Credit Union Auto Lending Growth Slows but Still Grows
Keeping members on wheels continues to dominate in penetration and market share as loan quality also improves.
The COVID-19 pandemic has helped to stunt the growth of credit union auto lending, but that essential product remains a major part of the movement’s loan portfolio.
While some measures, such as market share, dipped year over year, loan quality – as measured by delinquencies – has held up well through the economic upheaval, according to Callahan & Associates’ analysis of third quarter 2020 data from the NCUA, the most recent available.
In fact, delinquency in the third quarter hit its lowest mark since 2013. While some of this improvement in asset quality can be chalked up to credit unions deferring payments on auto loans during the pandemic, this is still an impressive measure. It is worth noting that while delinquency is at a healthy level on average across the industry, until more information is available related to the proportion of loans in deferment and forbearance, this is only one view of member health.
Auto loans led the lending portfolio in terms of market share and penetration as well. More than one-fifth of all members held an auto loan at their credit union in September 2020, and 17.9% of all U.S. auto loans belong to member-owned financial cooperatives.
Growth Slowing, but Still the Portfolio Grows
Compared with the third quarter of 2019, total auto lending grew 1.2%, or $4.5 billion, to $382.7 billion outstanding. This was the slowest rate in September since 2011 but has rebounded slightly from the 1.0% annual growth rate reported in June 2020, mostly due to the economy reopening in the third quarter.
With growth suppressed, auto loans comprised 32.8% of total credit union loan portfolios in the third quarter, the lowest share in that metric since the first quarter of 2015. Some of that can be attributed to large increases in mortgage balances (up 12.9%) as low interest rates encouraged members to refinance existing loans and purchase new homes.
Refinances accounted for 57.0% of credit union mortgages in the third quarter, according to estimates from the Mortgage Bankers Association. As interest rates remained at or near historic lows, mortgage growth will likely remain strong, which would further increase the share of the loan portfolio made up by mortgages.
Total Vehicle Sales Begin to Rally
Total vehicle sales plummeted during the first months of the pandemic as automakers and suppliers shut down and joblessness soared. Projected annual vehicle sales totaled 9.1 million units in April 2020 – lower than any month following the Great Recession. However, this trend reversed as the economy adjusted to the “new normal,” and auto sales rallied as dealerships cautiously re-opened and offered online purchase programs. In September 2020 projected annual vehicle sales reached 16.7 million units.
Historically, credit union auto loan portfolios skewed in favor of used auto loans. Used auto balances expanded 4.4% to $239.5 billion (62.6% of auto loans) while new auto loans contracted 3.7% to $143.2 billion over the past 12 months.
During the year, the total number of auto loans extended by credit unions increased 2.3%, or 592,000, to 26.3 million. This dynamic decreased the average credit union auto loan balance 1.1% year over year to $14,542 as of September 2020.
Share and Penetration
Auto lending continued to have the highest market share of any loan product for credit unions nationwide. Down 50 basis points year over year, auto market share at credit unions was 17.9% as of the third quarter, continuing a slide that began in September 2018 when that metric peaked at 20.6%.
Comparatively, mortgage and credit card market share increased slightly over the past 12 months to 8.6% and 6.5%, respectively. Despite the slight decline in market share, auto lending continued to position cooperatives as competitive players in the national auto lending market.
The percentage of credit union members with an auto loan tied into their relationship, defined as auto loan penetration, fell 22 basis points in the past year to 21.1% as of September 2020. This is due, in part, to suppressed new auto loan supply during the onset of the COVID-19 pandemic and decreased consumer sentiment across the country.
Additionally, members continued to join credit unions through other product channels, particularly as indirect loan growth slowed. Over the past year, total credit union membership increased from 120.9 million in September 2019 to 125.0 million in September 2020, a 3.4% increase. During that period, net new member growth was largely through core deposit offerings (with the number of accounts increasing 4.4%), and mortgages on the lending side (accounts up 6.0% to 3.1 million).
At 21.1%, auto penetration is the highest of any loan product. Credit card penetration as of the third quarter was 17.4% and first mortgage penetration was 2.5%.
Indirect Lending Growth Decelerates but Still Dominates
Indirect lending continued to be a major source of auto lending for credit unions, but that growth has now contracted for two consecutive years. In September 2018, indirect lending was up 15.5% year over year following two back-to-back years of growth above 20%. In September 2019, that growth slowed dramatically to 4.7% and then further to 1.7% as of September 2020.
That said, the indirect channel still accounted for $235 billion, or 61.3%, of credit union auto balances. The slowing growth can be attributable both to an industrywide tendency to pull away from indirect lending channels in pursuit of higher-yielding originations, a trend that is amplified by historically low interest rates and decreased consumer loan production.
Loan Quality Improves Despite the Pandemic
Auto loan delinquency improved year over year, falling 14 basis points to 0.44% as of September 2020. Over the past year, new auto loan delinquencies were down 8 basis points to 0.31% while used auto loan delinquencies fell 20 basis points to 0.51%.
Credit card and mortgage delinquencies also fell over the year, to 0.87% and 0.50%, respectively, as overall asset quality improved across the country (as measured by reportable delinquency). This improvement across all three major loan product types reflected credit unions offering payment deferrals and other relief programs, federal stimulus packages that provided some extra cash to those in need, and consumers opting to decrease their debt burden in the face of economic uncertainty.
Michael Zelna is an industry analyst at Callahan & Associates in Washington, D.C.