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BofA Treads Where Others are Cautious; Auto Lending in Focus

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The booming automobile industry continues to attract attention from Wall Street biggie, Bank of America CorporationBAC , which has reportedly hired a number of loan officers and salespersons in recent months to boost auto lending, according to a Reuters report.

Amid regulatory caution and rising losses from auto lending, when several banks are skeptical, BofA's move suggests that the company remains confident despite a murky picture.

Citing an interview with BofA's executives leading its auto lending business - Matt Vernon and John Schleck, and their head, D. Steve Boland - the report stated that since last May the bank has increased the number of loan officers by almost twofold to 110 from 60. Alongside, Vernon and Schleck lead products including home equity loans.

Boland noted that he sees opportunities for auto loan growth, particularly from borrowers with good credit. The company remains focused on prime and "superprime" borrowers. Most of the company's auto borrowers have credit scores higher than 700, exceeding the score of 660, which is usually considered good.

Growing Auto Industry

The auto industry is growing rapidly. Demand for automobiles is rising amid a backdrop of falling crude prices as well as improving employment. Moreover, quick availability of credit, driven by easy lending practices of some banks is boosting demand.

Notably, domestic auto sales for Feb 2016, climbed to a 15-year high as sales increased around 7% year over year. Meanwhile, the seasonally adjusted annual sales rate ("SAAR") climbed to 17.9 million units, up 10.8% year over year. Moreover, growth in auto sales is expected to continue through 2016 as well, according to the National Automobile Dealers Association.

Concerns

While the current trend in the automotive sector gives relief to auto manufacturers despite the weakness in the U.S economic recovery, it puts the banks at risk owing to its dominance in the auto finance market.

The growing auto loan market has led to stiff competition, which ultimately resulted in lax lending practices. Lenders are attracting borrowers by providing longer repayment periods (more than the usual six years, or 72 months) and increased loan balances.

Though longer repayment periods lower borrower's monthly payment, lenders remain at stake in the event borrowers fail to oblige the payment. It is difficult for a lender to recover the significantly large outstanding loan balance through sale of the borrower's car. Further, the value of the car is likely to fall with increased supply of cars in the market, which will further make it difficult for the lender to recover the loan amount.

Citing Federal Deposit Insurance Corp, the Reuters report also mentioned that industry-wide, auto loans of $1.1 billion were classified as uncollectible by the banks in fourth-quarter 2015, which reflected an increase of 15% year over year. Further, according to a report released by Fitch Ratings last month, delinquencies on U.S subprime auto bonds hit a 6-year high.

Notably, last October, the U.S. Comptroller of the Currency Thomas Curry, mentioned in a speech that scenario of the auto loans space "reminds me of what happened in mortgage-backed securities in the run-up to the crisis."

Bottom line

According to Experian Automotive data, BofA holds the 10th position among U.S. auto lenders with only 1.84 % of the market in fourth-quarter 2015. During 2015, the company made $23.7 billion in auto and recreational vehicle loans, which reflected an increase of 41% year over year.

While BofA should benefit from the growing auto industry, the associated risks cannot be ignored.

BofA currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the finance space include Banc of California, Inc. BANC , GAMCO Investors, Inc. GBL and Piper Jaffray Companies PJC , each sporting a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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