December 2, 2023

Car Auto Finance

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Citizens to end car dealer financing program this summer

Citizens Bank signage.
Citizens Financial Group, holding company of Rhode Island-based Citizens Bank, will discontinue its indirect auto lending program this summer to shore up tail risks in its portfolio.

Bloomberg News

Citizens Financial Group, the bank holding company for Citizens Bank, says it will end its indirect auto lending program this summer. 

Citing a desire to retool its balance sheet and focus on “relationship-based lending,” the Providence, R.I.-based firm announced Wednesday that it would stop providing indirect auto loans on July 1.

“As Citizens continues to optimize its balance sheet, this decision further enables us to lend in areas that provide better risk adjusted returns and improved opportunities to deepen relationships with our customers,” said Eric J. Schuppenhauer, Head of Consumer Lending, in a press release. “We greatly appreciate the opportunity to have been the lender of choice for thousands of dealership partners over the years and are thankful for the dedicated team of colleagues that have delivered exceptional service.”

The move comes amid a broader recalibration of assets and liabilities at the $222 billion bank, which was hampered by the volatility in the banking sector this spring, following the failure of Silicon Valley Bank and Signature Bank in March. 

Indirect auto loans are a type of financing in which lenders lend to dealers or third parties who then pass that financing along to buyers. Citizens has been scaling down this part of its business since late last year. In the third quarter, the bank announced it had reduced the number of relationships it has with auto dealers and de-emphasized origination volume for these types of loans. 

As of March 31, the bank’s book of outstanding indirect auto loans totaled $11.5 billion, a decline of 6.5% from the end of 2022 and down more than 20% year-over-year. The bank intends to continue servicing these loans even after it stops new origination. 

In April, CEO Bruce Van Saun signaled to investors that the bank would be tightening standards on auto loans as a “cautionary measure.” He said the bank did not see underlying weakness in the business, but noted that the heightened standards were necessary to avoid “tail risks in the portfolio.”

Total deposits in the bank declined by 4.7% during the first quarter of this year amid the volatility in the banking sector. To stem these losses and attract new customers, the bank increased the interest it pays on deposit by 51 basis points during the first three months of the year. This higher cost of funding has caused the bank to revise its expectations for net interest income to decline by 3% during the second quarter.

During the first quarter earnings call, Van Saun also flagged commercial real estate loans as another area of potential weakness in the bank’s loan portfolio. As a result, it added $35 million to its allowance for credit risks in anticipation of a recession.

“Our current reserve level contemplates a moderate recession and known risks, and there should be less of a need for further reserve builds given anticipated spot loan decline for the year as auto runs down,” Van Saund told analysts.