Two Loan-Growth Hot Spots For Banks: Cars And Students

Universities and car dealerships have something in common: Their customers are behind two rare examples of increased lending by banks.

A number of big U.S. lenders, including J.P. Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), said both their auto and student lending increased markedly during the first quarter.

Weak lending by banks has been a hallmark of the financial crisis. The amount of loans outstanding from banks has fallen at the fastest rate in decades.

But now, banks with capital to lend are pushing to make more loans to both car buyers and higher-education students. For good reason: The credit crisis wiped out competition in both industries. Meanwhile, the beginnings of an economic rebound have helped more car owners stay current on their loan payments.

"Many other lending institutions have not had the capital available to lend and have had to withdraw from certain parts of the student-loan market," said Thomas Lustig, president of education lending at PNC Financial Services Group Inc. (PNC) The Pittsburgh regional bank's student loans rose for a fourth straight quarter, up 62% over a year ago.

In the run-up to the credit bubble, big and mid-size banks turned impressive profits by originating loans of all types, and then quickly selling those loans to other investors. They collected fees in the process, known formally as securitization.

Now, with securitization investors still smarting from a credit-boom hangover, lenders are pushing back into traditional banking businesses--such as writing and holding consumer loans--to generate future sources of earnings. Auto and student loans mark two of the first examples of that down-shift to write-and-hold lending.

Basic economics are also revving up the growth of both types of loans. For starters, rank-and-file consumers often make a priority of keeping current on their car payments, especially for cruising to and from work. Tax-refund season is also helping to put the brakes on delinquencies, according to Fitch Ratings, while improving prices for used cars are increasing loan-collections rates, reassuring lenders about the safety of making new loans.

In education lending, bankers say the recession has motivated Americans to return to school, either by choice or by necessity. Sweeping federal legislation will soon exclude banks from making federal student loans, but they will still be allowed to make higher-cost private loans.

Complete quarterly data for the banking industry won't be available for weeks. But SNL Financial tracks data for 19 banks of diverse sizes that specifically report their holdings of vehicle loans. That group reported its third consecutive quarterly rise in vehicle loans, up 9% over last June.

At San Francisco-based Wells Fargo, total auto loans rose 5.8% in the first quarter over the fourth quarter. Wells Fargo's loans to auto dealers themselves rose 41% in the last quarter alone, and the bank said delinquencies among auto loans stabilized in the middle of last year--far faster than most loan types have recovered during the financial crisis. Wells Fargo's student loans grew 3.5%.

J.P. Morgan is currently the largest auto lender in the country, and its total loans rose for the third straight quarter, up 10.5% since the end of June. One reason for the turbo-charged performance of the New York bank's car-loan holdings: sputtering competition from weakened car companies' financing arms.

J.P. Morgan's student loans also rose for the third straight quarter.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com

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