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Today’s topics:
What a major auto lender didn't share
Rental cars can be a good purchase… sometimes
Reading time: about 3 min
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What a major auto lender didn't share
Capital One released its Q4’22 earnings on Tuesday. The company missed revenue targets ($9.04 billion instead of $9.07 billion) and reported a net income of $1.2 billion, which is half of what it was a year ago. Adjusted per-share earnings are at $2.82, which is significantly below analysts' expectation of $3.87.
Along with other banks that are anticipating a downturn in the economy, Capital One has been bulking up their reserves for losses. Banks set aside these funds when credit quality begins to deteriorate, which occurs when past-due accounts or charge-offs start increasing.
Capital One’s provision for credit losses increased $747 million to $2.4 billion, which is up $1.4 billion year over year. I wonder why…
Let’s look at the auto lending section of the report. The trends I talked about in my previous newsletters (here and here), credit tightening and rising defaults are all evident. The net charge-off rate for auto loans was 1.7%, up from 0.6% last year. Auto loan originations were at $6.6 billion, down 20% year over year.
But wait, there’s more! Here’s what Capital One did not talk about:
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From what I see on my dealership floor, I believe that Capital One has taken the most drastic turn in tightening the credit, compared to Ally, Santander, and others.
Our volume with Capital One is down 50% quarter over quarter. To put it simply, we are not putting any business through Capital One because its offerings are not competitive anymore. It feels like the bank intentionally turned off the spigot with originations. Either it is preparing to face significant losses, or the company is just being extra cautious.
So I dug deeper and spoke with a few insiders. Here’s what I found out:
There’s a lot of internal turmoil happening inside the bank. In the words of the person familiar with the situation, never has there been so many high performers moved between divisions. Not just any divisions! Turns out that many leaders are moved from the dealer technology and products division to the “help me catch up” division. This division’s purpose is to work with delinquent customers.
This department has been largely neglected in the past, so why would Capital One suddenly decide to stifle innovation and reshuffle its workforce?
I see it as another affirmation of what to expect from the market in the coming year. Significantly propping the services division by the top automotive lender tells me that delinquencies are rising as consumers are struggling to manage their auto loan payments.
Cox Automotive’s data also supports my thinking: auto loan performance in December deteriorated with loans delinquent by more than 60 days increased by 5.3% and were up 26.7% from a year ago.
Rental cars can be a good purchase… sometimes
I’m getting quite a few questions about rental cars in my Car Buyer Community. Are they a good deal?
In the past, things were pretty easy. Retired rentals were a good source of inventory for dealerships and decent deals for shoppers: well-maintained, low mileage, affordable cars.
In the last couple years the situation has changed. Rental car companies had to adjust to the new tight-supply environment that put rental cars in short supply. Replacing vehicles became hard. Rental companies were holding on to vehicles way longer than usual instead of flipping them at 30K miles.
On top of that, just like everyone else, rental companies had to pay over MSRP when acquiring cars. Now are having aged fleets that are quickly depreciating as used car prices deflated from their historic peaks. Is it a good idea to buy a retired rental car then?
Lately I’ve seen plenty of rental cars that felt tired: check engine light on, worn out brakes, bald and mismatched tires, and neglected interiors. Cost cutting measures by rental companies are evident.
That’s why at this point, my general recommendation is to leave purchasing rental cars to professionals – dealerships – that have facilities to recondition them, perform the required maintenance, address issues and recalls, etc.
Remember that rental companies insure their cars themselves, so there’s a chance that accidents may not appear on CarFax and AutoCheck. Without being an expert, it is impossible to say if a car has prior damage.
As rental companies renew their fleets and things return to normal, I’m not against buying a former low-milage rental at a fair price. It may still have a balance of the original warranty, and could be a good deal worth considering.
Also, look at former demo or loaner cars at dealerships: unlike traditional rental cars, they are usually treated much better and are maintained on schedule by dealerships. They are titled as new but usually are sold at a good discount.
Thank you for joining me again here on the CarDealershipGuy newsletter. See you soon!
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-CarDealershipGuy
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