Capital One Financial is lagging slightly from the booming auto market, with its chief executive citing “aggressive” actions by credit unions and other lenders that are keeping prices roughly flat even as interest rates rise.
The McLean, Va.-based lender isn’t undertaking a “huge rollback” in the auto sector or its dealership relationships, CEO Richard Fairbank told analysts on a quarterly earnings call after sales closed. markets Thursday. But profit margins have tightened in auto loans, prompting Capital One to “cut the edges”, Fairbank said.
“The automotive opportunity continues to be significant for Capital One,” Fairbank said, adding that the company “will continue to be quite tight around the edges” until pricing becomes more attractive.
Capital One issued about $10.3 billion in auto loans during the second quarter, down 12% from $11.7 billion in the first three months of the year. Auto originations were 20% lower than Capital One’s nearly $13 billion in loans in the second quarter of 2021.
Fairbank said major banks and most auto lenders have “raised prices very consistently and responsibly” to accommodate the Federal Reserve’s interest rate hikes, which have pushed up the cost of financing for industry.
A few big players, however, kept prices “well behind” the Fed’s rate hikes, Fairbank said. Credit unions also have a different business model and “really haven’t budged at all” in their pricing, Fairbank said, giving them a big boost in market share. Fairbank did not specify which companies were keeping their prices flat.
Capital One’s caution aligns with that of Providence, Rhode Island’s Citizens Financial Group, whose CEO says he’s focused less on autos in a broader effort to “start managing risk” in the event of a recession.
Yet Ally Financial said this week that it sees some clues that the auto market will slow down anytime soon due to strong consumer demand for cars.
Capital One’s weak appetite for auto loans contrasts with its penchant for consumer credit cards.
The company, which last year spear a premium travel card called Venture X, was expensesstrongly on marketing over the past two quarters. The push continued into the second quarter, with marketing spend just over $1 billion.
Spending bonuses for new cardholders drove up marketing spend as spent on Capital One online travel and airport lounges it is launching for Venture X cardholders. The company has opened a lounge at Dallas-Fort Worth Airport and is expected to open locations at Denver Airport and Dulles Airport in Washington DC this year. It also offers partner lounges at other airports for cardholders.
Fairbank said the company is already seeing the benefits of its decade-long campaign toward “big spenders,” whose higher purchase volumes drive up interchange fee revenue and whose strong redemption behaviors limit any credit deterioration.
“Our 10-year quest to build our big spender franchise has resulted in a significant increase in marketing levels, but the sustained revenue, credit resilience and capital advantages of this enduring franchise are compelling and growing,” said Fairbank to analysts.
Heavier marketing spend doesn’t seem to be on analysts’ minds. “We appreciate management’s willingness to invest in both marketing and technology to capture opportunities and drive future growth,” RBC Capital Markets analyst Jon Arfstrom wrote in a note to clients.
Credit Suisse analyst Moshe Orenbuch, meanwhile, wrote that he was “moderately positive” on the bank’s performance and highlighted the success Capital One “has had so far in building its franchise. of a transactor”.
The focus on consumption cards also comes as fears of an impending recession intensify, increasing the risk that loan losses will begin to increase significantly.
Fairbank alluded to the economic environment, saying there’s “more uncertainty right now” and “it’s not lost on us.” But he said the company is still underwriting its loans assuming a tougher economic environment so its credit portfolio can remain resilient.
Capital One has also made “some tweaks around the edges” in credit cards, but it continues to “feel good and lean into” the opportunities it sees with its target customers.
“I think your net impression should be that even though we have a very close eye on the economy and obsess over it every day,” Fairbank said, the company consistently subscribes “to a worse scenario.”
Overall, the company reported net income of nearly $2 billion in the quarter, down 43% from $3.5 billion a year earlier. The decline was partly due to a $1.1 billion provision for potential credit losses, compared to a release of nearly $1.2 billion in the second quarter of 2021.