October 31, 2000

LEASE PROFITS SPEEDING AWAY FROM BANKS
Author: AUDREY Y. WILLIAMS, Staff Writer

Edition: ONE-THREE
Section: BUSINESS
Page: 1D / Estimated printed pages: 3

Article Text:

Can you guess how much a new car leased today will be worth three years from now?

Apparently, a growing number of bankers can't either.

With the auto market already flooded with used cars, banks are having a harder time getting top dollar for leased vehicles they put up for sale after the lease has expired. As a result, a growing number of them are losing money in their auto-leasing operations, as their profits are already being squeezed by rising interest rates, restructuring charges and credit quality issues.

For the third quarter:

* Charlotte's Bank of America Corp. - the hardest hit during the quarter - announced a $257 million writedown because the Hondas and Toyotas its customers leased have declined in value.

* Huntington Bancshares Inc. of Columbus, Ohio, took a $33 million charge related to its auto leasing operations.

* And Bank One Corp. said a $58 million charge against its third-quarter earnings! related to auto leasing pushed fee income at the Chicago bank down 17 percent.

"It's turned out to be a risky business for them," said, Jennifer Thompson, an analyst with Putnam Lovell Securities, in New York.

Indeed, she said, "I see a lot more trouble down the road with this."

But while some banks are losing money in the auto-leasing business, consumers looking to buy used cars are likely to reap rewards.

Shorter-term leases have become more popular, creating a glut of used cars as people exercise their option to turn them in. And that flood of vehicles, industry officials say, has driven down prices, giving consumers plenty of cheap, almost-new cars to choose from.

"I see (falling used car prices) as more of a spike than a trend," said Jim Edwards, executive director of the Carolinas Independent Automobile Dealers Association, a trade group that represents about 800 used-car dealers in the Carolinas.

All the while, bankers - who! must estimate a car's residual value, or how much it will be worth, y ears in advance - are unloading previously leased vehicles at 2 percent to 6 percent below their original estimates, analysts say. According to CNW Marketing Research Inc., during the first three quarters of the year, leaseholders lost from $710 on every compact car to $2,800 on luxury models.

"It's just hard for banks to make this business work," said Art Spinella, CNW president.

During the past two years, in a move to compete with auto finance companies who slashed lease payments to attract customers, banks did the same, Spinella said. They hoped to make up the difference later when they would sell the cars at auction.

But with the used-car market already flooded, especially with sport utility vehicles, the strategy failed, Spinella said.

"I think it's going to take a couple of years for this to go through the system," he said, noting that the problem began roughly two years ago.

First Union Corp. stopped underwriting auto leases in March! 1999 after nearly 20 years. But the Charlotte bank still has a $2.6 billion auto-lease portfolio, and during the second quarter boosted its reserves to cover falling residuals. Wachovia Corp., with leased cars on its books for more than 25 years, also called it quits a little more than a year ago.

"As it turns out, that was a good decision on our part," said Andy Love, a senior vice president at Wachovia, who worked closely with the bank's auto leasing operations. "It was never a big business for us anyway."

Wachovia's auto-lease portfolio remains a little over $100 million, down from about $250 million at its peak, Love said. The Winston-Salem bank also has insurance to protect against depreciation in residual values.

"When you're in the leasing business, you're in the used-car manufacturing business," Love said. "How you sell what you manufacture determines how profitable you'll be."

One former auto fleet manager says auctions - the most popul! ar way of selling off-lease vehicles - aren't the answer.

"What banks are going to have to do is find another way to remarket their vehicles," said Darryl Draper, now the co-founder of Driveoff.com, an online auction that offers to consumers at wholesale prices the cars that were leased from dealerships or leasing companies.

Car-leasing companies save money, Draper said, because they don't have to pay to truck cars to an auction. Her online auction allows off-lease cars to remain at the dealership.

Bank of America still sells many of its cars wholesale to dealers or at auctions. But it also runs a company called Price Auto Outlet where it sells off-lease cars directly to consumers - online or at car lots in five cities, including one in Greensboro that opened in May.

The company's tactics to lure customers include non-negotiable sticker prices that are below book value and offering them $50 if they travel more than 50 miles to a Price Auto Outlet lot.

But right now, none of that seems to be enough to buffer t! he effects of the changing used-car market.

Said Love: "I think it's cyclical and there are times when the used-car market is particularly weak. We're just in one of those times now."

Caption:
Staff Photo By MICHELLE HAZLEWOODPhoto

Memo:
The following correction ran on 11/2/00 and refers to original tag no. 0010310469.

Copyright (c) 2000 The Charlotte Observer
Record Number: 0010310469