AUGUST 2004

Car Leasing Retrenchment

The American Banker reports that Consumer Bankers Association surveys show that banks lost money on over 90 percent of leased cars returned in 2001 and 2002. Banks, in turn, are leaving the auto leasing business. Leading the retreat is JPMorgan Chase, one of the largest auto lenders in the U.S. While "[a]uto leasing currently accounts for less than 5% of JP Morgan's $44 billion auto finance portfolio," Jamie Dimon, JPMorgan Chase's president, recently announced further reductions in originations. As CEO of Bank One, JPMorgan Chase's recent acquisition, Dimon followed the same course. Wachovia Corporation left the auto leasing business in 1999 and its recent acquisition, SouthTrust Corp., announced the end of its leasing operations occurred during the second quarter of 2004. PNC Financial Services Group Inc. announced in May the completion of the sale of its auto leasing portfolio. Rounding out the list of large banks exiting the auto leasing business are Bank of America, KeyCorp, and National City Corp.

What accounts for the loss of profitability in leasing operations? Low interest rates enabled consumers to purchase new cars instead of leasing. Falling used car prices undermined the prediction of leased car resale values, virtually eliminating profits from residuals. State regulators called into question banks' leasing advertising practices and terms, and several banks have been involved in litigation regarding accident liability.

The chief economist of the National Automobile Dealers Association, Paul Taylor, noted that 31% of new cars were leased in 1997—the peak year for auto leasing. Currently, the rate stands at 20% of new cars. However, Taylor foresees an upturn in leasing activity "over the next six months as interest rates rise." The companies that have maintained their auto leasing operations, such as Wells Fargo & Company and Huntington Bancshares, Inc., will benefit from the rising rates.

Banks still engaging in auto leasing origination could face stiff competition from another type of player in the industry—the finance divisions of large U.S. automakers or "captives"—that often engage in price cutting to reduce inventories. In fact, the New York Times reports that General Motors Corporation and Ford Motor Company "...continue to make their money as banks. ...G.M. reported that second-quarter earnings totaled $1.3 billion, up 49 percent from the period a year earlier, an increase fueled largely by its financial services division, [General Motors Acceptance Corporation]." Almost two-thirds of G.M.'s $1.3 billion profit derived from GMAC. Likewise, "...Ford reported $1.17 billion in net income, much of it from its financing operation. It said it had a slight loss in its automotive operations." In the face of shrinking U.S. market share (despite rebates and other incentives) and large U.S. inventories, the auto leasing units of banks should expect the captives to put a crimp in their leasing activity plans.