Guest Opinion: Auto Lending Roller Coaster Continues
If the folks who manage automotive lending at credit unions are feeling a little queasy these days, it’s with good reason. Watching their market share the past four years has been akin to spending a long weekend at an amusement park, going up and down on the world’s steepest and fastest roller coasters.
Several years ago, the banking world was in high-risk mode, with banks, finance companies and captive lenders fighting for a slice of a frenzied lending market. Loans with high loan-to-value ratios to customers with somewhat riskier credit became the norm. Credit unions, taking a traditionally conservative approach, captured just 15.64% of the market in the first quarter of 2008.
Of course, this risky loan strategy came to a crashing halt, and credit unions, because they had much less of their loan portfolios at risk, did not need to pull back as much from automotive lending. When the markets crashed, credit unions were well-positioned to serve the remaining automotive market. The upshot was a 24.17% market share in the second quarter of 2009.
However, all good things must come to an end, as they say. As bad loans began to cycle through and come off the books, banks and captives were ready to resume regular lending activity. As banks and captives adopted more aggressive lending policies in the past two years, credit union market share retreated back to 15.28% in the first quarter of 2011.
So where on this wild ride do credit unions stand today, and what are the signs of more ups and downs or smooth tracks in the future?
First, when comparing open loans from first-quarter 2011 to first-quarter 2010, credit unions have shown only a slight drop, going from $144 billion in first-quarter 2010 to $142 billion in first-quarter 2011. Banks had the steepest decline, going from $231 billion to $225 billion, and captives went from $194 billion to $193 billion. Only finance companies saw their overall open loan balance grow, jumping $13 billion from $64 billion to $77 billion.
One might look at the finance company performance and think credit unions are underperforming. The reality, however, is that finance companies typically serve higher-risk customers and are grabbing a portion of the market that credit unions traditionally avoid. When looking at credit union performance versus banks and captives, credit unions have held their own.
Another key indicator is the stability of credit union loan portfolios. For the most part, credit unions have stuck to their traditional conservative lending practices. This has yielded industry-leading stability for credit union loan portfolios. When looking at 60-day delinquencies, credit unions have only 0.35% loans at risk. This compares favorably with banks (0.60%), captives (0.50%) and finance companies (1.58%).
However, even though delinquencies are lowest for credit unions, they are lower for every lender type in the industry. With fewer delinquencies on the books, it is likely that banks and captives will become more aggressive in their lending strategies.
In addition to a drop in delinquencies, credit unions also have the lowest quarterly repossession rate in the automotive lending industry, at 0.20%. This compares with an overall industry average of 0.68%. Finance companies, because of their focus on subprime customers, have the highest quarterly repossession rate (2.57%), followed by captives (0.52%) and banks (0.35%).
Another sign of credit union stability is found in terms of overall dollars at risk. Credit unions have just $396 million at risk, compared with finance companies at $1.047 billion, banks at $934 million and captives at $743 million.
With few loans failing and relatively low dollar volumes at risk, credit unions have clearly stuck to their traditional conservative lending patterns over the past few years. What then does the future hold for credit unions and automotive lending?
First, automotive analysts predict sales will continue to improve at a steady rate. According to Morgan Stanley, auto sales could reach as high as 14 million in 2012 (Bloomberg.com, April 19, 2011). That means the total pie for automotive lenders should grow correspondingly.
Lenders overall seem to be loosening their criteria for loans, as the average score for a new vehicle loan fell by 10 points year over year. In first quarter 2010, the average score for a new vehicle loan was 776. In first quarter 2011, this dropped to 766. In addition, loans to subprime customers grew by 3.6% from first quarter 2010 to first quarter 2011. Both of these trends seem to indicate a more aggressive strategy for the industry as a whole.
Despite the lower credit scores for customers and the expansion into lower risk tiers, lenders have stayed cautious when it comes to loan-to-value ratios. In first quarter 2011, the average loan-to-value ratio for new vehicles was 107.17% and 126.35% for used vehicles. Credit unions are very close to these industry averages, at 111.79% and 129.69%. This will be a key statistic moving forward. If banks and captives start to grant higher loan-to-value ratios, it would signal a more aggressive strategy that could mean a drop in market share for credit unions.
Overall, the automotive lending industry is significantly healthier today than it was two years ago when credit unions grabbed a large chunk of market share. With banks and captives on more solid footing and an expanding pool of loans, it is likely they will become even more aggressive with their lending strategies in an effort to regain lost market share.
Regardless, credit unions remain extremely well-positioned to continue to serve the automotive loan market. However, if they want to hold on to a larger portion of market share and smooth out the peaks and valleys of their recent roller coaster ride, they may have to begin employing more aggressive lending strategies.
Melinda Zabritski is director of automotive credit at Experian Automotive.
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