Auto Lending Continues To Drive Credit Union Business

Despite rising rates and slowing loan growth, auto lending has remained relatively robust. Credit unions are still a choice financial institution among the nation’s consumers when they consider an auto loan.

Up 10.8% annually, total auto lending expanded $35.8 billion over the year to $365.3 billion as of September 2018. This is the sixth consecutive year of double-digit growth in the third quarter as total auto loan balances at credit unions have more than doubled since September 2012. Auto lending continues to be strong at credit unions despite slowing growth in the overall loan portfolio and rises in interest rates.

Credit union auto market share was 20.6% as of Sept. 30, 2018, up 5.9 percentage points in the past five years. With the largest market share for any major loan product, auto loans continue to be key for balance sheet growth at credit unions.

Indirect growth continued a three-year decline, down 3.8 percentage points year-over-year to 15.5%. Still, the financing option remains a major origination pipeline for credit union auto loans. Indirect growth has outpaced total auto growth for the past seven years.

Although average auto balances continue to rise, delinquency has been effectively managed as new auto loans continue to have the lowest delinquency (0.39%) of any lending product at the nation’s member-owned financial cooperatives. Total auto delinquency decreased five basis points over the year to 0.60%.

2018 saw continued strong vehicle sales. The National Automobile Dealers Association said it expects 2018 to be the fourth straight year of more than 17 million unit sales nationwide and is forecasting 16.8 million unit sales in 2019.

The auto industry is also seeing a shift in consumer demand from new cars to used as new car prices continue to rise. Additionally, a rise in off-lease used cars and lightly used vehicles are combining to increase the supply of used cars and depressing their prices.

SUVs also continue to grow in popularity. Consumers are increasingly choosing versatility and space as mileage becomes less of an influence. This has prompted some major automakers to refocus their product line. Ford, for instance, has announced plans to stop manufacturing sedans and coupes, except for the Mustang, and produce only SUVs and trucks in North America.

Driving Into The Data

Total auto balances expanded 10.8% over the year to $365.8 billion. Broken out, new auto loans expanded 12.5% from the year-ago third quarter to $145.5 billion and used auto loans grew 9.8% to $219.7 million. The total number of auto loans extended by credit unions increased 8.3% or 1.9 million to 24.6 million as of Sept. 30, 2018.

Altogether, auto loans comprised 35.2% of the total loan portfolio in the third quarter. With the number of vehicle loans growing at a slower pace than vehicle loan balances, the average auto loan balance for the industry increased, moving up 2.4% year-over-year to $14,856 as of the third quarter.

Auto lending also continues to be where credit unions are the most competitive with other financial institutions. More than one in five auto loans nationwide are financed through credit unions; market share is up 1.6 percentage points in the past year and 5.9 percentage points in the past five years.

Along with one-fifth of the total domestic market, over one-fifth of the credit union membership base has an auto loan tied into their relationship. Auto loan penetration increased 76 basis points in the past year to 21.1% as of September 2018, by far the highest penetration rate of any major loan product.

Indirect Lending

Indirect loans continue to be a big funnel for auto lending at U.S. credit unions, although there’s been some tightening as of late. Up 15.5% year-over-year to $220.4 billion, indirect balances account for 60.3% of the total auto lending portfolio. Indirect growth slowed 3.8 percentage points over the year from the 19.3% rate reported in September 2017. Indirect growth has decreased in the third quarter for each of the past three years. Still, the indirect channel remains quite strong, as annual indirect growth has outpaced annual auto loan growth and increased its share of the auto portfolio since 2011.

The slowing growth can in part be attributed to tightening margins. Generally, auto rates move slower than interest rate hikes in the overall market. The competition that credit unions face from other financial institutions in the auto lending space naturally puts downward pressure on rising rates and tightens the profitability of the loan. In instances where there is additional dealer compensation, credit union margins are further reduced.

That dynamic, along with absorbing all interest rate, funding and credit risk makes the indirect channel an increasing challenge for some credit unions. Additionally, credit unions have found difficulty deepening their relationships with the member further than the auto loan.

Still, auto loan delinquency has remained relatively low, down five basis points year-over-year to 0.60% in the third quarter. New auto loan delinquency dropped three basis points over the year to 0.39% while used auto loan delinquency was down five basis points to 0.74%.

New auto loans, in fact, are the best performing loans of any major lending product in terms of delinquency in the credit union loan portfolio. Auto delinquency at credit unions has remained within a 10 basis point range since they began reporting the metric in 2013.

Aman Johal is an Industry Analyst for Callahan & Associates. He can be reached at 202-223-3920 or ajohal@callahan.com.