CarMax says tighter lending hits its car sales due to Fed rate hikes and bank jitters

By Steve Gelsi

Car loans are not only more expensive now, but they're harder to get as lenders get pickier

CarMax Inc. signaled that higher interest rates at the Fed have started trickling down into the realm of car buying, as the used vehicle seller added tightening lending standards to a list of headwinds its business faces.

Not only are banks and other lenders raising interest rates on loans to keep pace with benchmark-rate hikes by the U.S. Federal Reserve, they're also getting more selective to protect against potential loan losses and setting aside more capital for reserves on their balance sheets.

For its part, CarMax (KMX) said Tuesday that tightening lending standards along with inflationary pressures, climbing interest rates and prolonged low consumer confidence contributed to a 12.6% drop in total vehicle sales in its fiscal fourth quarter, compared with the year-ago period.

Also read: CarMax stock rallies after big profit beat, even as revenue fell well short of expectations

Its lending business, CarMax Auto Finance, reported a 36% drop in income to $123.9 million due to compression in the net interest margin, as its cost of capital for car loans rose more quickly than the interest payments it collected. The company also booked a higher provision for loan losses, which eats into net interest margin as well.

In the previous quarter, CarMax made no mention of tightening lending standards and simply pointed to widespread inflationary pressures, climbing interest rates and low consumer confidence as factors in a 20.8% drop in total third-quarter retail used-vehicle sales.

With the blowup of Silicon Valley Bank and Signature Bank in March, banks are becoming more cautious, which means they may not be as likely to lend to people with lower credit scores.

"Recent bank failures have added to the risks of a recession this year primarily as a result of banks pulling back on lending related to heightened regulatory scrutiny and potential regulatory fallout," Keefe, Bruyette & Woods analysts said in a research note on Monday. "There is a growing concern that the recent bank failures could put pressure on the U.S. economy as banks (particularly the small and midsized firms) tightened their lending conditions to ensure a healthy balance sheet."

Josh Bivens, chief economist at the Economic Policy Institute, told NPR recently that "bank lending standards are going to get noticeably tighter in the next couple of weeks and months."

For its part, CarMax said it has been tightening its lending standards as it did in the Great Recession, at the start of the COVID-19 pandemic and at other times.

"We have tightened just to make it a little more conservative to watch this consumer carefully but again, with our tightening ... we'll be happy to pick up that volume as we've done," said Jon Daniels, senior vice president at CarMax, on the company's conference call with analysts on Tuesday. "We think we're well reserved and we'll watch the consumer carefully."

For now, CarMax expects loan delinquencies to range between 2% and 2.5%, which is its typical range.

On the bright side, CarMax said it's been able to raise the interest rates it charges customers for car loans, and that inflationary pressure seem to be leveling off.

"When we look out -- you never know where funding costs are going to go," Daniels said. "You never know what consumer is going to walk through the door. Ultimately, we need to remain competitive and make sure that we're able to sell cars and provide competitive rates for our consumers. But when we look out, we've come down off of this peak."

Also read:Banks on the line for deposit flows and margin pressure in Q1 updates as they reel from banking crisis

-Steve Gelsi

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04-12-23 0810ET

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