Citizens Financial Group, whose CEO says it’s less focused on auto-in a broader effort to “start risk management” if a recession hits.

Yet Ally Financial said this week it sees it few hints that the car market will slow down in the foreseeable future due to strong consumer demand for cars.

Capital One’s reduced appetite for auto loans contrasts with its propensity for consumer credit cards.

The company that last year started a premium travel card called Venture X expendituredifficult on the marketing of the last quarters. The boost continued in the second quarter, with marketing spend rising just over $1 billion.

Spending rewards for new cardholders drove up marketing spend, as Spending on Capital One’s online travel and airport lounges It launches for Venture X cardholders. The company has opened a lounge at Dallas-Fort Worth Airport and will open locations at Denver Airport and Dulles Airport in Washington DC this year. It also offers partner lounges at other airports for cardholders.

Fairbank said the company is already seeing benefits from its decade-long push toward “heavy spenders,” whose higher purchase volumes are driving up interbank fee income and whose strong repayment patterns limit any credit deterioration.

“Our 10-year quest to build our franchise for money-intensive customers has resulted in significantly higher levels of marketing, but the continued revenue, credit stability and capital benefits of this enduring franchise are compelling and growing,” Fairbank told analysts.

The higher marketing spend didn’t seem to bother analysts. “We appreciate management’s willingness to invest in both marketing and technology to capitalize on opportunities and drive future growth,” wrote Jon Arfstrom, analyst at RBC Capital Markets, in a note to clients.

Credit Suisse analyst Moshe Orenbuch, meanwhile, wrote that he was “modestly positive” about the bank’s performance, noting the success Capital One “has had to date in building its Transactor franchise.”

The consumer card focus also comes as fears a looming recession, increasing the risk that loan defaults will rise significantly.

Alluding to the economic environment, Fairbank said there is “more uncertainty at the moment” and that “is not lost on us”. But he said the company always underwrites its loans assuming a tougher economic environment so its loan book can remain resilient.

Capital One has also “trimmed some of the edges” on credit cards, but it continues to “feel good and lean towards” the opportunities it sees in its target customers.

“I think your net impression should be that while we have a very close eye on the economy and we obsess about it every day,” Fairbank said, the company is systematically charting “a worsening scenario.”

Overall, the company reported net income of nearly $2 billion for the quarter, down 43% from $3.5 billion a year earlier. The decline was due in part to a $1.1 billion provision for potential credit losses, compared to a nearly $1.2 billion release in the second quarter of 2021.

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