More Bad News For Autos: Wells' Auto Loan Originations Crash To An All Time Low

Joining the trifecta of reporting (and beating) banks, Wells Fargo also reported better than expected Q2 EPS of $1.07 (exp. $1.01) despite missing on the top line (revenue of $22.2bn vs exp. $22.5bn) but the better news was to be found elsewhere, namely in the sequential rebound in the company's mortgage loan originations and mortgage pipeline, which after tumbling to a post crisis low in Q1 staged a modest rebound, with applications rising 41% to $83 billion in Q2 while the pipeline rebounded by 21% to $34 billion, although on a year over year basis the numbers were still disappointing, down 13% and 28% respectively.

The good news - if only for Wells - was accentuated by the favorable increase in the bank's Net Interest Income, with Net Interest Margin rising to a multi-year high of 2.90%, "as the benefit from higher short-term interest rates, disciplined deposit pricing and a reduction in long-term debt, was partially offset by the impact from lower loan and investment securities balances."

However, while the bank's modest improvement in its core housing business was admirable (if not for the market which has sent the stock in the red at least in premarket trading), there was a flashing red light elsewhere: in an unexpected twist, Wells reported that auto loan originations crashed 45% Y/Y to only $4.5 billion, the lowest print since the bank started disclosing this item back in 2013.

The lack of loan origination hit Wells at the bottom line, with total average loans $956.9 billion, down $6.8BN q/q, with period-end loan balances down $982MM, reflecting the decline in auto loans; the bank also notes legacy junior lien mortgage loans continued to decline as expected.

Wells blamed "tighter underwriting standards", which if accurate is ominous for the broader auto sector which is now facing not only surging delinquencies primarily among subprime borrowers, but according to Wells, is about to get squeezed "bigly" on the supply side. It also means that auto sales in the coming quarters, already poor, are about to suffer an even sharper decline, pressuring not only overall US debt-funded consumer spending but also manufacturing production among the auto suppliers and downstream sectors, with adverse consequences for the broader economy.

Source: Wells Fargo

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