Strong Banks and Contained Credit Risk

Credit Concerns Emerge from First Brands and Tricolor

Recent volatility has impacted credit markets, driven by two high-profile bankruptcies, First Brands Group and Tricolor. First Brands, a major U.S. auto parts manufacturer with more than $11 billion in liabilities, filed for Chapter 11 at the end of September following years of leveraged acquisitions and non-transparent financing structures. The collapse has rattled confidence in segments of the private credit market.

At nearly the same time, Tricolor, a used car seller and subprime lender that marketed to customers excluded from traditional banking systems, like those in low-income immigrant communities, filed for Chapter 7 liquidation amid reports of financial misconduct. The combination of these two failures rang concern across the market that pockets of consumer credit, particularly tied to subprime lenders, are showing early signs of strain.

Auto Asset Backed Securities Weakness Highlights Subprime Stress

Beyond these headline bankruptcies, auto asset-backed securities (ABS) have shown signs of deterioration, reflecting stress among lower-income borrowers. CarMax shares fell over 20% after reporting that provisions for loan losses rose by about $30 million to $142 million year-over-year, driven by poor performance in some pandemic-era loans. Similarly, OneMain Holdings (OMF) reported delinquency rates up 23 basis points year-over-year in August, again reflecting stress concentrated among subprime borrowers. Subprime 30-day delinquencies have risen to 11.1%, while prime delinquencies remain steady at 1.8%, underscoring that most of the weakness is concentrated among riskier borrowers.^[1]

The combination of persistently high vehicle prices and rising financing costs has pushed more consumers underwater on car loans, with nearly 28% of trade-ins carrying negative equity, the highest rate in four years.^[2] These factors are creating localized stress in the consumer lending ecosystem, particularly among smaller lenders and specialty finance companies.

Share and Amount of Negative Equity Car Loans:^[3]

Auto Loan Delinquency Rate^[4]

Regional Banks’ Earnings Provide Context

Recent regional bank earnings have highlighted how these credit concerns are being managed within the financial system. Fifth Third Bancorp (FITB) saw higher charge-offs this quarter, up 64 basis points year-over-year, driven by a $178 million impairment tied to Tricolor. Management noted that this issue had undergone “significant scrutiny” and reaffirmed confidence in the remaining portfolio. Excluding that one-time hit, net charge-offs were up just 7 bps year-over-year, with deposits and capital ratios both in line.

Huntington Bancshares (HBAN) painted a more reassuring picture, reporting positive overall credit performance and noting that most regional peers have de-risked significantly since the global financial crisis. Regions Financial (RF) acknowledged modest increases in delinquencies and charge-offs, attributing the rise to a specific credit resolution rather than portfolio weakness, reinforcing the message that exposures to struggling NDFI or subprime borrowers are manageable and diversified.

Regional Bank Performance^[5]

Large Cap Bank Earnings Reinforce Resilience

Despite the unsettling headlines, credit market volatility appears contained. Broader indicators of financial health remain stable, and policymakers have reiterated confidence in the system’s resilience. The broader financials sector is posting a blended year-over-year earnings growth rate of 18.2%, the second highest among all sectors.^[6]

Additionally, the third-quarter earnings season delivered a powerful reminder of the sector’s strength. Morgan Stanley stood out with 23.5% ROTCE and $18.2 billion in net revenue, up 18% year-over-year, driven by robust trading and record inflows of $81 billion into wealth management. Wells Fargo raised its medium-term ROTCE guidance to 17–18% and announced $30 billion in excess capital, signaling a new phase of expansion following the removal of its asset cap. Bank of America delivered a 9% increase in net interest income and expanded operating leverage by 560 basis points, while JPMorgan’s markets and investment banking units posted 25% and 16% revenue growth, respectively. Together, these results demonstrate that credit quality at large institutions remains strong, with delinquencies well-contained and balance sheets positioned to absorb volatility.

Subprime Weakness, Not Systemic Fragility

The divergence between subprime lenders and large financial institutions has become increasingly clear. Rising delinquency rates among companies like Tricolor and CarMax are concerning, but they represent a narrow slice of the market. Major banks have reported stable credit conditions and consistent performance across their prime and commercial lending portfolios. The current data suggest that delinquency concerns are limited to subprime borrowers, not the banking system as a whole. With unemployment low, wage growth steady, and consumer savings still above pre-pandemic levels, widespread credit contagion remains unlikely.

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Sources:

^[1] Bloomberg, as of October 2025

^[2] Bloomberg as of October 2025

^[3] Edmunds, as of October 2025

^[4] Bloomberg, as of October 2025

^[5] Bloomberg, as of October 2025

^[6] Bloomberg, as of October 2025

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