With 35% of their loans riding on cars, credit unions have reason to be alert to an economy where the vanguard of a slowdown has been auto sales.
Credit unions’ portfolios of loans on new and used cars had been rising at double-digit annual rates until January, and in March the automotive loan growth rate fell below growth for all other loans for the first time in at least five years.
Data from CUNA Mutual Group in Madison, Wis., showed new car loans grew 5% to $148 billion in May, while used car loans grew 5.1% to $226.6 billion. All other loans grew 7.1%.
Steve Rick, chief economist for CUNA Mutual Group, said consumers have largely satisfied their need for cars and other consumer goods they couldn’t afford in the wake of the Great Recession.
Rick forecasted in March that total loan growth in 2019 would be 8%, but now he thinks it will be 7% or lower for the year. Similarly, Rick expects auto loan growth will be somewhat lower – perhaps 6% to 6.5%.
“I’m adjusting my loan growth forecast for credit unions because things are slowing down really quickly,” Rick said.
Rick and CUNA economists have been concerned about the impact of tariffs, the trade wars and the wavering threats of escalations on car prices, and thereby car buying.
Those concerns are shared by Greg Brown, chief lending officer at Golden 1 Credit Union of Sacramento, Calif. ($12.7 billion in assets, one million members), the third-largest auto lender among credit unions.
Brown said the environment for car lending in California will depend on decisions in Washington, D.C., and the health of economies from China to France. “Who knows what the tariffs are going to do, and what the trade war will do. We’re a global economy now, and all of those things will affect us.”
In the meantime, the inverted yield curve that began in May was one sign that a recession might be coming. Every recession since 1955 has been preceded by about a year by a period when short-term yields exceeded those on long-term Treasury bonds.
Rick said another sign came in July when the first estimates of May credit union results showed loans grew 6.4% from a year earlier, while savings grew 7.1%.
“For the first time since the Great Recession we have deposits growing faster than loans,” Rick said. “That is a really good predictor of a recession coming in six to nine months.”
If credit unions are looking for a bright side to slowing growth of auto lending, they can look to banks, which are still doing worse.
As of May, FDIC data showed banks had $434 billion in automotive loans, up 3.2% from a year earlier, but nearly two percentage points slower than credit unions. As a result, credit unions increased their share of auto loans from 23% five years ago to 32% this year. Banks’ share has remained at about 40% of total auto loans reported by the Fed.
Another advantage for credit unions is that they are traditionally stronger in used car loans, which has remained healthier than new cars.
The shift to used cars has been seen at Golden 1. As of March, its new car loans stood at $2.7 billion, up 3.8%, while used cars rose 7.2% to $2.1 billion.
Brown, the chief lending officer, said higher new car prices have pushed more buyers to consider used cars. While prices of used cars have also risen, they are still cheaper and present a better value to consumers.
“Let’s face it. When you drive a new car off the lot, you get a higher depreciation than when you take a used car off the lot,” Brown said. “The used car market never took the dip people thought it would. The cars are holding their values today better than they ever did before.
Overall, Brown said production is down, so he expects the total car portfolio will be flat or slightly down at year’s end from the end of 2018 “because production will be down.”
Golden 1, which ranks No. 6 among the nation’s top 10 credit unions by assets, has the group’s largest concentration of auto loans: 54.5% of its total loans as of March 31. That’s down from 55.6% a year earlier, and Brown said the credit union’s intent is to lower that proportion further.
“We’re trying to focus on some of our other products, like first mortgages and credit cards to just improve our mix a bit and reduce our reliance on auto lending,” he said.
While its auto loans are dispersed throughout the state, its mortgage business only recently began expanding into Southern California.
“Auto lending can be a tricky business,” Brown said. “All the high loans-to-values sitting out there, the ins and outs of what you have … you need to watch how you’re making your loans, and start doing things that are better for the member.”
One recent change that tightened its standards was to reduce its loan-to-value limits. In general, Golden 1 now limits 84-month loans to 110% loan-to-value, and shorter terms at 115%.
“That negative equity was getting to be too high. We were seeing some of the people who wanted to get into their next car not being able to because they had too much negative equity,” Brown said.
Golden 1 doesn’t have a problem with delinquencies or charge-offs. In March, Golden 1’s rates of delinquencies at or beyond 60 days were 0.29% for new cars and 0.34% for used cars. Delinquencies for all credit unions were 0.35% for new car loans and 0.65% for used car loans.
“It’s more of, how are we trying to help members be more financially stable now and into the future?” Brown asked. “Are you going to let them do 125% of the MSRP, which a lot of the credit unions do, or are you going to cut back to the 115% mark?”
The averages for credit unions encompass a wide range of experiences.
One of the exceptions to the automotive slowdown is Bethpage Federal Credit Union of Bethpage, N.Y. ($8.6 billion in assets, 390,046 members). It has seen its automotive portfolio rise 20.6% over 12 months to reach $436.1 million at the end of March.
The Long Island credit union is a relatively small player in car lending, but it is aggressively working to expand. At Bethpage, its $436.1 million in total car loans accounted for only 7.1% of total loans in March, up from 6.3% a year earlier.
Loans on new cars rose 15.1% to $152.1 million in the 12 months ending March 31, while its used car portfolio rose 23.9% to $284 million. Bethpage closed on $122 million in total car loans in the first half; about two-thirds of those were from used cars.
“They get more value from getting the used car, rather than paying the increases on the new car,” John Witterschein, Bethpage FCU’s vice president of consumer lending, said.
The average new car price is about $36,000, compared with $21,000 for a used car. “Used car prices are going up slightly more than new car prices, especially for SUVs,” Witterschein said.
About 60% of its production comes through its indirect channels. Most of its growth has come from its expanding geographical footprint for indirect loans outside Long Island by forging new dealer relationships in areas from the New York City suburbs to Upstate New York.