Episode 7 - What does the current state of consumer lending and credit prospects for auto lending mean for risk management?
Credit

Episode 7 - What does the current state of consumer lending and credit prospects for auto lending mean for risk management?

June 26, 2023

In the latest episode of the Risk Intel podcast, host Ed Vincent engages in a conversation with Amitabh Bhargava, a seasoned professional in the risk space, specializing in Credit Risk. Amitabh's impressive career spans roles as a commercial underwriter at ICICI Bank and an 18-year tenure at Capital One, where he oversaw credit analytics and research for the consumer and wholesale portfolio, as well as executive credit risk assessment and portfolio modeling. Amitabh currently heads the credit portfolio management practices within SRA’s credit consulting team. Listen, read or watch below to learn more about the state of consumer lending and credit prospects for auto lending and how this impacts risk management across the banking sector.

Consumer Lending Trends: Resilience Amidst Rate Rises

Despite ongoing rate hikes, the consumer lending sector continues to demonstrate resilience. Amitabh sheds light on key metrics that reflect consumer behavior, such as spending patterns, employment status, income levels, wealth indicators, debt burdens, and overall confidence. Factors such as strong employment, stable incomes, favorable wealth indicators, and the utilization of excess savings accumulated during the COVID-19 pandemic contribute to the sector's robust performance.

Consumer Landscape: Dichotomy in Credit Performance

While prime and super prime consumer credit segments exhibit strength, there is evidence of strain in the subprime sector. Amitabh explains that the majority of excess savings have been spent by the bottom 80% income cohorts, resulting in a divergence in credit performance. Understanding these dynamics is crucial for analyzing the broader consumer lending landscape.

Auto Lending: A Significant Component of Consumer Lending

Auto lending represents a substantial portion of the overall consumer lending market. Around 25% of non-mortgage lending is attributed to auto loans. Amitabh explores the impact of COVID-19 disruptions on the availability of vehicles, including supply chain interruptions and semiconductor chip shortages. These factors have led to higher prices for new vehicles and a scarcity of used vehicles in the market. Coupled with increased interest rates, affordability concerns arise.

Structural Changes and Uncertainties in Auto Lending

Amitabh highlights significant structural changes within the auto lending market, including the rise of electric vehicles (EVs) and the emergence of direct sales from manufacturers like Tesla. These changes disrupt the dominance of indirect auto lending through dealerships, creating uncertainties for lenders. Additionally, the lack of historical data on EV depreciation adds further complexity to risk assessment.

Proactive Risk Management: Stress Testing and Risk Assessment

To address these challenges, Amitabh recommends that lenders conduct stress testing and comprehensive risk assessments of their portfolios. Leveraging tools like SRA Watchtower, which provides a library of risk indicators and key performance indicators (KPIs), and can facilitate a systematic analysis of risks across multiple dimensions. By conducting scenario analysis and collaborating with industry peers, lenders can proactively mitigate risks and adapt their strategies.

Conclusion: Embracing Data-Driven Insights in Auto Lending

The conversation emphasizes the importance of data-driven insights and forward-looking risk management practices in navigating the evolving landscape of auto lending. With an understanding of the sources of risk and the implementation of effective mitigation strategies, banks and credit unions can adapt to changing market conditions and ensure the health of their auto lending portfolios. Stay informed by tuning in to the Risk Intel podcast for more valuable discussions on risk management and industry insights.

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