New FIAT 500 cars lined up on the lot at Fiat of Van Nuys, in Van Nuys, California, U.S., on Monday, June 27, 2011. 2011 marks the return of Fiat to America after exiting the U.S. market in 1984. Photographer: Jonathan Alcorn/Bloomberg *** Local Caption ***
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Santander Consumer USA, the Dallas-based subprime car-loans unit of Spain’s biggest bank, has continued to hit the brakes, cutting originations by a quarter and pumping up its reserves as it retreats from a “heated” market.

Regulators have been warning for a while of sloppy underwriting standards in the $1.14tn sector, where low interest rates, falling unemployment and low fuel prices have combined to drive demand.

Investors have worried that this growth will eventually hurt lenders that have raced to the bottom, stretching out terms for borrowers while pushing up loan-to-value ratios and debt-to-income ratios.

For the past three quarters Santander Consumer has warned of the effects of intense competition, assuring investors that it was happy to cede market share to less “disciplined” rivals.

It continued throttling back in the fourth quarter, announcing on Wednesday that fourth-quarter originations dropped 24 per cent from a year ago. It also made a $686m provision for likely loan losses, bigger than analysts’ forecasts of $637m.

The company said that loans originated last year were performing better than those in 2015, when analysts worried that it was straining too hard to keep up with subprime-focused lenders like American Credit Acceptance, Skopos Financial and Exeter Finance.

Jason Kulas, chief executive, described the market as “very competitive”, noting that wholesale-funded lenders like his still had good access to funds and the US consumer remained on “a solid footing”.

“We don't see anything out-of-control happening in the industry right now,” said Mr Kulas, who took over as chief executive from Thomas Dundon, his old college roommate, in July 2015. “We think competition is relatively stable, but it is still heated.”

Shares in the company slipped 7.2 per cent to $12.81 on Wednesday in New York. Like many financial stocks, Santander Consumer enjoyed a strong post-election bump but it is still trading at about half the peak levels of mid-2015.

Mark Palmer, analyst at BTIG, said that the market was giving the company some credit for its recent “prudent course”, but it “continues to pay the price for the more aggressive approach it had taken in the past”.

The company’s push upmarket is likely to come as some relief to regulators, who have worried about its parent’s grip on the risks it is facing. Santander Consumer is 59 per cent owned by Santander’s US holding company, which has flunked the annual stress test carried out by the US Federal Reserve for three years in a row. 

Other banks have been keen to increase exposure to the upper tiers of the car-loan market, seeing that assets performed relatively well during the crisis of 2008-09. But last summer the Office of the Comptroller of the Currency warned them to cool it, citing “unprecedented” growth in loans, rising delinquencies and falling used-car values.

Big banks have since grown “incrementally more cautious” on auto lending, said Betsy Graseck, analyst at Morgan Stanley, noting that loan-officer surveys carried out by the Fed show overall tightening of standards since the middle of last year.

Auto-loan originations at JPMorgan Chase during the fourth quarter fell 14 per cent from a year earlier, for example, while Wells Fargo saw growth in originations decelerate from a year-on-year rate of 7.1 per cent in the third quarter to 4.9 per cent in the fourth.

Ms Graseck said that there were still questions over how much longer the cycle can run, in view of better lending practices and a general upturn in consumer confidence under the new administration of Donald Trump.

“We do believe the auto credit cycle is in the later innings, but a brightening economic picture likely puts this ball game into [an] extra innings,” she said.

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