Auto loan delinquencies continued to increase in the first quarter, but the year-over-year rise was the smallest in more than two years. Banks have pared loan growth for the product type, pledging to focus on pricing and credit quality, and the pivot appears to be paying off.

In the first quarter, the 30-day-plus delinquency rate for bank-owned auto loans was 2.24%, an increase of 14 basis points from the year-ago quarter. It was the smallest year-over-year increase since the 2016 fourth quarter. The moderation in delinquency increases comes as some banks have made it clear they are willing to accept lower volumes in exchange for better pricing and stronger credit quality. Year-over-year growth in total auto loan balances was under 2% in the first quarter, making four straight quarters of sub-2% loan growth for the product type while overall loan and lease growth runs greater than 4%.

Huntington Bancshares Inc. is one of the banks pulling back. Its year-over-year auto loan growth was just 1.7% in the first quarter, and its loan balance was down 1.2% from the linked quarter. The bank's auto loan delinquency rate was a mere 70 basis points in the first quarter, down 4 basis points from the year-ago period. During the bank's April 25 earnings call, CFO Howell McCullough III said the linked-quarter decline in the bank's auto portfolio could continue in the quarters ahead.

The slower rise in delinquencies for bank-owned auto loans runs counter to findings from the Federal Reserve Bank of New York. Economists at the agency conduct a consumer credit panel, which reports delinquency figures using information from consumers' credit reports. That study suggested auto loan performance continues to deteriorate with 90-day delinquency rates at 4.69% in the first quarter, up 43 basis points from the year-ago quarter. The report covers a wider swath of auto loans than bank-owned loans, which tend to consist of more prime-rated borrowers.

"It's likely going to be stable to declining going forward because we're very, very pleased with the pricing actions that we're taking. We're very pleased with the volumes that we're generating. And we just think it's the right tactic given where we are from a rate perspective and the concentration of auto on the balance sheet. So I would expect stable to declining going forward," McCullough said, according to a transcript.

"I think we're seeing a divergence in data points," said Joseph Cioffi, a partner who represents financial institutions for Davis & Gilbert LLP. "Because it's not unanimously in one direction, there's currently no reason to panic."

However, there is some data suggesting improvement among certain subprime auto loans. A May 23 report from S&P Global Ratings showed 60-day delinquency rates for securitizations of subprime auto loans were flat year-over-year at 4.28% in March after showing steady increases in the previous six years.

Cioffi operates a site tracking subprime auto performance and recently conducted a survey of participants in the securitization market. Among all respondents, 70% said they expect subprime auto loan performance to deteriorate in the near future. Cioffi said most of the market's concerns appear to be tied to the broader economy, as a jump in the unemployment rate tends to drive substantial losses in the subprime sector.

Finance company Santander Consumer USA Holdings Inc. has focused on subprime auto to a greater extent than more traditional depositories. During the lender's April 30 earnings call, an analyst asked whether a decline in loans to borrowers with very low credit scores represented a strategic shift. In the first quarter, borrowers with a FICO score below 540 constituted 19.4% of held-for-investment retail installment contracts, down from 21.6% a year earlier. The lender also reported one of the largest year-over-year declines in its 30-day-plus delinquency ratio, dropping 290 basis points to 12.24% in the first quarter. But President and CEO Scott Powell said the shift in FICO scores and the delinquency drop were not the result of a strategic change. Rather, he attributed the delinquency drop to continued strength in the broader economy.

"Our radar is fully switched on, and we look at a lot of detailed information around vintage performance, payment rates, roll rates. We look across the industry. We track what our competitors report," Powell said, according to a transcript. "It seems like most of our competitors in the auto space are reporting lower delinquency in losses."

Click here to set up real-time alerts for data-driven articles on the U.S. financial sector. Click here to access data on the 25 largest auto lenders among banks and thrifts as of March 31, 2019. S&P Global compiles auto loan data based on loans reported in call reports and Form Y-9s. Click here to see the aggregated data for commercial banks.

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