The mortgage price wars in Canada have barely cooled, but the country's banks are fighting another intense battle as they compete for market share in the next area of growth in banking – the auto industry.
Lenders are in a race to finance car dealerships as the auto sector bounces back, dealers seek out cheaper loans to stock their showroom floors, and more Canadians contemplate buying new vehicles.
"Everybody is trying to assert their space," said Paul Clark, chief executive officer of TD Auto Finance. "It is an incredibly competitive market."
For the banks, it's a lucrative strategy that reaches beyond cars: finance a dealer's lot, lending money for the hundreds of models needed to draw customers in, and you can likely bank the dealer's mortgage, retirement and estate planning, along with services for most of the staff.
For dealers, it is a windfall that will save smaller operations thousands of dollars while some larger dealer groups could save as much as $1-million in annual interest costs.
On the consumer end, the cheaper funding gives dealers flexibility to lower prices in a car-buying market that has slid in the first three months of the year. But the aggressive lending also comes as the average Canadian household is already highly leveraged.
Banks have been dropping their rates for dealers as much as 0.75 percentage points below prime on so-called floor plan financing, or loans to dealers to stock their lots, said one dealer who switched to TD.
"They are on a mission," the dealer in Western Canada said of the deal he signed recently. "If you want to grow your business [as a bank] with the least amount of risk, what's better than to get good car dealers with good brands," said the dealer, who owns about a dozen stores.
Recent acquisitions in the auto lending market have sparked the battle. TD expanded aggressively after purchasing Chrysler Financial in 2011. And Royal Bank of Canada's recent deal to buy Ally Financial, which closed in January, has given it a massive platform from which to grow.
Banks have jumped to match each other's rates as they try to keep long-standing and lucrative customers from jumping to another lender. The financing arms of the auto makers, known as captives, are also offering special rates to dealers to compete with the big banks.
"The floor plan financing market has become increasingly competitive. We've seen some very aggressive rates out there," said Richard Goyder, vice-president, personal lending at RBC.
AutoCanada Inc., Canada's largest publicly traded dealership group based in Edmonton, recently received a cut of 50 basis points on its floor plan loans to 2.5 per cent from 3 per cent. The group could save between $750,000 and $1-million on the $150-million to $200-million worth of inventory on the lots of 30 dealerships, said Jeff Christie, vice-president of finance.
An expected surge in car buying is also driving this competition. The average age of cars in North America has been rising, after consumers put off buying new vehicles during the recession. At some point that logjam of consumer demand will burst, the banks figure, although there is considerably less pent-up demand for new vehicles in Canada than there is in the U.S. market.
RBC spent $1.4-billion to buy Ally in a heated auction with 15 other bidders. The deal helps revive struggling Ally with a badly needed injection of capital.
TD and Bank of Nova Scotia responded to that expansion with rates that some dealers are calling the best they've seen in years. For Scotiabank, which has been a major player in the auto-lending business, the increased competition is a noticeable shift. With mortgage lending slowing as the housing market cools off, banks are looking elsewhere for growth.
"In a mature Canadian market, there are some other competitor banks out there that are taking an interest in the [auto lending] business," said Ron Porter, senior vice-president of automotive finance and indirect lending at Scotiabank.
But there are questions as to how sustainable this lending is as banks scramble to undercut each other. Mr. Porter doubts the sector can keep up this level of rate cutting. "That's probably yet to be seen," Mr. Porter said.
During the 2008-09 credit crisis, car manufacturers were forced to scale back their financing activities or get out of the market altogether. This has created a gap that the banks are now eagerly hoping to fill.
"It's one of the few asset sectors which is growing," said Mr. Goyder at RBC. "We know the housing market is declining, and auto is absolutely somewhere where there is still some growth."
He agrees the current rock-bottom rates being offered by the various banks may not be able to continue. "Pricing at those levels is probably not sustainable in the long term," Mr. Goyder said. "The banks who are engaged in that kind of activity are doing it in an attempt to grab some market share."
Unlike the mortgage market, it is unlikely the federal government would raise concerns with aggressive lending in the auto sector. Finance Minister Jim Flaherty criticized several lenders this spring when they began advertising deeply discounted mortgage rates to drum up new business. Ottawa has been trying to cool off the housing market to avoid a crash in prices should interest rates go up.
However, the government has no regulatory hand in auto lending. The federal government can influence the mortgage market by deciding which kinds of mortgages it insures through the Canadian Housing and Mortgage Corp. Asked about the auto lending market heating up though, Mr. Flaherty said last month, "We don't insure car loans."