C. Myblog

Auto Lending: The Concerning Slow Decline

September 15, 2011

Traditionally, auto loans have been the “bread and butter” of credit union loan portfolios.  However, 1st mortgages have claimed that honor with short- and long-term trends showing continued declines in auto loans as a percent of total loans for the credit union industry’s balance sheet.  Auto loans have been consistently decreasing from roughly 40% of total loans in 2000 to 29% as of June 30, 2011.  The green trend lines reflect distribution changes since 2000 (long dash) and since 2007 (short dash)—which show little fluctuation in trend.  If the trend since 2007 is realized, auto loans will be down near 24% by December 2014.

Keep in mind that year-to-date auto sales in 2011 are up by 10.4% compared to 2010 according to Ward’s Auto Group.  Also, according to the Wall Street Journal, Chrysler Group LLC said recently its sales leaped 31% in August, while General Motors Co. and Nissan Motor Co. each reported increases of just under 20%.  Ford Motor Co. posted an 11% gain.

While some meager growth in used auto lending has occurred for credit unions from Q1 to Q2, the industry’s auto portfolio overall is on track to shrink another 1.6% in 2011.  Consider that the banking industry (FDIC-insured institutions) is on track to grow autos around 13.6% in 2011 according to FDIC data.  While overall non-revolving loan market share for commercial banks has traditionally been around 3 times that of credit unions per the Federal Reserve’s G19 release, the difference in growth rates and the downward trend is still quite concerning.

What’s The Point?

Some credit unions may have lost their focus on one of the primary things that made them great in the first place—auto loans.  Additionally, the continuing trend of increased 1st mortgage balances (which could be significantly extending balance sheets) is somewhat alarming in light of interest rate risk concerns; 1st mortgage balances are positioned to grow almost 4% in 2011 for the credit union industry.  While Bernanke is on record “forecasting” an extended period of a low target rate, we know that forecasts do not always come true.  Consider this past quote:

Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.

Fed Chairman Ben Bernanke
Semiannual Monetary Policy Report to the Congress
July 18, 2007

Each credit union is unique and must be armed with the right decision information in order to focus resources appropriately.  Understanding local demand trends and being positioned to take advantage will be even more critical going forward as banks and captive auto finance companies continue fighting for (and dominating) this piece of the consumer pie.  As we see it, it may be time for credit unions to take up the fight to more aggressively attract some of the auto market back.

Showing 2 comments
  • Gregg Stockdale

    It looks like the captive finance is “buying” the business. Mark the vehicle up by $XK and then offer 1% financing for 60 zillion months. We can’t compete with that and we shouldn’t. The carrying costs, administrative, loan losses, and generaly lousy interest rate says… Wait for a better day. The BIG mistake is for cu’s to chase these rates because their other alternatives are low as well. It won’t take much of an upswing in rates or even marginal losses to make that strategy shown as a real detriment to the long-term health of the credit union. Just because we “can” doesn’t mean we “should”. Personally, it looks like cu’s are either going with micro-finance / pay-day alternatives or MBL to put some “meat” on the table. Our time-horizon needs to be longer than the next quarters call report. Remember, we are cu’s … not wall street. When the captive finance company looses money, they can raise capital in the form of stock… we can’t. We don’t get the bail out others do. If we get lost in the numbers, we’ll end up making some very bad long-term decisions.

    As pointed out recently on Bloomberg… our 10-year+ run of of the economy was based mostly on borrowed money. Now the day of accounting has come. Prepare for austerity, thinner margins, and a changing member demographics. Planking and social media are fun, but they won’t keep you around for very long without something else of substance to offer.

  • c. myers

    Thanks for your comments. This is what we believe: Each credit union is unique and must be armed with the right decision information in order to focus resources appropriately. Understanding local demand trends and being positioned to take advantage will be even more critical going forward as banks and captive auto finance companies continue fighting for (and dominating) this piece of the consumer pie. As we see it credit unions have a great opportunity to get creative with auto loans. Don’t limit the creativity to rates. Think process and speed.

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