Car loans mean banks don't need high interest rates to rake in cash
Published Date: 7/19/2019
Source: axios.com
Ally Financial was the latest bank to declare a major profit windfall in its second quarter earnings report, as the U.S. banking industry's largest auto lender reported a profit increase of 67%.Why it matters: Americans are borrowing record sums to buy new vehicles — and used ones — and they continue to pay relatively high interest rates. Banks are seeing big profits as a result.The intrigue: U.S. Treasury yields have fallen to their lowest level in more than 2 years, pushing down interest rates on bonds and savings accounts. Yet, Fed data shows auto loan rates in Q2 remained well above their average over the past decade, and even higher than in the fourth quarter of 2018 when Treasury yields reached their highest since 2011.The interest rates banks charge for loans are typically tied to the yield on Treasuries, as banks adjust their rates in conjunction with movement in the bond market to remain competitive for customers.However, as rates in the U.S. and globally have fallen in 2019 that traditional correlation has not yet materialized.What's happening: U.S. consumers are scaling back on new vehicle purchases and even buyers with top tier credit are opting for used instead of new, data shows, but the banks continue to squeeze big profits.Ally's stock rose 6.5% to an all-time high of $33.49 a share Thursday as retail auto loans clocked $72.3 billion, up from $69.9 billion in the year-earlier period. Its average yield on retail auto loans increased to 6.58% from 6.08%.Where it stands: Experian, which tracks millions of auto loans each month, said the average amount Americans are borrowing for a new vehicle rose to a record high of more than $32,000 last month.Americans also are paying record high average monthly payments for both new and used vehicles."We have not seen a slowdown in loan demand. In fact, volume for new and used loans is up from previous years," Melinda Zabritski, senior director of automotive financial solutions for Experian, told CNBC in June.The bottom line: Investors have worried that lower rates will hurt banks' profit margins and income. So far, that hasn't been the case.Go deeper: Debt-ridden millennials are taking out loans to pay for weddings