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. 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.
“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 tightened their lending conditions to ensure a healthy balance sheet.