The U.S. auto-loan market is starting to show some strain.
First, delinquencies among lower-rated borrowers have risen to the highest level since 2009.
Second, the amount of auto loans outstanding is growing at the fastest pace on record and now accounts for a bigger proportion of total U.S. household liabilities in at least 14 years.
Third, delinquencies and losses are expected to only get worse.
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To be clear, this doesn’t point to an imminent, 2008-style meltdown. After all, the U.S. auto-loan market is about $1.1 trillion, which pales in comparison with the $8.9 trillion U.S. mortgage market and $8.6 trillion of dollar-denominated corporate credit. And only about one-quarter of the outstanding car loans have been extended to subprime borrowers, who are the ones having the problems.
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Still, the auto-loan losses are concerning, especially in light of the continuing economic recovery. As more borrowers fail to pay their bills, there will be some significant losers.
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Ally Financial, for example, reported an 11 percent decline in pretax profit in the fourth quarter as delinquencies and losses rose, according to filings highlighted by Bloomberg Intelligence’s Ryan O’Connell. Even harder hit was Capital One because about one-third of its roughly $45 billion of auto loans are extended to subprime borrowers, as O’Connell pointed out. It reported a 52 percent jump in provisions year-over-year, with pretax profit at its consumer lending unit falling 40 percent.
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So far, investors don’t seem all that worried about auto-loan distress. Capital One’s shares have surged 29 percent since the end of September, while those of Ally have risen 20 percent. After all, these companies are still solidly profitable.
But these two companies will be important to watch as harbingers of broader pain in the auto industry as well as in broader consumer creditworthiness. And they’re not alone. The pain will also most likely extend to smaller independent lenders, including Exeter Finance, DriveTime, Flagship Credit Acceptance and Westlake Financial Services, not to mention the captive financing arms at auto companies.
Less-creditworthy borrowers may be having the most trouble right now, but they’re not the biggest concern for auto-loan investors. Subprime loans pay higher yields, which provide investors bigger cushions to absorb defaults and delinquencies. Prime loans, though, have much narrower margins, so if creditworthy borrowers start to have trouble, losses will pile up much faster.
And just think, delinquencies are rising despite the generally strong economy. Should growth slow, more car owners will inevitably struggle to meet their obligations, including those with better credit ratings.
Meanwhile, as rising delinquencies and losses cut into profits, companies may opt to simply underwrite more auto loans, possibly at narrower yields. This shrinks any room for error and will most likely only make the situation worse should growth stall. Meanwhile, used-car values have declined, reducing potential recoveries.
The troubles in the auto-loan market will inevitably cause a lot of headaches and possible insolvencies. If auto lenders get more aggressive with their loans to bolster their profits, the eventual losses will only be worse.
Is it possible to rapidly increase shareholder value and promote diverse boards at the same time? Is a homogeneous board an indicator of an underperforming company?
At the recent Skytop Strategies Shareholder Activism event, board composition, diversity and its link to company performance was a focus. While stagnant or cozy board environments can lead to underperformance, activists disagree about how to solve the problem.
‘It’s our belief that improving the diversity of underperforming companies is a necessary first step to help facilitate improving shareholder value,’ said one activist, who listed improved oversight, less groupthink, less loyalty to a CEO and new skills and insights as positive benefits from a diverse board.
But some activists in the room expressed concerns about the talent pool for diverse board directors, cautioning against ‘diversity for diversity’s sake’.
One attendee suggested that diversity often falls down the list of priorities when activists are looking to affect the value of a company in a short time period. In those instances, funds may turn to established board members with a track record of business transformation.
Institutional investors that take a longer-term approach may be more willing to expand their search for a new board member and invest additional time to ensure a less experienced board member is sufficiently onboarded.
‘You will make a better board by assessing where your board is currently, looking at where your strengths and weaknesses lie and making a decision based on that,’ says Michelle Greenberg-Kobrin, clinical professor of law and director of the leadership program at the Heyman Center on Corporate Governance, Cardozo School of Law, speaking exclusively to IR Magazine.
‘Thinking about the biggest-name candidate without thinking about the qualities he or she can bring seems to be short-sighted in terms of both corporate governance and shareholder value.’
Recent data compiled by Bloomberg shows that the largest five US activist funds have sought at least 174 board positions and landed 108 since 2011. Only seven of those nominees are female.
Paul DiNicola, managing director at PwC’s Governance Insights Center, says investors and chairs need to broaden their search beyond existing board members and sitting CEOs. ‘In the S&P 500 there are individuals one and two levels below the chief executive who have experience of running very large businesses,’ DiNicola says, speaking exclusively to IR Magazine.
PwC’s recent corporate directors survey reveals that 35 percent of board members think at least one of their peers should be replaced – citing lack of knowledge or expertise and ageing demographics as the top reasons for ineffectiveness.
While self-assessments are a tool to identify underperformance, more than half (51 percent) of corporate directors say their boards didn’t make any changes as a result of their last self-assessment.