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Trends in Auto Sales and Prices: Questions to Consider

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Automakers have been informing investors for months now of a potentially difficult road ahead. Recent articles indicate trends that may present risks or opportunity to your credit union, depending on your situation.

Auto sales have declined the first three months of the year with the current, seasonally-adjusted pace annualizing out to 16.6 million compared to 16.7 million this time last year. Goldman Sachs Group, Inc. is now estimating demand for only about 15 million vehicles in 2017. Compare that to the record of 17.6 million set in 2016. (Source: Bloomberg)

For used cars, the National Automobile17-04-car-row Dealers Association’s (NADA) price index dropped in February by the most since November 2008. Both General Motors and Ford have warned about lower used car prices as many cars come off leases and into the used car pool. (Source: Bloomberg)

Additionally, auto loan delinquencies have increased across all credit tiers causing some lenders to tighten terms or pull back.

As you plan for the remainder of the year and beyond, the list below offers some great discussion topics for ALCO meetings and/or reforecast scenarios to consider:
If auto lending declines, what other avenues are available to us to grow loans? What investment opportunities are available?

  • How might slower-than-expected auto growth impact earnings?
  • If the average used car price falls, how many additional loans will need to be booked in order to meet budget goals? Given our current funding rate, how many more applications would we have to process in order to book those additional loans? How could we process more loan applications without adding expenses related to additional staff or overtime pay?
  • What if we have to dramatically reduce offering rates or increase fees paid to dealers to get the volume?
  • What if credit losses are higher than expected?
  • Are there opportunities that could be created if competition pulls back? Should we take advantage of any such opportunity?
  • How might loan demand be impacted if interest rates rise?
  • What if interest rates rise, putting pressure on us to raise deposit rates, but fierce competition for auto loans leaves us unable to raise loan rates?

The list above is not all inclusive but is a great start. As with most things, there are both opportunities and risks to consider. The sooner you start to consider them, the better off your credit union will be.

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Some Things to Consider About a Rising Rate Environment

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The Federal Reserve increased the federal funds target rate to a range of 50-75 bps at its mid-December meeting.  In its forecast (the “dot plot” shown below), the Fed indicates further tightening in 2017.

010517-dot-plot-buz

While credit unions have certainly lived through rising rate environments in the past, few have managed a credit union through a rising rate environment coming from the lowest interest rates our markets have ever experienced.  Combine this with how dramatically the world has changed since the last time rates went up (setting aside the 25 bps increase in December 2015, the last rising rate environment experienced came during 2004 to 2006) and the future is nearly unprecedented.  Can you believe that Apple’s first iPhone came out in 2007 (Source: Time)?

Now that smartphones are ubiquitous and members have access to every financial services “app” in the known universe right in the palm of their hands, what might a rising rate environment mean for your credit union?  Will your members behave differently now than they did in the past?

Using your asset/liability model proactively will allow you to see a range of potential outcomes before they happen.  This will better prepare management and board for both the risks and the opportunities that are out there.

Some questions to consider and then turn into scenarios to model include:

  • Will we be able to increase loan rates?  Or will competition for loans from FinTechs or traditional competition, or the level of long-term rates, keep loan rates stable?
  • When, and by how much, will deposit rates need to increase?  How might this impact our deposit mix?
  • What things are outside of our control – such as a competitor’s liquidity position and the potential impact to us if they have to raise deposit rates dramatically to attract funds?  Or new competition, possibly from non-traditional sources?
  • If deposit rates increase, but loan rates do not, what additional efficiency can the credit union create to have sustainable earnings with a tighter margin?
  • Given the ease of moving money across institutions, are we at risk of seeing members move funds from our credit union?  Or, what if consumers move funds to our credit union that we may not be able to lend out?
  • There are always opportunities.  What opportunities lie ahead for our credit union in this environment?

This list of questions is not meant to be all inclusive, but answering these questions is a great place to start. There are many more questions to be answered.