Vehicle loans soar at banks

High cost of debt limits lending by GM, Ford

August 05, 2005|By COX NEWS SERVICE

ATLANTA - Kevin Cornwell hadn't planned to buy a new truck when he took his Chevrolet Blazer in for routine maintenance.

But the 35-year-old salesman left the dealership owning two - the Blazer and a 2005 Chevrolet Tahoe. His enticement was General Motors' popular employee-discount-for-everyone promotion, which cut about $5,000 from the Tahoe's sticker price.

Cornwell and thousands of other new buyers have been a boon to Detroit automakers, whose discounts successfully lured shoppers into showrooms. U.S. automakers sold a record 1.8 million cars and light trucks in July, up 16 percent from July 2004.

But the employee discount has been beneficial to bankers as well, who say they are seeing sharp increases in auto loans, which can make up as much as 15 percent of their loan portfolios.

For example, Wachovia Corp., of Charlotte, N.C., said auto-loan volume rose 28 percent nationwide in June. In Georgia, volume was up 42 percent.

"It's a pleasant surprise," said William H. Linginfelter, chief executive officer of Wachovia's Georgia operations. Once July's results are tallied, he expects Wachovia's auto-loan volume in Georgia to have increased an additional 30 percent.

SunTrust Banks of Atlanta, the nation's fourth-largest auto lender among banks, said the volume of loans for vehicles increased 30 percent in July, the best showing in 18 months.

NetBank, of Alpharetta, Ga., said it financed $49.7 million in new auto loans in June, up more than 28 percent from June 2004.

GM, the first of Detroit's Big Three to launch the employee-discount sales incentive, ended its wide-scale promotion Monday but will keep the offer on select 2005 models until they are sold. Ford Motor Co. is continuing its promotion through early September. DaimlerChrysler AG's Chrysler Group is expected to keep its offer through the end of August.

Japanese automakers, who generally have had fewer difficulties, didn't offer the same deals. But that didn't stop some of them from posting record sales gains in July.

Mark Pregmon, senior vice president of consumer lending at SunTrust, said he expects the loan trends to continue even if there is a slowdown in auto sales.

That's because Detroit automakers did away with the zero percent financing deals that were so popular two years ago. To spur sales after the Sept. 11, 2001, terrorist attacks, domestic automakers offered zero percent loans through their financing subsidiaries.

Only the most creditworthy consumers qualified for that deal, but the Big Three also offered beneficial interest rates for other buyers - usually better than what banks offered.

But automakers borrowed money to finance those promotions.

Since March, Standard & Poor's and other firms have lowered credit ratings on the debt Ford and GM are carrying, making it more expensive for them to finance these loans.

"They've got all the debt they can handle," SunTrust's Pregmon said of the automakers' financing subsidiaries. "They can't afford it."

GM, the world's largest automaker, said last week it will sell $55 billion in car loans to Bank of America over the next five years.

"One of the key reasons banks are seeing better loan volume is that the big auto companies cannot be aggressive on loan pricing since they saw credit ratings cut back," said Christopher W. Marinac, a banking analyst with FIG Partners in Atlanta.

"Lower credit ratings mean higher cost of debt when Ford and GM issue debt securities. So, the banks are now seeing better volume."

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