NEW YORK (Reuters) – Wells Fargo & Co WFC.N is downsizing and reshaping its auto lending business in response to growing market tensions, as well as a bank-wide push for more centralized risk controls.
Wells, which was the second-largest U.S. auto loan provider less than a year ago, has already cut quarterly issuance by nearly 30% in the nine months to March 31, according to a company presentation on May 11. . It also began consolidating collections operations in a move that people familiar with the business say could eliminate hundreds of jobs, after a new auto finance chief took the reins in April.
Wells Fargo is joining other lenders to reduce exposure to the rapidly cooling US auto market. Bankers, auto industry executives, analysts and regulators have been warning since 2014 that the auto loan market could overheat after years of being fueled by low interest rates and easy financing conditions.
In pursuit of growth, some lenders, including Wells Fargo, began accepting borrowers with poor credit. By late 2015, however, auto default rates began to outpace other types of consumer debt, according to data compiled by Cox Automotive, prompting some lenders to tighten standards and walk away from the market.
Wells Fargo began reducing its auto exposure starting last year. It reduced the share of subprime loans in the auto portfolio to 8% in the first quarter from more than 11% a year earlier, according to a company presentation.
Analysts expect to see higher delinquency and default rates when Wells Fargo reports results on Friday.
“The general view, which they’ve been pretty clear about, is that loan growth will be negative for the next two to three quarters,” said Brian Foran, analyst at Autonomous Research. He expects the automatic pullback to reduce Wells Fargo’s net interest income growth by about a percentage point over time.
Bank executives have acknowledged that tightening standards comes at a price.
“Wells Fargo is prepared to forego volume and share to protect its balance sheet from credit risk,” Franklin Codel, the bank’s head of consumer loans, said at the bank’s Investor Day in May. .
At the same event, CEO Tim Sloan named auto loans the company with the greatest potential for a “negative credit event.”
A Wells Fargo spokeswoman declined to comment on this story beyond what executives have already said about auto loans.
As Wells Fargo’s auto lending plummeted, it fell from No. 7 to No. 2 among major U.S. auto lenders, according to Experian Automotive.
The bank also began an overhaul of its automotive business earlier this year as part of a sweeping overhaul following a sales scandal that rocked the third-largest US bank by assets.
In April, Laura Schupbach took over as CEO of the car company, months after her predecessor, Dawn Martin Harp, announced her intention to leave. Schupbach is a 22-year veteran of Wells Fargo who recently steered her insurance business past various finance and expense roles, according to her corporate biography.
Weeks later, the bank began the process of moving collections staff from 57 locations across the country to three central centers in Raleigh, North Carolina, Irving, Texas and Chandler, Arizona, according to a report. internal note consulted by Reuters.
People familiar with the company say hundreds of positions are likely to be cut. A bank spokeswoman declined to say how many jobs could be lost and would not allow an interview with Schupbach. Martin Harp could not be reached.
The auto loan shake-up, some details of which were first reported by Auto Finance News, is the latest indication that Wells Fargo management is looking to better control companies that have traditionally operated with a great deal of independence.
In interviews, three people who worked within the auto loan operation raised questions about the long-term impact of moving away from the “manage it like you own it” philosophy.
In recent years, auto loans have generated nearly twice as much revenue per dollar spent as the bank as a whole, according to people familiar with the numbers.
They attributed this performance to tight cost control and the operational independence that was once a source of pride for Wells Fargo. But this business model has come under scrutiny after revelations that thousands of branch employees have created up to 2.1 million accounts to meet ambitious sales targets.
Following an internal investigation, Wells Fargo administrators released a report in April recommending stricter, more centralized risk management. Since then, Wells has begun moving 5,200 at-risk employees from business units to an “enterprise risk” division.
Although the changes could make companies less agile, tighter controls were inevitable, said Marty Mosby, an analyst at Vining Sparks.
“It was hard for them to let go of that last piece of who they really were,” he said. “That’s what made them more profitable than the other bank.”
Reporting by Dan Freed; Editing by Lauren Tara LaCapra and Tomasz Janowski