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Auto Lending: The Concerning Slow Decline

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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.

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Big Questions For 2010

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2010 begins with an immense question attached to it:  Where will the economy go this year?  Confounding any sort of clear answer are the conflicting signs of continued recovery and renewed downturn that came with the close of 2009:

  • The housing market has seen home prices rise for the sixth straight month in October.  However, the recovery appears fragile as one-in-seven households are either in foreclosure or delinquent on payments, while almost one-in-four households are underwater (Real Estate Faces Tough Recovery Slog, WSJ, 1/4/2010)
  • Car sales surged at the end of the year to an annualized rate of 11 million, making December the second-best month of the year.  However, this was still far below the 16 million annualized rate seen as an indicator of a healthy auto industry (Late Surge in Car Sales Raises Hopes for 2010, WSJ, 1/4/2010)
  • The Dow Jones finished up 18.8%, however, unemployment remains around 10% and the Fed, concerned with the fragility of the recovery, continues to keep the Fed Funds rate at a record low of 0-25bps (Fed Will Hold Down Rates, Citing Tenuous Recovery, NY Times, 12/16/09)

It is fair to assume that 2010 will hold its fair share of surprises, opportunities and crises that will require tough decisions and quick, deliberate action on the part of credit unions.  One question credit unions are asking themselves right now is, Are we as prepared as we can be? Below is a brief list of questions to consider to help assess your preparedness for what promises to be an interesting year:

  • Have we thoroughly explored the impact of a further economic downturn on our business model and business plan?  A material recovery?
  • What is our short list (no more than five) of strategic initiatives that must be pursued regardless of the economy to better position the credit union for the long term?
  • Have we created and communicated detailed game plans and do we have a defined project control process to ensure that progress on these strategic initiatives will be accomplished in 2010?
  • Are our board and senior management aligned on the definition of success for 2010?
  • Given the level of uncertainty and the likelihood of “surprises,” have we blocked, in advance, regular time for key decision makers to discuss new issues and make decisions?

With answers to these questions, your credit union will be in a better position to make decisions and react to unforeseen events.  This is especially important, as the point at which you address a problem is directly related to the number of viable options you have for solving it…