CarMax's negative subprime auto data is bad news for US banks
CarMax, the largest used car dealer in the US, has revealed negative subprime auto data in its earnings, which could be a problem for banks, says Piper Jaffray, adding this indicates that "we will continue to see more pressure on used car prices in the coming months" and its "a clear signal the market recognises subprime lending may have been overextended". 

Negative subprime auto data from CarMax's earnings is bad news for regional banks, according to investment firm Piper Jaffray. "CarMax is the largest used car dealer in the country, we believe these developments indicate we will continue to see more pressure on used car prices in the coming months," Piper Jaffray's Kevin Barker wrote in a note to clients Tuesday. He added, "The decline in sales from lower tier borrowers (near-prime to subprime) are a clear signal the market recognizes subprime lending may have been overextended. These developments continue to confirm our thesis that lower used car prices and lower auto sales will pressure earnings/revenue for banks most exposed to the auto sector, in particular" Huntington Bancshares, Wells Fargo and BB & T. The analyst noted how CarMax's auto finance division reported a 7.7 percent income decline and recovery rates on defaulted loans decreased to 50 percent from 55 percent. Moreover, "tier 3" [subprime] sales for the used car retailer chain fell to 11.9 percent of total revenue from 14.7 percent in the previous quarter because of "lower applicant volume and measurable credit tightening." The company also increased its loss provisions to 1.05 percent of loans from 0.94 percent a year ago. "We believe the decline in recovery rates indicates we are likely to see further pressure on used car prices and increasing provisions, especially for the most credit sensitive lenders, such as BBT and WFC," the report said. As a result, Barker reiterated his price targets and ratings for BB & T at $34/underweight, Huntington Bancshares at $10/neutral and Wells Fargo at $44/underweight.

A customer looks at a Ford F-150 pickup truck at a CarMax dealership in Brandywine, Md. Hasan Sarbakhshian | Getty Images