When TD bought Chrysler Financial, the former in-house finance arm of the auto giant, the business badly needed an injection of capital to grow.
Auto mechanics have seen the trend coming, as rising numbers of aging cars show up in their garages. Now the banks are taking notice.
North Americans are holding on to their vehicles longer than ever in this economic downturn, with the average age of cars and trucks on the road approaching 11 years. At some point soon, consumers are expected to start venturing back into the market in droves looking for new cars, or upgrading with a used vehicle.
Eyeing this trend, banks in the United States are now fighting more aggressively for auto lending business, hoping to finance American drivers as they return to the sales floor. When Toronto-Dominion Bank placed its bet on cash-strapped Chrysler Financial Corp. just more than a year ago, the $6.3-billion deal to buy the auto maker's lending arm was a bold wager that TD could revitalize the slumping business in a market that may be just starting to wake up.
"The bet we had to make was could we restart this engine," TD chief executive officer Ed Clark said in a recent interview.
Market forecasts in the U.S. suggest new car sales will climb to between 13.5 million and 14 million this year. While that is still far below the 16 million cars that were moving off dealership lots before the recession, it's a 5 per cent increase from the previous year, causing optimism among lenders.
Meanwhile, used car prices are expected to climb 2 per cent this year in the U.S., another indicator of a more robust market. It is the third consecutive year of increases, according to industry data compiled by the National Automobile Dealers Association this month.
When TD bought Chrysler Financial, the former in-house finance arm of the auto giant, the business badly needed an injection of capital to grow. But TD needed something else: Having amassed a network of 1,300 deposit-rich branches along the Eastern U.S., the Canadian bank was in search of a way to invest some of its capital to get a better return.
Wading into the auto market in a recession where the consumer is largely tapped out seemed like a gamble. But Mr. Clark said the return of car buyers to the market has left the bank slightly ahead of schedule on its projections for the U.S. auto lending division, which has been renamed TD Auto Finance.
"We ended up in 2011 earning more out of Chrysler than we thought that we were going to earn," Mr. Clark said. "But it's meant that it's probably more difficult next year because we are not going to get as much of a step-up next year."
TD is looking to originate about $1-billion (U.S.) a month in auto loans, with a total portfolio of about $25-billion in the U.S., Mr. Clark said. However, with the auto market showing signs of life, the bank is now coming up against more competition than it expected a year ago, when the deal was done.
Major lenders including Ally, Wells Fargo, Bank of America Corp. and Capital One have been fighting aggressively for market share since the summer. Like TD, each are vying to be the lender of choice when a buyer sits down at the dealership and is offered a menu of financing options. A General Motors Co. executive told analysts last week that the competition is noticeably more fierce between banks.
"There are multiple lenders out there and I do think that business is getting increasingly more competitive," said Don Johnson, vice-president of U.S. sales operations at GM. As the recession dissipates, he said lenders "are going to be in there fighting for every consumer they can get their hands on without being, I would say, irresponsible."
Despite worries over the credit market in the United States, TD executives believe auto lending south of the border is much less risky than mortgages.
"Auto loans were a fantastic performing asset class during the recession. The delinquency and the writeoff rates were much below what anybody would have expected," Tim Hockey, TD's head of Canadian banking and Auto Finance, said in a recent interview.
"That's because people will stop paying their mortgages [in the U.S.]a lot sooner than they will stop paying on their car loans. Americans need their cars to get to work, so if you stop paying on your car, it will be picked up by the lender within 90 days. But it turns out if you stop paying on your house, the average homeowner in the U.S. can stay in their home for a lot longer."
There are signs of frothiness developing in the market. This year, Bank of America, Capital One and other banks have been racing to approve auto loans – introducing 30-second financing approval at dealerships – in order to nab more deals.
TD is now the eighth-largest auto lender in the United States, where car and truck sales rose 10 per cent last year to hit 12.8 million.
For economists, trying to forecast where those numbers are going is more difficult than usual, given global economic uncertainty, high household debt levels and unusually low interest rates. It's not clear which of those forces will weigh most heavily on the consumer in the next few years.
"I don't think we're going back to the days of 16 million sales," said Craig Alexander, TD's senior vice-president and chief economist. He said the market will find "an equilibrium" that is likely below that figure, but is more sustainable.
Grant Robertson