US banks' auto loan delinquency ratio reached its highest level of any year in the last decade during 2023 even as wage growth and unemployment signaled overall consumer health.

The auto loan delinquency ratio at US banks stood at 3.32% at the end of last year, marking the highest ratio for the industry since at least 2013, according to S&P Global Market Intelligence data. The increase came even as the industry's total auto loans declined to $530.38 billion from $548.40 billion in 2022, the first year-over-year drop since at least 2013.

However, the rise in delinquencies was a result of unique aspects of auto lending rather than broader weaknesses in consumer finance, experts said in interviews.

Implications for consumer health

Elevated auto loan delinquencies in 2023 reflect factors unique to the auto industry following the dynamics seen post-COVID-19, Stanford University professor of economics Neale Mahoney said in an interview.

Supply chain constraints following the pandemic drove up prices for both new and used cars, but low interest rates and pandemic aid allowed consumers to continue buying cars, which allowed people to take out higher balance loans at rates that they may not otherwise have qualified for, inflating banks' auto loan balances, according to Mahoney. Therefore, the recent delinquency trend is not indicative of broader consumer health, he said.

"Auto loans are marching to the beat of a different drummer relative to the rest of the consumer loan portfolio," Mahoney said. "We don't want to place too much weight on auto loans as an indicator of broader consumer health."

The labor market is a stronger indicator of consumer finances, Mahoney said. The US unemployment rate stood at 3.9% in February while average hourly earnings rose 4.3% year over year, according to the Bureau of Labor Statistics. Mahoney doesn't expect any broad-based consumer problems as long as unemployment remains low and wage growth remains strong, but issues in the auto loan market will continue as banks work through its idiosyncrasies, he said.

Barclays analyst Jason Goldberg expects auto loan losses to peak around the middle of this year, assuming unemployment stays low.

"If people have jobs, they tend to pay back their car loans because they need the car to get to the job," Goldberg said.

A decline in motor vehicle prices or interest rates will be key factors in bringing delinquencies down, according to Center for Automotive Research Chief Economist Yen Chen, who predicted delinquencies will remain elevated through 2024.

Ally overtakes Capital One

Among the top 25 auto lenders, nine posted a sequential increase in their portfolios, while 16 recorded quarter-over-quarter decreases in the fourth quarter of 2023.

Ally Financial Inc. overtook Capital One Financial Corp. to become the US bank with the most auto loans in the last quarter of 2023. While both companies' total auto loans declined quarter over quarter, Ally's 1.2% decline was just enough to boost it above Capital One, which saw a 1.8% linked-quarter decline.

Auto loan originations at Capital One declined 7% on a year-over-year basis during the 2023 fourth quarter as the company remained cautious in the face of headwinds such as elevated interest rates, normalizing credit and high car prices, Founder, Chairman, President and CEO Richard Fairbank said during a January earnings presentation.

"I think some of those headwinds are easing, and the results that we're seeing on our own book are really pretty striking and gratifying," Fairbank said. "That gives us a more bullish outlook, still with a note of caution."

Associated Banc-Corp again reported the largest sequential increase in auto loans among the top 25 at 12.4%. Bank of Montreal reported the largest quarter-over-quarter decline in auto loans among the top 25 with a 15.4% decrease.

* Access an industry document detailing auto loan holdings. * View US industry data for commercial banks, savings banks and savings and loan associations.

With an auto loan delinquency ratio of 13.35%, Boston-based Santander Holdings USA Inc. again had the highest ratio among the top 25 banks by auto loans. The company's ratio increased 148 basis points from Dec. 30, 2022.