NEW YORK — While referencing the need to cultivate relationships with dealers, Fitch believes U.S. banks have a chance to foster loan growth via their auto portfolios as consumer demand and sales of both new and used vehicles increases.

But analysts concede timing and competition could present challenges.

Fitch explained U.S. banks continue to struggle with sluggish loan growth, but there are expansion prospects in the auto loan sector driven by high demand.

Last month, analysts pointed out sales of new vehicles recorded their fastest monthly pace since 2009, and demand for used models has also been on the rise, highlighted by an increase in used sales and overall demand in 2011 and a subsequent 3-percent rise in prices in 2011.

In addition, Fitch noted an ease in lending criteria to more normalized levels has "opened the door" to borrowers that had been shut due to rigid lending standards.

"Higher demand for autos and, thus loans, and a loosening of credit scores allow for an increase in lender underwriting off of extremely tight lending practices, not as a result of riskier lending strategies," Fitch stated.

"While low interest rates continue to inhibit meaningful loan growth for banks, they can also precipitate consumer borrowing, allowing lenders to beef up their portfolios," the firm added.

Fitch surmised that banks may be able to maneuver their auto loan portfolios with less difficulty versus other sectors, given the typically short dated assets that run off relatively fast, leaving them with limited risk exposure.

"However, unlike comparable loan sectors, the auto loan space is a dealer-based business," analysts reiterated.

"Banks that have not cultivated longer-term relationships with dealers might find it difficult to enter or re-enter the auto loan business without facing barriers of access into dealer networks," they continued.

Fitch maintained that banks primarily compete for auto loan business on the prime side and directly with captive finance companies. The firm thinks captives have an advantage over banks in their ability to attract customers via manufacturer incentives and their intricate understanding of the underlying product and close dealer relations.

"Since auto loan performance was the first of the consumer assets to turn the corner following the financial crisis, lending increased in 2011 over 2010, particularly in the non/subprime sector," analysts said.

"Looking ahead in 2012, if new auto sales continue to be healthy and pick up during the year, this is a prime opportunity for banks to grow their auto loan portfolios further," they projected.

"In addition, we believe heavy demand could spur loan competition and drive down yields, putting pressure on margins," Fitch analysts went on to say. "This could also result in lenders loosening underwriting standards and overall credit; however, to date, lenders have shown discipline in this area, one we are focused on in 2012.

Additional information is available on www.fitchratings.com.